inflation and stocks

[treeman]

the inflation trade is to load up on oil and materials. and for the more aggressive to short tech at the same time. anyone actually doing this?

My current asset hedge shifted yesterday, as I got rid of platinum and upped my copper. Enough of that precious metals shit. That move is done, imo.

Im currently hedged about 40% assets in a basket of copper, wtic, and oddly enough rbob. On the lookout for some Brent, but I’m not gonna chase it and it looks up and away. Oh, and we are in backwardation. December contracts. You don’t see that too often, but sure, you can pay me to store my shit.

I was short the NQ until today when I released the short. But that was a pullback spread for my rty longs. I release the shirts, so I’m full rty now. I bought some more today. So, kinda short tech.

I don’t see anything aggressive about it at all though.

 

[piezoe]

I read through the paper. I did not need to make any photocopies. So you glimpsed over the abstract and concluded that your anonymous ET post is more grounded in facts and evidence than an academic paper you have never read. I see. You are pretty full of yourself, do you realize that? Also your post above is full of factual data errors. Some parts are just a rehash of what I already stated and in some other parts you directly contradict correlations over the past 30 years.

Sorry but I don't believe you. I don't see any evidence that you understand this topic.

 

[DiceAreCast]

That's fine by me. We need market participants like you, those who have an academic hard on, who believe they are somewhat intellectually superior to others, even though they are blatantly contradicted by historical facts and data. For your reference I traded professionally for over 15 years at bank prop groups and hedge funds. Of course you neither have to believe that. But I would not even have passed the second round of interviews for my first gig let alone made it to the position I command today if I did not have a keen understanding of macro economics, fiscal and monetary policy. If you just got riled up by my not being a native speaker then fine. Or perhaps you have an issue when a practitioner shaking your ivory tower. Whatever it is, I can move on but I will call you out on bullshit as contradictory to facts as stating inflation overall positively correlates with equity returns. We can happily discuss anomalies to the negative relationship between the two but if you can't even agree with market data and their historic relationships then I don't see much hope to further engage.

Sorry but I don't believe you. I don't see any evidence that you understand this topic.

 

[piezoe]

...as stating inflation overall positively correlates with equity returns

You may not have read the entirety of what i wrote, or if you did, you did not comprehend it. By avoiding unnecessary complexities, I made, so far as I know how, a clear exposition of those times when the market positively correlates with inflation and those time when it does not, and why. This relates to, and is consistent with the Elsevier article, at least with respect to data after 1971. I am not considering any period prior to 1971. As a trader you could, I believe, benefit from knowing not only what the market does, but why.

As a proprietary trader you would not necessarily have to have a full grasp of what I outlined, but it wouldn't hurt. Nevertheless, what you posted in your first post in this thread is entirely consistent with what I posted in my long response to you. In other words, inflation by itself can push equity prices up and produces positive correlation, but Central bank response to inflation pushes equity prices bank down and produces negative correlation. It is the timing and the lags that determine what you will be observing at any particular time.

If you care to criticize any particular point I made I will be happy to take your criticism into consideration so long as it is not taken out of context and therefore misunderstands what I actually wrote.

 

[DiceAreCast]

You clearly don't know what you are talking about Piezoe. That much I am certain of now. From your comment on proprietary trading you made that very clear. In no other discipline of financial trading does one need to have a better grasp of understanding macroeconomy theory than in prop trading. Even the odd guy who trades warrants and CBs or other special situations is impacted by the topic under discussion. Needless to say currency traders and bond guys.

Also, what's up suddenly with 1971 or any period before that, not sure why you suddenly steer in that direction. We talk about a much more relevant period, well after the Nixon shock and the end of the gold standard.

With all due respect I think you pretend to know a lot but when pressed you come up with all sorts of weird escape paths. I stand by my first post in this thread and I have studied my finance history and have made my living in it over the past 20 years. You can believe whatever you want to believe about relationships of economic data. The market prospers from diverse convictions. Of course only one can win, not everyone.

Just for the record, you have proven to not be capable of admitting mistakes when you were clearly wrong. That is my one and only reason I don't debate specifics with you. It would be completely pointless. You already rejected evidence once and accused me of only reading the abstract and lying about having read the actual paper. You also showed in previous exchanges that you just can't ever admit being wrong even when several people pointed you to evidence that contradicted your stance. Check my own post history, I have no issue to apologize and admit I was wrong when I was indeed wrong. Quite a different mindset between us in my book. Over and out.

You may not have read the entirety of what i wrote, or if you did, you did not comprehend it. By avoiding unnecessary complexities, I made, so far as I know how, a clear exposition of those times when the market positively correlates with inflation and those time when it does not, and why. This relates to, and is consistent with the Elsevier article, at least with respect to data after 1971. I am not considering any period prior to 1971. As a trader you could, I believe, benefit from knowing not only what the market does, but why. As a proprietary trader you would not necessarily have to have a full grasp of what I outlined, but it wouldn't hurt.

If you care to criticize any particular point I made I will be happy to take your criticism into consideration so long as it is not taken out of context and therefore misunderstands what I actually wrote.

 

[piezoe]

You clearly don't know what you are talking about Piezoe. That much I am certain of now. From your comment on proprietary trading you made that very clear. In no other discipline of financial trading does one need to have a better grasp of understanding macroeconomy theory than in prop trading. Even the odd guy who trades warrants and CBs or other special situations is impacted by the topic under discussion. Needless to say currency traders and bond guys.

Also, what's up suddenly with 1971 or any period before that, not sure why you suddenly steer in that direction. We talk about a much more relevant period, well after the Nixon shock and the end of the gold standard.

With all due respect I think you pretend to know a lot but when pressed you come up with all sorts of weird escape paths. I stand by my first post in this thread and I have studied my finance history and have made my living in it over the past 20 years. You can believe whatever you want to believe about relationships of economic data. The market prospers from diverse convictions. Of course only one can win, not everyone.

Just for the record, you have proven to not be capable of admitting mistakes when you were clearly wrong. That is my one and only reason I don't debate specifics with you. It would be completely pointless. You already rejected evidence once and accused me of only reading the abstract and lying about having read the actual paper. You also showed in previous exchanges that you just can't ever admit being wrong even when several people pointed you to evidence that contradicted your stance. Check my own post history, I have no issue to apologize and admit I was wrong when I was indeed wrong. Quite a different mindset between us in my book. Over and out.

Ok. Perhaps there is a little projection of your own personality going on here. I note with amusement that if I am "wrong" you are as well, because, of course, there is nothing incompatible among your first post in this thread and my long post. I simply expanded with much more detail and covered anomalous situations such as when there is a weak dollar, yet no inflation, such as during full on QE. That was a period of non-correlation with inflation, which was almost constant near zero, but strong negative correlation of the S&P with the dollar. Bernanke, try as he might, had to deal with swollen reserves because of lack of demand for credit. He finally threw in the towel so to speak and begin paying a very small interest on excess reserves to put a floor under rates to prevent them from falling to virtually zero. He said it was frustrating not to be able to get demand to respond to historically low rates.

As you do, I find that a fairly deep knowledge of macroeconomics and central bank operations is critical to my trading and investment success. I did much better in the markets when i started paying close attention.

As to this:

You also showed in previous exchanges that you just can't ever admit being wrong even when several people pointed you to evidence that contradicted your stance.

If you can point me to those posts specific posts, I shall be pleased to respond, so long as i can add anything constructive.

It just occurred to me that there is probably an inadvertent communication problem here. In my earlier post, (#10) I posed a rhetorical question: "Take a look at dollar futures over time versus the S&P over time. Does there seem to be any connection?"

Did you perhaps interpret my question to mean there is no correlation? Then I used an example of where there can be positive correlation between inflation and rising equity prices. Which we see sometimes. We've just been through a period like that. But I don't what to mislead anyone to think that I am suggesting inflation is the main driver of equity prices when there is positive correlation. It is unlikely to be. It's the C.B.'s intervention, or anticipation of it, that causes the negative correlation, however, as we have both pointed out.

 

[DiceAreCast]

"Does it? Ceteris paribus , inflation should increase the price of equities, No?" post #8 of this thread.

I think by now we can both agree that this was a nonsense post. The entire time I referred to this post alone. I glanced over your long post but when I stumbled across the 2nd or 3rd fallacy in thought I cut it short. What you did the entire time was to find exceptions to the strong negative correlation, though all such exceptions are driven by extreme exogenous influences that strongly impact asset prices and inflation, yet find no natural occurrence in financial markets. Do they matter for trading? Of course they do. But they don't drive nor explain the natural relationship between inflation and asset price returns in equity markets.

That's all I can say to conclude my participation of this topic.

Ok. Perhaps there is a little projection of your own personality going on here. I note with amusement that if I am "wrong" you are as well, because, of course, there is nothing incompatible among your first post in this thread and my long post. I simply expanded with much more detail and covered anomalous situations such as when there is a weak dollar, yet no inflation, such as during full on QE. That was a period of non-correlation with inflation, which was nearly constant near zero, but strong negative correlation with the dollar. Bernanke, try as he might, had to deal with swollen reserves because of lack of demand for credit. He finally threw in the towel so to speak and begin paying a very small interest on excess reserves to put a floor under rates to prevent them from falling to virtually zero. He said it was frustrating not to be able to get demand to respond to historically low rates.

As you do, I find that a fairly deep knowledge of macroeconomics and central bank operations is critical to my trading and investment success. I did much better in the markets when i started paying close attention.

As to this:



If you can point me to those posts specific posts, I shall be pleased to respond, so long as i can add anything constructive.

 

[piezoe]

Does there seem to be any connection?

"Does it? Ceteris paribus , inflation should increase the price of equities, No?" post #8 of this thread.

I think by now we can both agree that this was a nonsense post. The entire time I referred to this post alone. I glanced over your long post but when I stumbled across the 2nd or 3rd fallacy in thought I cut it short. What you did the entire time was to find exceptions to the strong negative correlation, though all such exceptions are driven by extreme exogenous influences that strongly impact asset prices and inflation, yet find no natural occurrence in financial markets. Do they matter for trading? Of course they do. But they don't drive nor explain the natural relationship between inflation and asset price returns in equity markets.

That's all I can say to conclude my participation of this topic.

OK , nice. We do agree (on the essential matters. at least.) And i just edited into my prior post a comment on the very post you refer above. We have thoroughly explored this topic!

 

[Arnie]

can someone please explain to me why when there is a rise in inflation it has a negative effect on the stock market?

It's not always the case. I think in the current environment stocks will do well relative to other inflation hedges. Stocks have underperformed when inflation spikes, usually above 4%. Under 4% stocks do well. But it's all relative. We are definitely in uncharted waters with historically low rates and massive printing, and exiting a lock down caused by a once in a century pandemic.

 

[longshort]

I solved the mystery. Since 2009, the monthly correlation of Fed assets and Wilshire 5000 is 0.85. Which means that money printing (manipulation) in recent years explains a whopping 85% of the stock pseudo-market.