Sky-high inflation and debt, falling bonds and central banks ready to raise interest rates means that we already have all the ingredients on the table for a bear market in the stock market.

Sky-high inflation and debt, falling bonds and central banks ready to raise interest rates means that we already have all the ingredients on the table for a bear market in the stock market.

Sky-high inflation and debt, falling bonds and central banks ready to raise interest rates means that we already have all the ingredients on the table for a bear market in the stock market.

The huge bubble in the financial markets

The other day I was asked on a social network about the percentage of liquidity that I have at this moment, to which I replied that it was over 90%. And the truth is, since this social network does not allow an explanation of the reasons that have led me to make that decision to be extended as it deserves, well, what better space than from my window in Invertia where I can extend everything I need, but Above all, being able to argue it with data and graphs so that it is better understood.

First of all, and from the point of view of common sense, what comes to mind is obvious. So obvious that it is explained in the first year of economics: the cycles of the economy.

throughout the ages, the economy recurrently goes through boom and bust phases. And these transitions in the economy from one stage of the cycle to another often occur in such a smooth and indefinite manner that most of the time, economic and social agents are not aware of the change in one stage until it is already well advanced. , so sometimes it is too late to make decisions.

And this is precisely what is happening to the US Federal Reserve at the moment with a clear inaction in controlling inflation under the belief that it is transitory. Now that they realize the aberration of having it at 7.5%, they are willing to surprise the market with an aggressive rate hike, and that could happen as soon as this Monday at the extraordinary meeting they have called.

In fact, this is how the US Federal Reserve started raising interest rates in the 1980s, with an extraordinary call.

US CPI

US CPI
Eduardo BolinchesFederal Reserve Bank of Cleveland

A rise in interest rates in a country where the level of public debt far exceeds 28 billion dollars It is going to have serious consequences throughout all world economies.

We will have a strong US dollar and with it an export of inflation to other economies that are not so stressed, although with equally high inflation.

US public debt

US public debt
Eduardo BolinchesUS Department of the Treasury. Tax Service

In fact, although the US Federal Reserve would not want to raise interest rates sharply so as not to hurt the stock market, it is really already taking care of the bond market in doing it.

The current price drops in the bond market are doing nothing more than anticipating the price of the discount rate that we should have from the US Federal Reserve.

US Treasury 10-year bond yield

US Treasury 10-year bond yield
Eduardo Bolinchesstock charts

This week we have seen how it was achieved 2% return but the worst of all is that the interest rate curve is flattening and soon we will be able to talk about it turning around.

And those turns, as we can see in the following chart, are excellent warnings of subsequent recessions.

Difference between the bond at 2 and 10 years

Difference between the bond at 2 and 10 years
Federal Reserve Bank of St.Louis

So the debt market is telling us loud and clear with a general drop in prices in Treasury bonds, private debt and high yield bonds that imply a clear interest increases.

A rise in interest that comes just at a time when we have another big bubble of real estate assets that leaves the one we lived in 2006 on the sole of our shoes and that ended up exploding with subprime debt and leading Lehman Brothers to the graveyard.

US house price index

US house price index
S&P Dow Jones Indices LLC

All this is not going unnoticed in the stock market which already left record highs last November in the case of the Nasdaq and since then we have been seeing falling highs and lows.

In fact, this phase in which we find ourselves of the supposed beginning of the bearish phase is characterized by very strong movements and with it an increase in volatility because the reactions are also very violent that lead more than one to think that we are at very attractive market prices and that should be used.

Evolution of the Nasdaq Composite

Evolution of the Nasdaq Composite
Eduardo Bolinchesstock charts

In the upper graph we can see that the long-term moving average has already been lost, which it hasn’t happened for 22 monthsbut this is only the beginning since the purge to the rise from the lows of the year 2020 should be at least half of the rise.

This leads us to a price of 11,400 points, although personally I don’t think the correction will end before seeing 9,855 points. However, this would be the best possible scenario with the purge from 2020 lows instead of March 2009, which are scary to calculate.

Russell 2000

Russell 2000
Eduardo Bolinchesstock charts

And I want to finish with the one that is for me the clearest graph that shows that we are in the process of distribution and that is none other than the Russell 2000.

This stock market index collects the 2000 companies with the smallest market capitalization and as we can see on the chart, it has clearly been in a lateralization process for almost a year before finally breaking out at the bottom.

Therefore, the reading to be carried out is very clear: the rise of Wall Street has been supported by very few values in an attempt to play for time on the part of the smart money and now the time has come, once their positions have been liquidated, to take off their mask.

If the market has started a major corrective move, we will know over time in the form of continuity of decreasing highs and lows. Time will therefore tell if I have been successful in switching to the side of liquidity or not, but what is undeniable is that now I am much more relaxed with my long-term hedged positions.

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