Unprecedented Inflows to Inflation-Friendly Assets, Brewing Bubbles, and Bracing for a Correction

Investors look to be bracing for increased inflation and are pivoting toward inflation-friendly assets in unprecedented droves. Is it a sign of approaching growth or an omen of potential runaway prices? It may be largely down to the Fed, which just concluded their first gathering of the Biden era. And as the GameStop saga continues, retail investors have also managed to push call volumes to extremes, and 89% of investors now think the market is flush with bubbles. U.S. indices meanwhile have continued to hit new highs this month, despite some stimulus-talk induced nerves, but the pattern may not continue forever according to the CAPE ratio (cyclically adjusted price-to-earnings ratio—a comparison of equity prices to earnings adjusted to account for seasonal fluctuations in the business cycle) and BCA Capitulation Indicator. Are your portfolios prepared for a potential leg down?

1. Low rates, lack of supply and Covid fears of city living continue to drive housing prices higher:

Source: The Daily Shot, from 1/27/21

 2. Many investors are positioning portfolios for higher inflation. After trying to stimulate inflation and growth for years, will the Fed maintain control?

Source: The Daily Shot, from 1/26/21

 3. Have retail investors pushed equity calls into bubble territory? The current 3-month moving average dwarfs historic highs...

Source: The Daily Shot, from 1/26/21

 4. The herd is often wrong; yet if 89% of investors think there is a some sort of bubble, are we all just playing a game of chicken or musical chairs? Momentum driven trends usually last longer than expected, but what do clients want in the end?

Source: The Daily Shot, from 1/27/21

 5. An interesting “tug-of-war” is happening between some large hedge fund/market shorters vs. the aggregate retail investor spurned on by some online websites. Historically, hedge funds and others would heavily short a stock and publish their reasoning. Those stocks usually fell as a result. However, the aggregate retail investor is now seemingly turning this on its head…the hunters have become the prey as retail investors continue to buy their darling picks despite some lofty valuations. The result is the short squeeze buying has sent these stocks to even higher valuations. Bubbles, regardless of cause, rarely end without a “pop”…

Source: The Daily Shot, from 1/27/21

 6. What will happen to the gaggle of tech darlings if these retail investors join the shorts? "Pop" indeed...

Source: The Daily Shot, from 1/27/21

 7. Will the aforementioned shorting battle be the catalyst to the next leg down?

Source: The Daily Shot, from 1/27/21

 8. Using the C.A.P.E. valuation methodology, here is what has happened historically:

Source: The Daily Shot, from 1/27/21

 9. Will the 40-year historical pattern repeat? If so, we are due for a 10%+ correction...

Source: The Daily Shot, from 1/26/21

 10. Regardless of the USD's movement, after a decade of relative underperformance, EM stocks look to be inexpensive versus the U.S. markets...

Source: The Daily Shot, from 1/27/21

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