Yesterday, we got the same question from an existing client and a prospective client. They both wanted to know if we were taking off our market short. We’ve been publicly short the S&P 500 (ticker: SPY) and the NASDAQ (ticker: QQQ) since the first week of January. It’s been our most profitable position this year even exceeding the great returns in Houghton Mifflin (ticker: HMHC) which was acquired for cash. It’s a good question and one that deserves a serious response.
A case can be made that employment is strong, the Fed is raising rates, and SLOWLY winding down its $9 trillion balance sheet. In addition, the markets are down big this year with many tech names down 80% – 90% from last year’s highs. We’ve put in writing that at some point, the bad news becomes priced in the market, and Fed rate hikes will eventually be effective. One way or another (either higher rates, or high inflation), we’re going to see demand destruction and a dramatic slowing of the economy.
Here’s the response we wrote yesterday to the question about whether we’ve covered:
I’ve kept the shorts on and the timing of taking them off is a subject of almost-daily discussion. Right now, I think actual inflation as experienced by the average American is double the CPI (around 16%) and that actual GDP (as adjusted by DKI) has been negative for the last 2 quarters. That’s the definition of stagflation (which we called in writing in Feb.).
The Fed is at .75% and has a $9 trillion (trillion!) balance sheet. Shipping rates are coming down because there’s no product coming from China, not because supply chains have cleared. No one is doing anything that would reduce fuel prices so we’ll see demand destruction based on price as opposed to more supply. In addition, food prices are going to go through the roof as food availability plummets. (There are already food riots in some countries.) None of this is going to help corporate earnings (unless you’re in oil, food, and other commodities).
That’s where I think we are today so we stay short for now. This has been an incredibly profitable position for our subscribers. We also acknowledge that there’s no sure way to bottom tick this market. Our goal is to make great returns over time, and we make no claims regarding daily trading results.
As soon as I cover, DKI subscribers will know.