Scenario:
Fact: Inflation and low interest rates incentivizes two things, borrowing and spending.
This recent stimulus focuses more on giving people money more than the last one which went more towards businesses, this will probably reflect on CPI measuring inflation unlike the last stimulus bill that didn't show much change. Jerome Powell plans asset purchases of $80 billion treasuries and $40 billion mortgage backed securities.
Which is interesting because housing prices are at very high prices and there's shortage of house supply probably caused by inflation and low interest rates making them cheaper and more attractive to buyers. Housing market has been running hot with buyers(is also true in many other countries as well).
The everything bubble:
It has also been pointed out that there is a so-called everything bubble. Basically every asset has gained a tremendous amount of value within the last year several years.
https://www.youtube.com/watch?v=5hTj2EkeS5E&ab_channel=GuggenheimPartners
Bitcoin is an interesting scenario because it looks like any another bubble, but it is the only currency in the world not being inflated right now. Every single country got hit by covid and are in similar bubbles/ boosting their own economies. Hard to say whether bitcoin can keep rallying or not, but I am betting that it will at least double in value before the end of the year. Is looking more attractive as more companies are pouring money into bitcoin(big banks starting to join in too like Bank New york mellon into the crypto game), and I believe it is too big to fail(by that I mean fail completely to be worthless too much global value put in). It is very volatile and can also see the price dropping to around 15k but I still have a very bullish outlook as there seems to be a market for a fixed supply store of value asset which has never really existed before. I think that there will be a sustained global demand for this asset as currency values drop everywhere.
(Not only is inflation incentivized for stimulating the economy, it is incentivized for indirectly lowering national debt so many countries with enormous debts will want to slightly overdo inflation but keep it below a currency panic point)
The economy might not be doing well in many sectors, and unemployment is still at high levels, but the market is booming due to incentivized borrowing and spending from low interest rates.
J-pow said his main goal is to keep the economy moving.
One consequence of all of this is inflation; j-pow admits that there will be inflation just not that much(supposedly). Expressed that seeing inflation moderately above 2% for some time is the goal. How much is moderately above? How much is for some time? So we know that he wants to devalue the dollar over raising interest rates therefore stocks will continue to surge.
J-pow has also gone on the news many times the past couple of weeks to firmly state that the US economy is the priority so he does not plan to raise rates anytime soon which I believe. I think the market doesn't really know whether to trust him or not, but based on last year I think that he is willing to push this through for a long time and I believe that he believes, he can fix this economic situation.
Mainstream news suggesting to sell tech buy banks, which looks like what a lot of the market has been doing this week. I think that this will maybe continue for a week or two leading tech prices at a prime discount to buy until another market bull rally happens again.
Early endgame is if inflation gets to obscene numbers. Not too experienced with what is considered high, but I know that 2-3 is considered normal so maybe Powell thinks 4-5% is ok? 5-10% is ok?
If it gets too high however, do Final plan.
Endgame:
The endgame for the bubble will be when we see on the news that covid is over, everyone is vaccinated and we can go back to living normally. A working economy with this much stimulus would overheat too quickly and will cause the fed to return interest rates to their normal values. The thing to look for is if corporate debt has increased. Specifically for BBB investment grade bonds or lower. These corporate bonds are the catalyst to slow down small cap and dying zombie businesses. Mortgage rates will also return back to normal returning housing prices to normal levels leaving new homeowners with the bag paying overpriced mortgage payments. These two combined will slow down the economy as people focus on repaying debts instead of consuming more goods. Also a lot of the recent speculation is a prediction that the economy will be just like how it was precovid which i think is far from true(ie overpriced airlines and cruise lines stock prices). Another thing to consider is that this is not localized to the US and is currently happening to the whole entire world possibly a global stagflation crisis. It may be a ripple effect and I think paying attention to countries that got hit hard before us but are ahead of us on recovery is a glimpse of future outlook. SSE composite possible indicator? I think China might be the best comparison since they are ahead on fighting the virus and ahead on limiting stimulus to their economy.
“China’s economic cycle is shifting from recovery to overheating and then stagflation, with rising inflation expectations and structural asset price bubbles,” Ren warned. “We may be standing at a cyclical inflection point.”
Ren pointed to moves by Beijing policymakers to tighten credit policy, particularly in the property sector, as evidence that economic growth has reached its peak and is set to decline.
With the United States and Europe adding more economic stimulus this month amid the biggest virus-vaccination campaign in history, the outlook for a global economic recovery has improved significantly, causing a surge in commodities prices. Copper has hit a nine-year peak of above US$9,000 per tonne, while corn prices rose to an almost eight-year high of around 5.6 per bushel.
Chinese economic analyst think that United States will maintain its loose monetary policy until at least the end of 2023 to support its economic recovery and labour market have reinforced concerns in Beijing as it tries to reduce the risk of domestic asset bubbles by gradually tapering off stimulus policies enacted last year.
Summary:
I believe there is a risk of global stagflation which is a scenario which I believe has not happened before, we can look towards certain countries as a glimpse of the future of the US economy. Mainly what china is doing now and how it is affecting the economy and how stagflation affected the japanese economy in the 80’s with their amazing run up which didnt fully recover from its peak up until recently(recovery possibly due to more economic stimulus prolonging the problem in japan, did they actually fully recover? Or did they reset the clock on stagflation recovery) I think further case study into the timeline of the japanese economic crash in the 80’s is the next step in understanding future events
Below is a graph of the Nikkei 225 index possibly we are still in the lower part of the 1980's peak
https://upload.wikimedia.org/wikipedia/commons/6/6d/Nikkei_225%281970-%29.svg
Final Plan(Possibly end of 2021 or 2022):
Buy monthly calls on -3x leveraged index funds
Sell any real estate or things related to real estate
Buy bitcoin/ shift portfolio to hold more cryptocurrencies
Prepare to buy the dip in large tech companies
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