The Vaccine and Inflation Trade Is Starting to Fade

It’s taken a while, but the US stocks finally put in a decent down day.

In overnight trade, the Dow fell nearly 2% while the S&P 500 and the NASDAQ fell 2.5%. Gold was down 0.4% and bitcoin 5%. WTI oil was steady at US$52.60. The Aussie dollar fell 1%. ASX 200 futures point to a 1% loss in today’s local trading.

With a bit of luck, this will morph into a 10–20% correction. It will scare a lot of the ‘hot money’ out of the market (for a time, anyway) and enable longer-term investors to buy at reasonable prices.

The ‘reason’ for the overnight falls? According to The Wall Street Journal, who asked a fund manager what they thought, it’s to do with the vaccine rollout:

Delays in the rollout of Covid-19 vaccines, coupled with lingering lockdown measures, marked a “double whammy” of bad news for investors, said Hani Redha, a portfolio manager at PineBridge Investments.

“I think the market expected that by now we would be talking about loosening, not tightening restrictions,” he said. “On the vaccine rollout, this is very problematic for the near term. It is very critical for shaping the growth bounce back, and these issues are just adding more delay to that.”

In so many ways, there will be no return to normal

I guess you could blame the vaccine rollout. Although in my view, it was always way too optimistic to expect a hastily developed and unproven vaccine to return the world to normal in a matter of months. In so many ways, there will be no return to normal.

Funnily enough, I was scrolling through some charts yesterday when I noticed Sydney Airport Holdings Pty Ltd [ASX:SYD]. I posted the chart below on Twitter (@gcanavan2) and wrote ‘Sydney Airports suggests the vaccine trade is fading’.

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

The November spike is from the vaccine development announcements. It’s now given up all those gains.

I mean, are normal healthy people going to rush out and get the jab just so they can travel overseas? The MSM isn’t telling you this, but the vaccine is killing people. Just check out this website. Don’t try and search for it with Google though, it won’t show up.

Big tech is doing its bit to help big pharma help big government give us all an experimental ‘vaccine’…for our own good of course.

Stay safe!

Anyway, the point being, if you need a jab to travel, maybe the industry won’t return to ‘normal’ as expected. That’s what the chart is telling you, anyway.

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The other return to ‘normal’ that just isn’t going to happen is the economy returning to any semblance of decent growth. Massive fiscal deficits will not change this.

As Jim Rickards wrote in yesterday’s edition of Strategic Intelligence:

In reality, debt levels of the type contemplated will slow growth, not accelerate it. There is no stimulus; just more debt and slower growth.

I suspect this may be the bigger reason behind the overnight sell-off. That is, there has been a bit of a rethink about the ‘inflation is coming’ narrative.

As the Financial Review reports:

In their latest statement, Federal Reserve policymakers were decidedly dovish: “The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.”

In his post-statement comments, Fed chairman Jerome Powell said he was far more worried about the economic recovery falling short than he was about higher inflation.

Chairman Powell said it was premature to talk about tapering asset purchases, that its appropriate that monetary policy remain accommodative and that financial stability vulnerabilities overall are moderate.

The only inflation is in asset prices. And that’s precisely because a deflationary real economy keeps bond yields low and real yields negative. In turn, that means investors use a low discount rate to value stocks and other financial assets, which pushes up their price.

On top of that, you’ve got clueless elites trying to hold their broken system together with more fiscal and monetary stimulus. Do you want to own fiat currency in such an environment?

Good luck with that over the longer term.

What will the market do next?

As I’ve said previously, you should hold cash for tactical purposes. Put it to work during sell-offs and build it up when things get a bit crazy.

I have no idea what the market will do next. By the time you read this, Apple, Tesla and Facebook will have reported quarterly earnings and US futures could be ripping higher. Or the market may finally have a more realistic take on things and take some profits after an insane run over the past six months or so.

As far as the Aussie market goes, all I can say is that if we’re going to have a decent correction, this is a pretty good point to do so. The ASX 200 is bumping up against some very long-term resistance here, as you can see in the chart below…

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

It’s trading just above the 2007 peak but will likely tick back down below there today. In mid-2019 the index did the same thing, before experiencing a short and sharp correction.

It wouldn’t surprise me to see another correction unfold here at this important level. The market needs to flush out the hot money before it can make a sustained move to new all-time highs, something that I expect to happen this year.

A correction back down to 6,000 points would be healthy. Yes, the bears would get all excited and tell you to wait for much cheaper prices. But unless the sell-off is accompanied by higher bond yields and/or higher real interest rates, you can safely ignore them.

It will be a correction to buy…


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Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

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