Real World Versus the Digital World, Which Does the Market Believe?
Aug 8, 2021 Trading Blog
Just a short article today on some market thoughts and how my market view may be changing a bit based on recent real life experiences, as opposed to digital Twitter world experiences. I wonder if other traders may start to drift toward the same beliefs, especially when it comes to oil and oil stocks.
Two weeks ago I took a family vacation to Key West. The plane was packed full. The Atlanta airport was also packed full of travelers. Once in Key West, there were people everywhere, and they were spending money. There was even a parade for the Hemingway Festival that must have included 10,000+ people. Not a mask in sight. Last night I went to the Jimmy Buffett concert where there were probably 50,000+, and while there were a handful of mask wearers, I’d guess that 99% just didn’t care at all. They were there to have fun, live and SPEND MONEY. Beer lines were long ($13) and the Merch lines were full ($40-$60 t-shirts). People want to live again.
Sometimes when we live in a digital world like Twitter, we lose track of the real world. There’s this small group of doomsday individuals on social media, yet occasionally they appear to be the majority. Truth be known, that group is probably extremely small, yet incredibly loud. They don’t represent the majority, especially in the real world. As traders, I think we get sucked into this digital world and it affects our market views. The difference in the digital world and the real world is HUGE right now. Just something to keep in mind when you make trading decisions. Are your trading decisions based on the digital world or the real world? Which is the correct view?
From what I’ve seen in the real world lately, this economy has room to run. Go back to November 2020 and the vaccine announcement. The market exploded higher with the SPY going from ~328 to ~442. The XLE went from 30 to 56. Now, imagine that this Delta variant disappears (it will). Imagine that the government backs off and drops all these silly lockdowns and mandates (they will). Imagine that all the already vaxxed get the booster (they will) and the remaining unvaxxed are coerced to comply (they will be). That kind of situation could be November 2020 all over again. There is so much bottled up demand out there, I’ve seen it first hand. Given this demand, I can’t imagine how the economy itself could reverse downward in any significant way. While there’s always black swans, I just don’t see people hiding again, they want to live – and spend.
So what could go wrong? The market has it’s own sick way of fooling us. I think the one thing that could go wrong is that things go too well and the whole thing overheats, which forces the FED’s hand. Good news becomes bad news for the market. It’s counterintuitive. We see the inflation problem that developed on the November vaccine announcement and now that inflation is at dangerous levels. What happens to inflation when a second round of “re-opening exuberance” happens? What happens when all those 50,000+ from the Buffett concert learn that it really is ok and safe to live again? What happens to their friends who are still living in fear when they see others living life again? Will they also join the party? And then it snowballs back to life as normal. The real question is, can this economy, and all the QE and printing, withstand that kind of spending without overheating an producing inflation that forces the FED to act, and possibly act quicker and more forcefully than desired?
If it overheats, the FED has no choice but to implement a taper and possibly raise rates. The real question is how fast will the market require they act? What happens to the stock market if the FED is prevented from manipulating it? Can it stand on its own without the money printer on full blast? There will be some big volatility as we blindly feel our way through that inevitable process. And then there’s the scenario of what would happen to the economy if the market did crash and all the confident 401k holders immediately stopped feeling wealthy and subsequently stopped spending? It’s one vicious cycle.
The one question that bothers me is whether the government realizes all this and is purposefully keeping its foot on the throat of the public with covid fear, lockdown threats and mandates. Are they throttling the recovery to protect the largest source of wealth we have (the stock market)? Are they throttling it so the FED can continue to print and enrich the 1%? Exactly what would happen if the government backed off and opened this great country 110% and allowed people to live (and spend) again? Do we ever get the chance to find out the answer to that question or does the whole process and cycle remain manipulated forever?
I really don’t know what happens from here, but what I do know is that bottled up demand fighting against the government oppression is going to produce some BIG volatility at some point. Who ultimately wins this battle, citizens who are ready to live again, or a government who wants to control those citizens so as to alter market cycles and manipulate the stock market? Only time will tell.