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The Melt Up Ingredients -Stimulus, Debt, Inflation & Low Interest Rates

We have seen this movie before. After the roaring 1920's, the stock market melted up to euphoric highs only to crash in stupendous fashion. In the internet boom of the late 1990's the NASDAQ hit likewise euphoric highs only to crash back down to earth. Following extremely lax lending practices coupled with low interest rates the flying real estate boom coupled with mortgage backed securities fueled the 2007/8 great recession taking the entire banking and monetary system to the brink. Massive stimulus injections lifted us out of that great depression.

Economists have long seen repeating economic cycles in history. Booms followed by Bubbles and then Busts with long periods of economic stagnation, only for the cycle to repeat. We have written about this before but want to write about it again because while we have seen this movie before in the US and all around the world, the movie we are seeing unfold the US today is different to one's we have seen in US history.  

The convergence of record national debt, stimulus, low interest rates, inflation, a booming stock market in the midst of a global recession have created a mix of ingredients that could fuel one of the great bubbles and busts of the modern era.

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What's Chaikin Folks? Identifying Money Flows

There is a whole lot of Chaikin going on! In todays blog post we are continuing the series about technical analysis and the large toolbox of indicators available. Today we are looking at an indicator that attempts to measure money flows into and out of a security.

The Chaikin Money Flow was created by Marc Chaikin along with the Chaikin Oscillator and Accumulation/Distribution signals to measure the flow of money into or out of a security over a given period of time.

The Money Flow Volume was conceived by Chaikin to measure the buying and selling pressure for a security over a user defined period of time such as 15, 50 or 200 days. The most popular setting for this indicator is over a 20-21 day period. The value of the oscillator swings between 1 and -1 with buying pressure being greatest when the value is closest to 1 and selling pressure being greatest when the value is closer to -1.

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Inflation - How Big a Risk Is It?

The exponential rise in the national debt since COVID began by the tune of more than $3.8 Trillion of stimulus monies was inevitably going to lead to a wave of hard asset inflation as well as consumer inflation. The only question was "how much"?

In the last couple of days, the markets woke up to the fact that inflation might be worse than the federal reserve predicted. The CPI (Consumer Price Index) numbers released for April 2021 rose 0.8% versus an expected rise of 0.2% month over month. Should we be alarmed and worried? In the short term, the answer is "not really". If you have been tracking first quarter earnings calls, you will have heard many CEO's describing how tight supply chains are right now. Higher costs of raw material inputs are being passed onto the consumer. As COVID restrictions ease and consumer demand for goods and services rise alongside tight supply chains operating on "just in time" demand cycles, the natural consequence of greater demand and tight supplies is higher price increases.

It is difficult to say how inflation numbers will fare over the coming months as it will take time for supply chains to re-calibrate and meet rising demand.  However, as this occurrs, inflation numbers will likely decrease as supply increases. Overall, however, we expect the inflation trend to show up as net higher consumer prices across most hard and soft asset categories, compared to before the pandemic.

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The Impact of The Biden Tax Plan

Joe Biden announced his new trillion dollar infrastructure plan last week and how he intends to fund it, which sent chills through the markets and the $400,000 plus annual income earners. Of course, this should not have come as a surprise. The odds of the Biden Administration not implementing such a key campaign promise was close to zero. What the announcement did do was sound the alarm ammong the top segment of american earners that it was time to take action and evaluate steps to mitigate taxes going forward under the likely scenarios outlined by the president.

The actual proposal however still needs to pass the chambers of congress and the resulting outcomes will not be known until it does. It is likely that the proposed announcement of a hike on income and capital gains taxes was a negotiating tactic and it would be unlikley that long term capital gains would be as high as the 39.6% proposed rate and more likely to be sub 30%. In addition, it is anticipated that there will be an increase in estate and gift taxes which will also require heirs to pay capital gains taxes on assets above a certain amount that they inherit.

The cosy tax rules governing asset inheritances which has allowed wealth to be locked up generationally without taxes needing to be paid on any assets held for the long term looks likely to change. The Biden infrastructure proposal needs funds to pay for it and just adding to the national debt to pay for it is not a solution. In a predominant capitalist society the spoils of industry and most advantageous tax rules go to the few while comparatively much larger segments of the population live on sub $15/hour wages and are unable to cover the increasingly expensive needs of life.The middle classes are shrinking and the working classes have felt left behind.The new Biden Tax plan aims to address some of these imbalances.

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Technical Indicators - Bollinger Bands

This week, we are going to continue with our "key technical indicators" series for stocks or any publicly traded instrument for that matter. Today, we are going to explore "Bollinger Bands".

Bollinger bands are a volatility indicator that depict two deviations from a moving average in the price trend of a stock, commodity, fund etc. This is depicted as two lines on either side of a moving average indicator which represent the outer (upper and lower) bands from the moving average. When a stock, on the upside, rises above the outermost upper band as in the chart on the left this can indicate the stock is over bought and may be an opportune moment to sell. Likewise, if the price trend falls below the outermost lower band, it can indicate the stock is over-sold and may be an opportune moment to buy.

As with any technical indicator, these can be used over different trading timelines whether this is intra day, daily, weekly, monthly or any timeframe you may choose. Their relative significance will also vary by the timeline you choose and as always are useful to use in combination with other technical indicators and values.

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Hawley Advisors
1600 South Main Street, Suite 190
Walnut Creek, CA 94596
Phone: 925-906-9800
Fax: 925-906-9884
info@hawleyadvisors.com

 

 

Hawley Advisors is an investment advisor, registered with the State of California. Any investment ideas or strategies on this website are for the purposes of education and general information only and should not be construed as specific investment advice. For more information about our firm please check the SEC Public Disclosure website: https://www.adviserinfo.sec.gov/

 

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