Retail Investor Wreckage

So many doubters out there.  After the dovish pivot in January 2019, the financial community now expects Powell to fold like a lawn chair anytime there is a pullback in the stock market, and go back to being dovish.  He's basically turned into Bernanke Light so people expect him to stay that way.  I don't fault them, I felt the same way but realized in September that Powell was putting on an act and pretending like inflation was transitory, when he knew it was just an excuse to pump the markets and increase his chances of being renominated.  

But the circumstances are much different this time around.  Powell has gotten renominated.  He has 4 more years of power.  And he is a politican first, central banker second.  And when politicians start caring about inflation, so does Powell.  Politicians didn't care about inflation for the last 30 years, so obviously deep down inside, the Fed also didn't care about it, even if they pretended like they did.  That's what average inflation targeting was, a way to give themselves more room to print money in case the stock market went down.  

But the politics around inflation is changing, as the rate of price increases is so high that the average consumer is noticing.  Its overlooked when the pork stimulus is flowing, and everyone is having a good time as stocks keep going up, but when the flow slows down, the stock market starts going down, the consumer, no longer receiving the stimmy checks realizes that prices are going up while their savings are dwindling.  It doesn't help that most of the crap that retail was buying (AMC, GME, SPACs, ARKK, shitcos) have gotten destroyed over the past 12 months, doing much worse than the SPX.  

The end result is that most of the printed money ended up at the Citadels of the world, via Robin Hood, while a lot of greedy and ignorant retail investors have been left holding the bag, just as everything they need for everyday life has gotten more expensive.  Sure, wages have gone up, but most of these retail investors quit their jobs to daytrade in 2020/2021 and collect their unemployment stimmies.  

How depressing must it be to see your savings go down the drain in POS like AMC and GME because you drank the Koolaid from the Reddit community?  And then having to get a real job because you can't live off of your stock market gains anymore?  Its the reverse Robin Hood effect, and when retail is losing money, they trade less.  They are  bagholders, and most bagholders just hold, they don't sell.  When you don't sell, you don't trade.  Less trading, less profits for brokers.  That's what you are seeing as Robinhood has gotten crushed along with all the meme stocks.  

Wall Street has done it again.  It has managed to suck in retail money into the worst investments at the most bloated stock prices in US history (even more than the dotcom bubble).  This after wrecking the parents of those same people 20 years earlier!  And most of these millenials were trying to stick it to Wall St, trying to manipulate POS higher via herding and massive call options purchases.  Instead, they got stuck holding calls going worthless and stocks down 70% from their entry level.  Truth is stranger than fiction. 

Here is the inflation situation:  wages up big, commodity prices up big, housing prices up big, and money supply up big.  Its not about supply chains.  That's a red herring.  Its about the money supply.  When the supply of money goes up 40% in 2 years, and there is no increase in productivity, prices should naturally go up 40%.  The Fed and the US government put on a party for the ages, and you are left with the aftereffects:  a bloated stock market, money supply up 40% in 2 years, wages going up, commodity and housing prices going up even faster, and the rich getting richer and the poor getting poorer (higher inflation, lower AMC, GME, and shitcos).  

And the Biden administration is so incompetent that their solution to the inflation problem is to try to ram through more pork (Build Pork Bigger plan) and try to goose oil prices lower by releasing what is left of the SPR.  Its a clown show.  Its taking a page out of the Argentina playbook.  (By the way, Trump was just as bad: cutting taxes and favoring corporations when they were already swimming in cash, and running up trillion dollar deficits at the peak of an economic cycle.)

We got a big gap down after the 3 day weekend.  The sentiment is steadily getting worse, but there are a huge amount of inflows into the market over the past 4 weeks:

 

Those 4 week inflows are the highest since January 2018.  Unlike January 2018, when SPX was surging higher, the inflows are happening while the SPX is going sideways from 4550 to 4800.  As you can see, high equity fund flows are associated with negative returns (-12.89% avg. above $12.4B inflows).   

I am still willing to buy deep dips but I need to see some more fear, higher put call ratios and more bearishness.  If we get down towards thee 4550 area this week, we could get that flush out for a dip buying opportunity.  With bonds trading weak again, in the short term, its not looking good for stocks.  But tops are a process, you normally don't go straight down from a peak, so I expect a lot of backing and filling over the next few months before that waterfall decline.