The S&P 500 closed 2021 at a new all-time high, indicating that the ongoing central bank monetary experiment is nowhere near winding down:

For years now, we’ve seen many compelling analyses, usually based on valuation issues or macroeconomic risks, predicting an imminent crash and explain why the bull market just could not continue for long.

In 2016, the “smart money” was ultra-bearish. Around the same time John Mauldin was predicting an imminent 50% correction… For all the intellectual exertion that goes into such analyses, most market experts have missed the one force that has had the decisive impact on stock prices: central bank monetary inflation. This is not exactly a new thing, but a recurring pattern that’s been remarkably consistent for at least a century now as the following table shows: And for years they’ve all been dead wrong. For all the intellectual exertion, most analysts have missed the one force that has had the decisive impact on stock prices: central bank monetary inflation. This is not exactly a new thing, but a recurring pattern that’s been remarkably consistent for at least a century now as the following table shows:

The same principle was at work during and immediately after the roaring 20s. According to Murray Rothbard, “M” money supply was growing at an 8.1% annual clip from mid-1921 through 1928 fuelling a nearly 25% annual inflation of stock prices.

I elaborated this hypothesis in “The One Force moving stock prices and what it tells us about the future,” which I published in the wake of the 2020 market crash. Thus far the hypothesis has aged exceptionally well which then also seals the end-game. As I then wrote, we’ll see “an accelerating bull run accompanied by hyperinflation after which comes an epic crash.”

OK, not everyone’s convinced that we’ll have hyperinflation. But regardless of whether we’ll see hyper-, or only high inflation remains to be seen, the one thing we know for sure is that all bubbles ultimately burst, with no exceptions, so that’s a predictable outcome. Of course, predicting the end-game is very different from predicting its timing and the price levels of key events. I believe the best we can do is to navigate along with the prevailing trends with utmost patience and discipline.

2022 will be a year of trends

In addition to the asset bubble we are are also facing the accelerating inflation, rising interest rates and the prospect of a commodity super-cycle that could span a decade or longer. All these developments promise large-scale price events (LSPEs) in many markets. Below is the current directional exposure (as a percentage of full exposure), based on 12 individual CTA strategies tracking short-, medium-, and long-cycle trends in 16 key global financial and commodities markets:

As the aging bull market nears its peak, price fluctuations are sure to get more volatile so keeping moderate risk exposure across a diverse group non-correlated markets should be prioritized. The business-as-usual investing that’s worked over the past three or four decades is now fraught with risk. It is time for investors to consider bold action to protect their wealth, even taking the advice expressed by Jim Grant in a recent interview, that investors should always allocate some capital to something they don’t believe in. But that’s another discussion entirely.