These Huge Market Distortions Indicate Vulnerabilities (and Opportunities)

The last time we had a divergence this pronounced was in 2000, right before the Nasdaq dropped 83% from its highs.

These Huge Market Distortions Indicate Vulnerabilities (and Opportunities)

In this article:

  • The problem with inflation and the Fed's balance sheet
  • Worrying divergences in US stocks indicating a bubble?
  • Similarities to my famous New Zealand dollar trade
  • Potential trade opportunities and their triggers

Thoughts on the Market - February 5, 2024

In my last write-up, I discussed how this past week was going to be full of important economic data and associated market risks. In fact, the numbers didn’t disappoint, as we had a week of outlier data, with the nonfarm payroll data being particularly shocking. The idea of a March interest rate cut by the Federal Reserve Board has been largely crushed by surging employment growth and much higher than expected hourly wage data. Powell has effectively confirmed that a rate cut at this time seems quite premature.

I have maintained for a long time that inflation would prove to be stickier than we would like, so I wasn’t particularly surprised by the much higher hourly earnings. The initial surge in inflation a few years ago was a natural by-product of supply chain shocks, huge government deficit spending, and the Fed going wild with monetary easing.

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