How can you ever really enjoy and relax about your current wealth and investment future unless accountability to capital preservation is hard wired into everything you are doing? Capital preservation must be your number one priority, as it is for all Best Investors. This does not mean you will make less in the long term? No. It means you will make more! It’s all in my book! https://geni.us/InvestLiketheBest

The chart shows that inflationary conditions, as seen last in the 1970s, are highly damaging for equity valuations. The average valuation for equities is more than 50% below the current level as measured by average 10 year earning

Typically stocks bottom well after the first interest rate cut, which may much longer than investors realize.

Given the debt levels, it will be much more difficult to reach the real interest rates levels needed to contain inflation.

Despite the extremes in historically reliable valuation measures, we can be certain of one thing: investors don’t care. They never do at market extremes. If they did, the financial markets could never reach extremes like 1929, 2000, and today in the first place…..What’s odd is how adamant investors seem to be not only that profit margins will remain above average, but that they will not retreat even from current extremes. Have investors looked at where margins are here? They’re not just higher than the historical norm – they’re higher than at every point in history prior to the past two years. Yet Wall Street analysts describe P/E ratios as “cheap” and “reasonable” without a moment’s hesitation about the denominator.

John Hussman

The Fed may benefit from adding QT and liquidity management to its interest rate tool, but this will likely be a direct hit on the stock market….

A healthy market and economy can’t continue for long without access to ample credit. The Bank stocks have been underperforming for well over 3 years. Far longer than they did just before 2000 and 2008.

What has become clear over the last month is that while central banks have been raising rates to contain inflation, the growth outlook has continued to deteriorate. Of key importance is that credit lending has materially shifted to tightening.

“The way you create deflation is you create an asset bubble. If I was ‘Darth Vader’ of the financial world and decided I’m going to do this nasty thing and create deflation, I would do exactly what the central banks are doing”
Stan Druckenmiller

The Federal Reserve is now responding with accelerating rate hikes following backward looking inflation data which showed a new high this week of 9.1%. However, the forward looking markets have started reacting differently.

It is important for investors to fully understand that current conditions are unprecedented in their own lifetime investment experience.

The scale of the credit cycle has continually expanded over the last 50 years, and policy makers are now confronting the biggest credit cycle peak just as they take on the largest inflation breakout in 40 years.

Consumers and investors have had to react to a new economic paradigm in 2022, as initiated by yet another extreme shift in central bank policy. It is becoming increasingly clear that central bank policy is not working well as measured by increased market volatility and ever increasing misses in their forecasts and objectives. Investors will have to raise their game.

Investor behavior and portfolios are struggling to transition from the biggest bull market in 100 years to a transformed environment, Stagflation. Investor allocations follow the markets and peaked with the market highs at the end of 2021.

Jerome Powell’s statements last week reinforced the Fed’s full policy reversal from the most reckless policy stance in history as confirmed by data on money supply, debt, QE, and real interest rates. The Fed now says it needs tightness of “financial conditions” just as the growth downcycle is gathering pace.

How can you be confident that your current investment approach is on track for the low risk AND high returns of the most successful investors?

The “Best Investor” approach shows that a relentless commitment to a “Capital Preservation and Compounding” Investment objective produces transformative results.

One of the most important new developments of the current year has been the shift in correlations between stocks and bonds. The chart below shows that the monthly return correlation has shifted back to positive after two decades in negative territory.

The yield curve inversion is very consequential for equities. Look at the track record and the strength of this signal. Not only did the yield curve have a lower high but now has a more negatively inverted curve.

Central Bank Policy has been trying to compensate for weak global growth ever since 2008. Policy measures have twisted and turned over the last decade or so but have only achieved temporary respite in terms of growth, while at the same time their ever growing interventions have introduced massive market and economic distortions that have continued to compound.

Real credit growth was very weak in the last 3 quarters of 2021. Ever since 1952, whenever credit growth fell below 2% per annum, the US economy went into recession.

Investors can benefit from a clear understanding of the dynamics between growth, inflation and the yield curve, and how it signals changes in allocation.

There are several components to the boom and now it looks like tightening financial conditions are coinciding with tightening fiscal conditions. That doesn’t unwind harmlessly because they want it to.

"The real problem for the Fed is that it has completely abandoned any semblance to a systematic policy framework, in...

Since the beginning of December this Insight has been talking about the emerging headwinds for the first half of 2022. It is as well to understand scale and depth of the issues as the Fed moves towards less policy support.