Op-ed views and opinions expressed are solely those of the author.

Inflation impacts the price of hard assets as well as goods and services. You can’t push this amount of money into the system and not have that door swing back and hit you in the behind. One of our analysts told me the other day that housing prices aren’t going up – the value of the dollar is falling THAT MUCH. Wrap your head around that for a minute. The reason it appears houses are going through the roof in value isn’t that they are, it’s that the number of dollars needed to buy that house has gone up because the value of the dollar has fallen – or is going to fall – by that much!

If you leave your money in the bank, it earns nothing, and its value is plunging. What it can buy is becoming less and less each day. Inflation is why a person retires with a pension of $4,000 a month in 1988 and it seemed like a decent monthly to live on, and they’re still here living their life and $4,000 a month is kind of thin if they have to pay rent and such. 

Our group of very experienced “rogue” traders and Street professionals do macro research on the market, and we deliver our real-time trades to our subscribers. We do technical chart analysis, we put our commentary on those charts, and we literally live inside this beautiful discounting machine we call “the Market” every day.

What do we mean by that?

The market is an amazing animal that takes in all information and it digests it and makes a determination – usually pretty quickly – as to the impact it will have on stock prices. And that decision, on any topic, such as future capital gains taxes or inflation, shows up in prices. When Biden Administration floated the “ideas” about a high capital gains tax, the market digested it in a day and figured out that the odds of it actually occurring was basically zero, and that anything that did get passed would be a “nothing burger” to most Americans. That’s why the market rebounded and then went about its daily business. 

On May 11th the DOW dropped -473 points and on May 12th it dropped -681 points. That’s a two-day drop of over 1,150 points. They call this a “repricing” and they say it’s due to inflation fears. I call it a severe crack that you have to pay attention to and yes, the market got it right again, it is fears of inflation. But it may be more than that. Let’s tackle inflation first, then I’ll give you the other reasons why the market “repriced”. It is likely that the price of everything is about to go up…and not come back down. We have had a long period in which the price of goods has stayed relatively sanguine and in many cases, even dropped. But that may be changing in the long term. That means that for you to afford your current lifestyle and expenses, you’re going to need to make a lot more money. Maybe like 30-50% more than you’re currently making. There was a day when making $100,000 a year was a lot of money, and now, sadly, if you live in a place like Southern California, Boston Massachusetts, or New York, $100,000 pretax barely makes it if you’ve got a wife and any kids for sure. Rent in a nice neighborhood is easily over $3,000 for a two bedroom apartment or home. After taxes, in California for example, that would mean that you would have around $2,000 a month for all your other expenses. Food, car payments, school stuff, clothing, gas. Forget saving for retirement. It goes pretty fast. 

Why did this drop in the DOW happen? They call it inflation fears and they’re right, sort of. You have had Janet Yellen and Jerome Powell running around for months saying they’re not worried about inflation and that they’re not going to raise rates and everything if fine. But the market started to call BS on this narrative months ago when it spiked interest rates in the open market from under 1% to around 1.75%. You see, the market has a vote. Like my friend from the military says, “You can plan all you want, but the enemy gets a vote, too.” And in this case, the market was voting that rates probably need to go up. That was months ago. Now, after all this stimulus has been shoved out into the economy, to a level that we have never seen in history, the consumer price report came out on May 12th and the truth was clear: We had a massive increase in prices. Inflation is not coming, its here. And the market reacted, dropping the DOW -681 points, and crushing the already bruised tech market.

The market was right. Inflation is here.

Rates do need to rise perhaps. So this narrative that Yellen and Powell are pushing out  -which is that rates won’t have to be raised likely until sometime into 2022 – is being called out, big time, by the market participants. The market is saying “you’re going to have to raise rates sooner than you’re talking about.” 

The thing that Carnivore sees additionally underlying this drop in the market is the fact that the supply chain is messed up. Prices are high and that impacts profit margins. Availability of certain goods, like cement and lumber, are a problem. Home builders we feel are due for a fall in stock prices, which we stated back around the first of May…and the reason is, there is no inventory. There are no homes to sell. It does not matter if you have great pricing if you have nothing to sell! The point is, the excitement about the reopening trade is great, but now we’re seeing that it may not be possible to produce revenue and profit figures that just a few months ago were assumed to be possible now that we see the challenges in the labor market and the supply chain.

At Carnivore Trading, we have to take these macro issues into account when we decide where to trade in the stock market. What sectors will win and which will lose? In the last month, we have been long lumber, cement, steel. We went long the marine container shipping companies and they really rallied strongly for us as everyone around the world wants everything that makes everything, and they want it now.

The issue is, there are only so many ships. So we saw that the guys with the ships would be able to charge whatever they wanted to charge, and get it. Financials will do well in an increasing interest rate environment, so we like small and regional banks that are leveraged to the spread between the Fed Funds rate and their loan portfolio. Finally, as a part of the reopening trade, we think that retailers will do very well going forward as the Generation Z crowd gets excited about going out again. Where do we see interest rates going? Putting a number on it is notoriously a fools errand, but let’s just say take whatever the so-called experts say, and we say it’s higher.

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Dutch Masters

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