I am looking at the gap between what financial markets are doing and what I see economic indicators are doing, and it all boils down to what I believe inflation is going to do.

The Fed keeps repeating that the current inflation we’re seeing is transitory, which is why they have kept doing two main things: 1. Keep interest rates near zero and 2. Keep their asset buyback programme going.

For me, even though I believe inflation is NOT going to be transitory, I would be foolish to discount the power of the monthly $120bln asset buyback by the Fed.

When I look at market dynamics, I have to look closely at who are the buyers and the sellers, and, for now, the Fed remains one of the largest buyers.

So, even though from a long-term macro point of view I see inflation to have a massively negative impact on the economy and markets, the current situation is different, and will remain so until the Fed becomes less dovish.

This discrepancy between what the market is doing and what I believe the economy is heading is what makes me extremely careful with all the positions I’m taking, as well as keeping a relatively short-term view with all my trades.

At any point the Fed will mention a slowing down of the asset buyback programme, bringing forward interest rate increases, or even mention a view of the inflation that is not “transitory”, I expect a rather significant correction across the board, if not even a crash, since market participants might become less confident of the support the market is getting, and we could be seeing a shift in market dynamics that could actually last for quite a long time!

In the meantime, as I’ve mentioned above, I would be foolish to not take into consideration the amount of money the Fed is pumping into the markets, and I will make sure I’m riding the wave before it comes crashing down.

How am I tackling this? As I’ve mentioned repeatedly, I am keeping a decent cash buffer in the portfolio, as well as keeping a very close eye on my holdings. Moreover, I only look at fundamentally sound assets that are deeply undervalued.

Timing the markets is not what makes consistent profits, but understanding what to look for is key to consistently staying in the green.

As always, I’m more than happy to answer questions or discuss any of these views.

Cheers,

Hassan

(Written by Hassan Afifi)

Please note that we do not provide any financial or investment advice. All the material shown here is for educational purposes only, and we only mention the author’s own personal opinion and approach for such educational purposes. If you would like to invest or trade, we urge you to do your own research and to seek professional advice from qualified investment advisors.

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