Inflation data came out this Tuesday, and the Consumer Price Index (CPI) was 8.5% higher than it was in March 2021.That’s the biggest yearly jump since December 1981 — my sophomore year of college. So in my entire adult life, I’ve never seen an inflation report quite like this.
And I’m willing to bet the same is true for you.Luckily, we don’t need to rely on personal experience to predict what’s coming next.
This scenario has played out before.The problem is, analysts are studying the wrong point in history…
Are We Due for a 35% Crash?
Naturally, most analysts are studying 1981 to predict how the markets will react to this news.But 1981 and 2022 couldn’t be more different. Inflation was actually falling in 1981. We may wish that was the case now, but it is decidedly not. This “highest since 1981” stat references May 1981, when inflation hit that level on its way down. This was after 15 years of inflation. You can see it clearly on the chart below. Today, we are at the beginning of the trend rather than the end.
A better point of comparison is 1964, when inflation was also rising.That year, President Lyndon Johnson declared war on poverty. At the same time, he increased spending on the war in Vietnam. By 1966, excessive government spending was driving inflation. As inflation roared, the Federal Reserve increased the money supply. You can see inflation begin to really ramp up in 1968 in the chart below.
Source: Federal ReserveThat sounds familiar. Today, government spending and easy money from the Fed are contributing to inflation. This next part, however, is where the story differs. In 1968, Federal Reserve Chairman William McChesney Martin, Jr. said, “I doubt very much whether it is possible continuously to pump up the economy so that we can avoid all suffering, all pain, all adjustments…” The late 20th century was a different time. Martin didn’t promise a quick fix. He didn’t blame anyone. He admitted the problem wasn’t easy to solve. He was right. Inflation was a problem throughout the 1970s. Eventually, the Fed broke inflation, pushing interest rates above 15%. There was suffering and pain as the economy adjusted. Within six months of Martin’s statement, the S&P 500 began a 35% decline:
Martin clearly saw the problem in 1968. Wages were growing faster than productivity, but they weren’t keeping up with inflation. That created a wage-price spiral.S&P 500 could break 11,000 by 2024.But there’s sure to be plenty of volatility over the next few years. While buy-and-hold investors watch their portfolios sink, then rise, then sink again… We’ll be actively trading every up and down along the way.Fast forward to today, and productivity is growing at 2% annually. Wages are growing faster than that, and inflation is growing faster than wages. This will almost certainly get worse. High pay raises for 2023 are locked in, meaning wages are set to rise even more. A wage-price spiral is underway. And it’s not possible to avoid “all suffering, all pain.” This may not be the note you wanted to end your week on… But remember: We’re options traders. We can profit on both sides of the market. I’m not expecting a 35% decline like we saw in 1968. As I’ve said before, I believe the
Regards,Michael Carr, CMT, CFTe Editor, One Trade
Chart of the Day:You Know What’s NOT Closed Today?
By Mike Merson, Managing Editor, True Options Masters
Regards,The markets are closed today for Good Friday…sorry, Chris), but so long as we don’t break below the white support line — currently at just about $40k — I don’t see any reason for bitcoin to fall apart here. If you’re one of those nutcase long-term investors like me, today’s prices are attractive. If you’re trading bitcoin, you want to long it at support and short it if we see a definitive break of that support, close below $38k.But you know what never closes? Bitcoin! Bitcoin, being a global macro asset constantly in the making — and also a pretty important part of the inflation story — is well worth a look today. The bitcoin breakout of a few weeks ago suddenly doesn’t seem quite as promising. BTC stopped dead short of the 200-day SMA, and has come back to once again test the rising support line. The action is frustrating, but all this looks like to me is another higher low on a slow, steady grind higher… New highs by May might be a bit much to ask for (
Mike Merson Managing Editor, True Options Masters