The Tremendous Crash To Come
What they haven't told you about inflation
Sorry for the hype of the title. Today we are going to go into a little more detail about the main causes that have made us face one of the most important debt crises in the history of mankind. We are going to try to reach all levels and make it for all audiences.
This winter, we face the uncertainty that we have never faced before. On the one hand, we have that many of the EU countries do not know if they will have enough heating to heat their homes, and if they have this heating, what price they will have to pay for it. We recall that one of the few indices that have risen this year is that of commodities (40% YTD).
In the last 30 years, the crises have been very different from this one. In all previous recessions, central banks seemed unaware of what was to come. However, it seems the central banks want to generate this crisis in this case.
Why? Very easily, because of inflation.
We are used to this kind of event happening only in underdeveloped countries. In fact, even in a certain way, the major powers are interested in it in order to continue reaffirming the USD and the EUR as the main reserves of value in these countries.
Let's see what inflation will be in 2022 in the main countries of the world:
But as we can see, none of them are spared. It is important to understand that the Fed and the ECB target 2% inflation. This inflationary figure has not been seen in most countries for more than 40 years.
The origin was the Covid.
After the pandemic, supply lines were broken, and when they were re-established, they have not been re-established quickly enough. There have been shortages of certain materials, and prices go up when there is more demand than supply. In addition, the habits of the population have changed, and there is more consumption in certain areas where there is not enough supply. This situation takes time to normalize, although it seems to be happening already.
There is also a shortage of energy. The origin of this is not only the pandemic, but the pandemic has not helped. Let's go over this issue more in depth as it not only influences the prices of all products and services but also directly impacts the population.
Monetary injections by Central Banks into the economy do not help either. Although we have had more than a decade of very relaxed Central Banks in terms of money creation, and this has had no impact on inflation (just ask Japan, which has been trying to create some inflation for thirty years), the truth is that 22% of the dollars created throughout history were issued in 2020. And they were distributed to the population in the form of checks.
We have been warning about this since mid-2021. At that time, any investor seemed to be a guru, the clearest case being that of Cathie Wood's fund, ARK. This fund rose more than 140% in one year and then fell sharply by 80%.
But before all this, there was the opposite effect: the restrictions caused demand to collapse, and there was a super-supply in some commodities never seen before.
Oil futures became negative: it is very difficult to stop production, and the barrels of oil had nowhere to be stored, so there was a time when it paid to take the barrels out of the way. The situation was such that finally, oil wells were shut down. They went from 1,000 open wells in the world to only 250.
When the economy recovered, these wells took a long time to be opened. It is not an easy task: finding workers, checking machinery... and, of course, checking the viability (is the energy demand permanent, or is there going to be a new oil boom?). In short, we have gone from an energy abundance (which pushes prices down) to a shortage (which pushes them up). It is true that many farms are open again, but we are above 700 compared to 1000 pre-pandemic.
In fact, one of our best investments back then was with options on a leveraged oil index.
We bought CALL OTM options (Strike = 20) with an expiration date greater than 2 years when the price fell to just over 4. In just a few months, the value of our options had gone x4.
It was a purely speculative bet with a very small % of the portfolio, and it was simply because it did not make sense what was happening in the markets. As we have always said, if you do the same as everyone else, you are doomed to have lousy returns.
Central banks want to send us into a recession.
Faced with a situation as complex as the one we are living in. Central banks can only do one thing when inflation is present in our daily lives. Well, two:
Stop printing money, even reduce the supply, QT. This would undoubtedly be the worst thing they could do and where they must be most careful. In case of cutting demand, and taking into account the high inflation, people would not be able to buy anything, and we would see how the supply chain would be cut off, everything would break.
Raising interest rates. A measure that, in the short term, the average citizen would not notice. But in the medium term, it would send us straight into a recession.
As in the 1970s, central banks have opted for the latter. What central banks want to avoid is that these sources of inflation (supply lines, energy prices, and monetary injections) become the trigger for an inflationary spiral. Basically, people assume that 10% inflation is normal, and employers raise their prices and salaries yearly by that figure.
In this scenario, we are not even talking about mortgages... We warned you about this a long time ago, and we are not going to go into it. But that person who asked for a fixed rate mortgage is earning a lot of money.
On the one hand, because of the revaluation of his house due to inflation, on the other hand, because of how expensive money is nowadays and because when everything is regularized, salaries will have to be aligned according to inflation, and, therefore, the cost of the mortgage (in terms of purchasing power) will be lower.
Where to invest
We do not know. What seems most sensible is:
NOT to invest in commodities after the big rises.
Invest in assets that have been hit hard: BTC, Growth, Indices, ...
As we have always said, the ideal would be to have an asymmetric portfolio. A portfolio that follows a system and is exposed to any market situation. From our point of view,
There is a 25% chance that the FED and ECB will be able to control this inflation. This would mean that in the next few months, we could see the main indices fall, so it is important to buy assets that behave well in this type of scenario and that currently have a discount of more than 50%.
There is a 75% chance that the central banks do not know how to control this situation and send us straight into one of the worst recessions in our history. In this type of situation, what usually happens is that the markets fall back 20-30% and finally fall another 20% in a terrible way when nobody expects it. For this scenario, it seems clear that the ideal is to have very OTM options so that when this happens, we can generate a huge profit and buy indexes and high-risk assets at a discount never seen before.
The above image, I think, clearly shows where we are. So let everyone draw their own conclusions and invest accordingly. We follow our system, and we are prepared for any scenario.
We would like to emphasize that if you follow our system or another one, be prepared for any scenario and remember that you are losing 10% of your purchasing power per year.
We hope we have helped you.
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