2- On fund flows, as @profplum99 noted earlier today:
“One of the problems with Value investing currently is that the funds themselves are being redeemed, ie the holders become forced sellers.”
This needs to change for a full rotation to truly materialize.
3- Perhaps the catalyst for the change in fund flows will relate to the second driver of the rotation: the shift to fiscal stimulus...
4- As @jam_croissant noted, the shift from monetary stimulus (which doesn’t contribute to velocity) to fiscal stimulus (which gets money moving) will be more successful at stoking price inflation.
5- Price inflation, in turn, will lift long term rates. This in turn will affect Growth more than it will Value, since a larger bulk of Growth’s PV comes from expected increases in future cash flows, so Growth overall is more sensitive to a rise in rates.
6- Even if this last week’s performance of Value relative to Growth fades or reverses into the weekend, it still counts as a significant “tremor”, as @hkuppy puts it, in the Growth/Value spread. These tremors should not be ignored...
7- It is my belief that these “tremors”, i.e. the immense factor volatility between Growth and Value, are signalling that a massive break in the spread is looming and a violent sector rotation awaits us.
1- The Fed is fighting deflationary forces because nature is trying to collapse unprofitable zombie companies that specialize in capital destruction. Since our monetary system is debt-based, a collapse of zombie companies creates a collapse in the money supply, i.e. deflation.
2- Deflation can feed on itself because it causes asset prices to fall. When asset prices fall, the asset side of companies’ balance sheets fall. But the liabilities side does not. So equities are wiped out.
3- The Fed is deathly frightened of deflation, which they think are falling prices, because they associate that with the Great Depression of the 1930’s. To offset falling prices they print massive amounts of currency and use it to buy everything in sight to lift asset prices.
Why Inflation Will Kill the Ponzi Sector (and Catalyze the Long-Awaited Sector Rotation from Growth to Value)...
A thread.
This topic was a black box to me a few weeks ago. I will try to crystallize what (I think) I now understand.
Disclaimer: Nothing in this thread is original. It brings together pieces from random tweets and discussions I’ve had recently, most notably with @hkuppy, @pineconemacro, @greekfire23, and @contrarian8888.
1- Inflation causes long term rates to rise. This is illustrated by the Fisher equation, which states that the risk-free long term bond yield (i) equals the real rate (r) plus inflation expectations (π), i = r + π.