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There Is One Fact About Financial History You Must Take Seriously (How Inflation Ends) – Mike Swanson

I don’t need to tell you that the stock market dumped bad again yesterday as the headlines are everywhere about it and we got a strong sell signal before that on Friday for the S&P 500 warning us that another drop was coming. The signal didn’t tell us that another crypto coin would malfunction or that a major crypto exchange would announce that it would freeze withdrawals, showing how worthless crypto truly is in the real world, but when markets are in a bear market typically bad things happen. There is a saying that bear markets are like the tide going out in the ocean and the turds come to the surface. That’s true and even the true character of specific market gurus gets exposed too.

But everything fell on Monday, including energy stocks, gold, and mining stocks.

We have a Fed meeting tomorrow and there is a chance that the market will bounce around that meeting or rally after it for a day or two, but we are nowhere close to the end of this bear market. If anything we have simply begun the second of three phases of it. More on that tomorrow.

I just want you to focus on one fact today.

We have seen so many false predictions and basic lies to keep people excited about the markets told in the past few months that I want you to focus on one single reality today so you don’t miss it.

We were told that inflation was “transitory” last year when it was not and told by bull market gurus and people like Cathie Wood that inflation was peaking in May so the stock market was fine when inflation was actually growing and the stock market simply was putting on a dead cat bounce. The market rally and talk of gurus like Cathie Wood fooled a lot of people into being complacent.

The thing is, though, that there are a lot of people that have made money in the markets that were not simple flash in the pans like her that I have a lot of respect for.

One of them is Stanley Druckenmiller who spoke at the Sohn 2022 investment conference.

In his presentation he noted that historically whenever CPI inflation has gone above 5% inflation did not go back down to below 3% until the Fed funds rate went above the CPI inflation rate.

Never did inflation just pop up and go down without rates going above the CPI.

That’s why Cathie Wood was wrong in her claims that inflation would peak and so were those that repeat what she says, because she became so popular with Robinhood app traders.

You can hear Druckenmiller say this six minutes into his presentation here.

There are huge implications to this.

First – the inflation we are going through is a secular trend like it was in the 1970’s.

During times of high inflation bonds do terrible and stocks don’t do that great either.

Commodities in fact outperform stocks.

Secondly – we are going through a rate hiking cycle right now.

Obviously, that is hurting the stock market.

But this cycle will come to an end one day (I think in the first quarter of next year as that is what the Fed funds market is projecting and I listen to that instead of guru predictions), and when it does come to an end it will do so below the rate of CPI inflation, as that is over 8% now.

That means after this bear market there will be another bull cycle for stocks associated with weak growth and inflation, although lower than it is now, but after that there will be at least another hiking cycle before inflation is truly defeated.

In the 1970’s they called policies like that “stop and go” on the part of the Federal Reserve and that is what is now coming.

We aren’t going back to the way things were and people like Cathie Wood who keep saying we are are telling you nonsense.

Gold dipped yesterday, but eventually I expect it will do what it did in the 1970’s and breakaway from the stock market and explode.

I’m not sure when that moment is going to happen, but I am watching the charts to recognize it when it does and holding core positions so I won’t be chasing when it happens.

But for now, just focus on the simple historical reality that once CPI gets above 5% it takes rates going above that CPI rate to bring inflation down for good.

We are nowhere near that level.

Think out the implications of that and adapt and adjust your investing and trading accordingly.

This is not 2020 when people could open up a Robinhood app and just buy whatever others were buying on it and make money.

Herding means losing lots of money now.

Just look what happened to the crypto herd yesterday.

It was all BS what they were told, but they believed the crypto gurus and are now holding millstones in their trading accounts.

Cash reserves are more valuable now than crypto coins, because cash reserves enable one to buy when this bear market is over while cryptos are lagging the S&P 500 so are acting as portfolio destroyers in this bear market.

When the Nasdaq drops cryptos crash and the rallies don’t make up for the devastating losses.


In fact if you have a crypto account at Coinbase, Robinhood, or one of these other exchanges you may want to consider closing the account completely and moving the cash into a bank account or real brokerage account where it can be used to buy stocks later.

In bear markets you don’t want to be one of the last ones liquidating at the end of them.

One last thing – go back to the 31minute mark in the Druckenmiller presentation and you’ll hear him talk about how he watches out for “stale longs” and “stale shorts” in his account and is honest with himself about when he is “running hot” or “running cold” in the markets and sizes accordingly.

That’s a smart tip and is why I write so much now about cash reserves – this is a time when most people should be sizing small in the market for when things get easier for them. I know how hard these markets can be and people who started trading in 2020 have never experienced anything close to what is happening now.