Markets are extremely complicated universes that are difficult to understand. We try in a thousand ways to reduce such a core to simple explanations. However, the reality is that there is never an easy explanation. However, it is easy for us to fall into superstition. “It rained today because the king lied. “The earthquake is the fault of sinners”. In short, markets fluctuate for thousands of reasons. There are many variables in such complex systems. However, the market is always very focussed on inventions. Reasons that in turn become agents of instability in their own right. Namely, In the financial world, news is also an event. Now what happens when nothing makes sense anymore? How should investors proceed in such crazy times?
People are always looking for consistency. That means everything has to have a meaning. The concept of trends is often used in the financial markets in particular. The upward trend. The downward trend. In addition, all markets are great storytelling shops. Remember Nietzsche’s wise words: “There are no facts, but interpretations”. Sometimes there is fear. Sometimes there is greed. Sometimes there is optimism. And sometimes there is pessimism. It all depends on the interpretations. Not everything is subjective. Of course there are technical elements that are certainly important. But a lot is subjective.
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What seems to be “madness” today? could it be called “a tense and cautious optimism”? derived from a series of mixed signals. Volatility is the product of uncertainty. Which usually means the market will take more time to develop a narrative. The inflation data is alarming and many people have raised concerns. However, The Federal Reserve has repeatedly stated that this is part of the recovery strategy. That is the dilemma. At the same time, since the rise in inflation is a “negative” sign, the reserve does not plan to raise interest rates in the near future. Which in turn is a “positive” sign. We see authorities full of optimism, but at the same time we have social networks full of skepticism. Doubts arise and, with doubt, uncertainty.
We see inflation in many areas. For example energy, real estate, food, raw materials. And the production costs of many industries have suffered as a result. At the same time, however, we also have deflation in other sectors. The service sector in particular experienced the pandemic with particular ferocity. Movie theaters, training courses, restaurants, hotels, tourism, clubs, airlines, education (face to face), etc. Many companies have felt the wrath of the crisis. This means a significant loss of income. Rents remain stagnant, but construction costs have risen. That is, inflation on the one hand and deflation on the other. For example, a person may be unemployed, pay rent with government aid, experience energy and food inflation, but suffer from deflation due to dependence on the tourism sector. All of this in a mixed-signal environment.
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The Federal Reserve added historic amounts of liquidity to the market, but it took months for the economy to recover. Employment is improving at a snail’s pace. Milton Friedman said, “Inflation is always a monetary phenomenon.” This (flawed) dogma, so accepted by libertarians and conservatives, confuses the “emission”. with “inflation” because it does not take into account the concept of the “speed of money”. In other words, there is virtually no liquidity unless it is spent on transactions. What caused a crisis in the form of K. That is, economic recession and financial boom at the same time. Financial assets have increased but are not in line with gross domestic product. Why? Well, because the money is not circulating enough. Mixed signals. A financial boom without economic growth.
Today’s big dilemma: Is inflation temporary or permanent? Today we are all anarchists. In other words, it is very fashionable to be against the establishment. The most popular sport on social media right now is making doomsday calls. And nobody trusts the authorities. Hence, both left and right currents cannot escape the temptation to criticize the “establishment”. for mismanagement of monetary policy. It’s the end of the world, of course. “This inflation is permanent and is caused by the progressive agenda”. Now the economy is recovering, demand is rising and employment is growing. The deflationary crisis was overcome in historic times and the stock markets are still through the roof.
There is talk of “ephemeral”. when the price increase occurs due to temporary problems in the production and distribution chain of the items in question. For example, the used car market saw a sharp rise in prices in April, which led to a huge surge in the consumer price index. The cause is the lack of new cars. Automakers, in turn, are affected by the shortage of microconductors. In this case we are not faced with a monetary phenomenon. There is inflation, yes. But due to a problem in the production and distribution chain. Once these issues are resolved, the prices of used vehicles will certainly go down with the new offering.
The unemployment rate is not rising fast enough, but at the same time there are reports of labor shortages everywhere. One element is the level of specialization of the workforce. For example, there may be a shortage of medical staff, but unemployment in general. On the other hand, when it comes to local wages, it is sometimes more profitable to rely on government aid than to work. So there can be problems with unemployment and, at the same time, labor shortages.
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In the stock markets, the technology sector experienced a great boom that led to overvaluation. Cyclical stocks, on the other hand, only benefit now after the lockout. In other words, we are facing a market rotation that is not always understood when taking averages into account. Mixed signals. For example, one day the SP 500 falls because investors take money from big tech to place in the cyclical sector. The average is falling, but that doesn’t mean the bull season is over. The same thing happens in the crypto market. Bitcoin appears to be stagnating and all of the action is being felt in the altcoin space. Not that Bitcoin is losing to the competition. These are transient rotations in a mixed-signal environment.
Important: don’t panic. No conspiracy theories, speculation, or unsubstantiated assumptions based on the follies we read on the networks of the prophets of catastrophe. Calm down, people! Invest well and wait. Buy cheap. Sell dearly. Never run out of Fiat reservations. Do the work. Don’t listen to predictions. Build your portfolio on a strategy.