It was a good race


By Jared Dillian, Mauldin Economics

I think the long bull run in stocks is finally over.

Keep in mind that I am saying this at great personal risk, because if I am wrong, well, there is no reason to be wrong as a market expert. Once something is on the Internet, it is forever, and people will be connecting to it for years to come. Look at that idiot who was wrong. It is difficult to predict, especially for the future.

Either way, here are some bulleted ideas on why stocks may have peaked:

  1. Inflation is honestly out of control. He shows no signs of improvement. And yes, supply chains are dirty all over the world, but not all supply chains. It’s a profound psychological shift, and the Fed is powerless to stop it.
  2. Speaking of the Fed, this trade scandal involving Kaplan and Rosengren is a big deal. There are people who have never been happy that the regional Fed chairmen are chosen by the boards of directors of the respective banks. The Fed will come under pressure to influence the replacement of Kaplan and Rosengren, who were two of the more hawkish members of the Fed. Soon the entire Fed system will be filled with progressives, just as inflation turns parabolic.
  3. China will be the source of the next crisis, as President Xi Jinping sees capitalism as a threat to his power. It has brought billionaires and successful internet companies to their knees, and it will continue. I think Xi wants a closed company, much like the Soviet Union in the 1960s. I wouldn’t be surprised if China hadn’t had capital markets in 10 years. There are big implications here.
  4. The bond market appears vulnerable. The rates went up slightly and that caused a lot of trouble in the stock market. I’ve been doing this for quite some time, and I’ve never seen a stock market so sensitive to tiny changes in interest rates. If 10-year rates go back to 2%, there are going to be big problems. I’m minimizing that a bit. It’s going to be a disaster.
  5. And finally, the feelings. I followed the sentiment closely, and was really freaked out by the memes’ actions in January, followed by bitcoin and dogecoin, then the NFT market and collectibles. Most of this calendar year has been one of speculation, and she is starting to get tired. This is the most important reason for selling stocks – this is a great secular high in bullish sentiment.

In any event.

What do you do with this knowledge?

Market timing

They say you shouldn’t be trying to time the market. You will eventually cut yourself into pieces. It’s true. Mainly because people are really bad at it.

But I think even small changes in an asset allocation at the top or bottom of the cycles can make a big difference in performance, and I think smart people with a lot of experience should give it a try.

This is one of those times.

Making the right adjustments is difficult in an environment of high inflation, as stocks and bonds are likely to do wrong simultaneously.

Think of the 1970s. Bad decade for stocks, bad decade for bonds… but good decade for commodities. And while I don’t think the 1970s are a perfect equivalent of what’s happening today, it’s a pretty good approximation of how you should invest in a time of high inflation.

What we’re starting to see in stocks is that yes, companies can pass on price increases, but they can’t keep up with the rate at which their costs are rising. Margins are compressed.

In 2020 and early 2021, inflation was benign, and it was a positive tailwind for stocks, but now inflation is a malignant force.

So if you have a 60/40 allocation to stocks and bonds, it’s time to make some adjustments.

Now most people will read this and say, “Shit! I’m going to panic to sell everything and panic to buy commodities.

You don’t need to do this: Very subtle changes in asset allocation can make a big difference in your returns. If you went from 60% stocks / 40% bonds to 50% stocks / 30% bonds / 20% commodities, that would make a huge difference.

Investing in commodities can be a little scary for people, but there are all kinds of exchange traded products that can help you – you don’t need to open a futures account. Although futures are fun.

So yeah, I think you should time the market – about two or three times in your life. With big obvious turns. It may not seem obvious to you, but to me it is. I could be wrong, but see paragraph 2.

The next party

The last night in New York was a huge success, truly one of the best I’ve ever had. The next one will be too, and you are all invited! I’ll kick ass with progressive house, Adam Silver will kick ass with house, and my good friend Saad Khan from Toronto is capable of some of the best warm-up sets in the world.

Friday November 12, Doux Supper Club, 59 W 21st St, 7-12 p.m. And it’s for a good cause: we save cats. I will post a link for the tickets in a few weeks. We’ll see each other there.

Jared dillian

Originally published by Mauldin Economics on September 30, 2021.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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