Hey Subscriber,

Well, I guess 4% inflation was NOT priced into the ARKK portfolio, eh?

Not a shot at Cathie Wood (she wrote very nice things about my first ChangeWave book) but investing in the stock market is and will always be balancing the risk/reward proposition.

My point here is that I assume that IF you owned ARKK or another high-risk/high reward thematic ETFs or underlying stocks, I assume you understood that you were engaged in a game of musical chairs.

PS You KNOW you are in a stock market game of musical chairs when ANYTHING you own goes up 50%+ (5 years of avg. stock market gains) in hours, days, or even a few months. 

IN the stock market flyer game of musical chairs, at SOME moment for many reasons the flying higher music will stop, and that is when you would A) SELL B) breathe a sigh of relief and C) revel in the massive hits of dopamine we all get when we are presented once again with undeniable proof of just how freaking smart we are. 

That is why we shared this foreboding chart on March 18 to advise you that the ARKK music was rapidly ending:

Key Point: Like ALL things in the once-a-hundred-year pandemic and post-pandemic economy, the risk-reward and price discovery process of equities and bond markets was accelerated and compressed by a factor of 15-20X into a $5 trillion game of musical chairs.

For instance, we at TR made a boatload of money TRADING the 2020 SPAC mania--with the only rule that we were not INVESTING in these SPACS if they exploded 100%-400%-800% in days and weeks--80 years of stock market wealth in a few days (SEE Nikola June 8-10) is, of course, NOT NORMAL and will, sooner than later, be corrected (see $11.50 price today).

This brings us to 8:30 AM in Washington DC and the Labor Departments' monthly release of YOU CPI and CPI-adjusted by removing volatile energy and food costs. In case you fell asleep in Economics 101 (strangely a class my ADHD addled mind loved) CPI is the Consumer Price Index (CPI) which is simply a measure of the average change over time (year over base year) in the prices paid by urban consumers for a market basket of consumer goods and services.

Now as my twin brother loves to say (a very good investor in his own right) "a blind three-legged dog with a note tied around its neck" SHOULD have expected a "hot" 4% CPI print from April simply from the rise in gasoline, flights and hotel rooms in the first real month of economic re-opening.

On our Zoom meeting with Jay Hatfield, the portfolio manager of our favorite high income plays AMZA and PFFA (PS if you are worried about after-tax returns on dividends, PFFA is dividend is only about 23% taxable--load up here if you fear 43% income tax on dividends) we BOTH forecast a 4% hot print--and I AT LEAST thought that 4% number was a big part of stocks and bonds getting "re-rated" aka valued with a higher discount to present value. 

NOTE: We will post the video this week--LOTS of good stuff including $75 oil prices to come! 

Yet I did think it prudent to wait to see the whites of the eyes of a 4% inflation print BEFORE making some important portfolio moves (I remember years ago that one time I made a macroeconomic forecast I made was wrong :). 

So yea, now that the rest of the world has caught up to the reality of the economic re-awakening aka our new bout with "CPI Inflation Inflammation" we are going to take our 105% average profits (not including 14% ish dividends) in mortgage REITs for whom rising rates are kryptonite:

SELL 
Annaly (NLY) up 69%
REML up 136%
NRZ up 93%

NOW--if you love the dividends and don't care about these mREITS going down in value as 4% inflation gets priced into mortgage bonds, at least sell REML because of the 1.5X leverage in the ETN structure. 

But YO-- I run our managed accounts and investment newsletters for ABSOLUTE performance and since the value of a mortgage bond trades inversely to interest rates, higher mortgage rates will mean that the NAV of a mortgage REIT will decline and that normally takes mREIT share prices with it.

Next on the block--we 1) KEEP
SONOS--great earnings tonight and guidance--Buy Under $36
CHNI--the definition of a value priced industrial --Buy Under $15
FSLY--got killed last week but down 50% from support is WAY oversold--buy under $42 for a speculative bet in recovery. 

2) Put our Mega Caps/RMO on a tight leash (50-day MA)

3) SELL  HTOOW EOSE to clean out the few remaining no-earnings bets and help wash the prodigious profits we have taken this year. 

Final Point: While ARKK will get an oversold "dead cat bounce" soon (a VERY non-PC/Woke Wall Street term as in "even a cat dropped from a 20 story building will bounce"), the RISK and REWARD of buying disruptive thematic ETFs that contain high growth but no profits ON THE DIP assumed 1) the forward growth of overall GDP would stay under 2% aka low growth and b) below 2% inflation would persist due to the powerful disinflation forces unleashed in the last 30 years.

We advised you (for at least 6 reasons) on May 4th why we found that the odds of the balance of disinflationary forces (in effect since the mid-'90s) and post-2020 pandemic inflation forces skewed heavily toward "stickier" inflation than just some "transitory" inflation as the US economy re-opens with 14 months of citizens couped up at home. 

But again, as we posted last week, for the first time since perhaps WWII, we now have all SIX types of inflationary pressures all occurring at the same time: again--we simultaneously have every heinous form of price and asset inflation bubbles known to the modern world.

We have:

1) Demand-pull inflation which arises when the aggregate demand increases at a faster rate than aggregate supply--can you say the "unlocking" of a locked-down $20 trillion economy that is about 70% consumer-driven that is currently without enough people/staff or aggregate supplies to possibly meet demand?  

2) Cost-Push Inflation is a result of an increase in the price of inputs due to the shortage of production (read semiconductors the new oil of the digital economy), leading to a decrease in the supply of outputs.

3) We have intensive wage inflation driven by the new $15 minimum wages, unemployment benefits that are more lucrative than working, and a material amount of skilled and professional labor dropping out of the labor market altogether. 


Anecdotally, those folks are coming to our Wealth Management practice and saying "OK Tobe--here's the dough--make me $200k in annual income and I don't want more than 20% in stocks, ok?"

PS: We are working hard on adding new space on our Wealth Management platform, OK? 

4) Of course we financial asset price inflation where every asset has gone way up in value from home prices to crypto with $5 trillion on cash money injected into our $20 trillion US economy and $5 grand of "stimmy" money and tax refunds.

5) Then of course you add the still meaningful YOLO marginal casino cash with 20 million NEW stock brokerage accounts chasing too few public or private or crypto or NFT things with "diamond hands."

6) And standing on deck, we have $2-3 trillion more of "infrastructure investments" aka fiscal stimulus from the Federal government on deck with the term "infrastructure" being a euphemism for providing a much deeper and meaningful economic safety net.

Finally, we all know the standard case against inflation. We have consistently made it clear for you to understand that we do NOT have the same economy as we had in the 1970’s—nowhere near in fact.

Thus--thinking about inflation through the lens of the 70’s hyper-inflation cycle kicked off by the oil embargo and end of the $35 gold standard backing the world’s major currencies and the end of the Bretton Woods agreement post-WWII is not relevant and is incorrect logic.

In 2021 it IS true that we have an economy built around digital intellectual property, semiconductors, intangible assets (consumer brand power) and 70% consumer spending and not metals, mining, heavy industry and manufacturing. Furthermore, technology, an aging population, and a shrinking population aka birth rates and immigration rates will all remain disinflationary forces with technology the most important disinflationary force in the economy.

BUT—the odds of YOY CPI inflation prints at 4% or more magically ending anytime soon (aka “transitory”) in the Great American Post-Pandemic Reawakening 2021-2022 gets more and more remote.

Key Point: The next important print comes next month with the all-important 5 Year Inflation Expectations report from the NY Fed. The Fed is much more dependent on inflation EXPECTATIONS than real-time CPI because future inflation expectations are VERY STICKY

Will the Fed not flinch with 4%+ CPI prints for 6-9-12 months IN A ROW? Especially with another $3 trillion of free money injected into the US economy on top of the $5 trillion already in?

IF 5-year inflation expectations rise over the next few quarters, the Fed will be backed into a quarter and SHORT term rates will have to rise as Janet Yellen told us last week.

Rising SHORT term rates are the death knell for secular no-profit tech growth but are wonderful for inflation-sensitive sectors like financials and EV materials and infrastructure industrials. 

When the inflation music changes, you gotta dance with new partners. 

BUY SOMETHING nice for yourself and your family with those mREIT profits, ok? 

Toby