Weekly Paid Newsletter 12/05/2021
You Won't Get Rich Young Because You Don't Understand Markets. Asymmetric Portfolio +44.14% YTD.
The greatest risk to markets has always been policy mistakes by central banks and/or governments. The risks increase as confusion about inflation abound. This was made clear on Tuesday with statements by Fed Chairman J. Powell.
Powell is beginning to recognize that the policies they have pursued over the past two years have been excessive and will take their toll on all citizens. He has materialized this through two key messages, the first: "THREAT OF PERSISTENTLY HIGHER INFLATION HAS GROWN", and the second, closely aligned with the first, is: "TIME TO RETIRE THE WORD TRANSITORY REGARDING INFLATION". The statements are not to be missed.
From a doctor to the chairman of the FED knows that the tone and form of a message matter, and that it is also important to play with the perception of the message. For the Fed, the simple thing would have been to continue with the same tone of moderate messages, which would not cause panic in the markets. So imagine what the situation must be like.
But the statements did not end there. Not only has it said that inflation has gotten out of hand, but it has also announced that it wants to reduce liquidity injections into the markets at an accelerated pace. The reason for this is, as we said a month ago, to avoid hyperinflation. To avoid keeping inflation persistently high, the Fed faces two challenges: 1) Raise interest rates, 2) Reduce liquidity injections and even stop them.
It seems clear that the simple thing to do was to opt for the second option.
Of course, the problem facing the Fed is very big and, as always, extreme measures will be taken at the last moment, when there is no possibility of reversing it. It was done with Covid and, no doubt, it will be done again.
Last week we already saw the influence of the Fed's decision on the long-term performance of U.S. stocks. This is not the only market where this is happening, in the German market, in the DAX, exactly the same thing is happening:
Viewed in the short term, it is even more terrible.
It still makes much more sense to invest based on central bank decisions than on company performance (sadly).
Meanwhile, large investors are beginning to shift a large part of their portfolio to cash, specifically by going long the USD, as these drastic reductions in liquidity can allow them to gain considerable ground on other currencies, such as the Euro or the yen.
Another statement that has made a lot of noise was that of Warren Buffett's partner, Charlie Munger. He has stated that although valuations in 2000 were higher than they are today, the market is now crazier than it was back then.
Here is where there are two possibilities, you continue with the plan you were taught from school to study, find a good job, contribute to your pension plan and invest in low-cost indexes. With a little luck when you are 60, you will have enough money to retire. Or you try to take advantage of this unique market opportunity.
Ordinary shares lead to ordinary results. Everyone is the master of his or her destiny, but if you want to be able to spend your time doing what you really love, the traditional way is never going to do it at a young age.
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