December 2021 by Luckbox Magazine

life. money. probability.

DECEMBER 2021

PLU S

What the Misery Index is Telling Us Bitcoin: The Perfect Inflation Hedge? Freezing Your Way to Fitness The Best Rock Albums of 2021

How to cope with inflation and embrace deflation 2112_COVER.indd 2

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the control freak's guide to life, money & probability

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December 2021

Rising Prices, Declining Confidence >> 10 12 Just Transitory?

20 Stagflation, Yes

34 Measuring Misery

14 Rainbow’s End

24 Price Appreciation

36 Perfect Hedge?

26 Gimme Shelter

38 Inflation in China

Higher prices and empty shelves may outlast the pandemic.

History shows pots of gold become even scarcer in inflationary times.

18 Stagflation, No

The boom will proceed when supply constraints disappear next year.

Will the Fed raise interest rates to end inflation? Don’t count on it.

Here’s how much more expensive everything got over the last two decades.

Even if prices for food and energy decline, higher rent may sustain inflation.

Ed Yardeni, the “Wall Street Seer,” views today’s inflation as persistent.

Owning bitcoin, which can never exceed 21 million tokens, can offset inflation.

The Communist Party is forcing businesses to keep inflation low for consumers.

28 Embracing Deflation Advances in technology can lower prices if the government doesn’t interfere.

December 2021 | Luckbox

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Cold enough?

P. 43

editor in chief ed mckinley managing editor yesenia duran associate editors mike reddy kendall polidori editor at large garrett baldwin technical editor mike rechenthin contributing editors vonetta logan, tom preston creative directors katherine bryja tim hussey contributing photographer garrett roodbergen editorial director jeff joseph

trends

trades&tactics

life, luxury & the pursuit of happiness

actionable trading ideas

FINANCIAL FITNESS

THE PREDICTION TRADE

43 Ice Ice Barrel 45 Is Inflation Transitory?

RECORD HIGH

46 The Top 5 Rock Albums of 2021 SENTIMENT

48 Should We Expand the Supreme Court?

BOOK VALUE

49 The Luckbox Bookshelf TRADER

50 Meet Derek Mullen CALENDAR

51 December 2021

NORMAL DEVIATE

53 Watch These 3 Inflation Indicators

CHERRY PICKS

55 Straddle Up

comments, tips & story ideas feedback@luckboxmagazine.com

FAKE FINANCIAL NEWS

THE LAST PICTURE

8 Fix the CPI or Bust

64 Bear Market Forecasting

FOREX

56 Expect a Rising Dollar if Inflation Sticks

DO DILIGENCE

media & business inquiries publisher: jeff joseph jj@luckboxmagazine.com

ISSN: 2689-5692 Printed at Lane Press in Vermont

60 Crypto & Cannabis Contrarians

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BASIC TACTICS 61 Big Moves in Small Bonds 62 Smart Inflation Hedges

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Luckbox magazine, a tastytrade publication, is published at 19 N. Sangamon, Chicago, IL 60607

58 Crude Oil Bets

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@luckboxmag On the cover: Illustration by Jason Schneider

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Luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. Active investing is not easy, so be careful out there!

December 2021 | Luckbox

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FED UP WITH INFLATION Hey, Mr. President All your congressmen too You got me frustrated And I don’t know what to do I’m trying to make a living I can’t save a cent It takes all of my money Just to eat and pay my rent

—Inflation Blues, B.B. King (1983)

When it became apparent last month that inflation had reached 6.2%—the highest it’s been in 31 years—even the optimists began backing away from the idea that pandemic-related price increases might prove short-lived. “It doesn’t look so transitory,” said former Treasury Secretary Larry Summers, who had been warning for months that pumping too much stimulus money into the economy could backfire. He could even have said, “I told you so.” Just a month into President Joe Biden’s administration, Summers had written in a Washington Post op-ed piece that the upcoming $1.9 trillion stimulus package might set off “inflationary pressures of a kind we have not seen in a generation.” The Biden administration’s financial triage for workers and businesses came on the heels of a $2.2 trillion stimulus bill signed into law by President Donald Trump shortly before he left office. All too soon, the year-over-year price of a late-model used car had increased 37%, the

cost of a pound of lean ground beef surged 28%, and energy prices shot through the roof. “I think that the policymakers in Washington, unfortunately, have almost every month been behind the curve,” Summers said. Maybe. But Luckbox is happy to leave the monetary policy blame game to the politicos. Instead, let’s focus on staying in front of the markets. The stock market’s longstanding buoyancy has been the direct result of upbeat consumer and investor sentiment. But look no further than the facing page to see that Americans are worrying about inflation. It troubles them even more than the deadly coronavirus. They’ve seen recent wage gains evaporate as prices rise, and they know no vaccine will protect against bloated price tags for vehicles, energy, groceries and healthcare—let alone higher education. Luckbox readers, arguably more financially astute than the average American, feel more pessimistic (realistic?) than the general public about the economy. Fortunately, the

Thinking Inside the Luckbox

Luckbox is dedicated to helping active investors achieve skill-derived, outlier results. 1 Probability is the key to improving outcomes in the markets and in life.

2 Greater market volatility brings greater opportunity for traders and investors.

3 Options are the best vehicle to manage risk and exploit market volatility.

4 Don’t rely on chance. Know your options because luck smiles upon the prepared.

magazine explores investment opportunities tied to the virtues of market volatility. After all, rising expectations for persistent inflation are likely to increase market volatility in the coming months. Yet, this isn’t your father’s ‘70s-style inflation. Readers would do well to seek historical context and abstain from runaway-inflation hysteria. Look for wisdom from market veterans like Ed Yardeni, who sat down with Luckbox for an interview that commences on p. 34. Don’t be afraid to follow where the quest leads. In the midst of so much inflation chatter, Luckbox Editor at Large Garrett Baldwin spoke with author Jeff Booth, a deflation acolyte with a fascinating take on the economy. Without question, President Biden faces challenges. Families gathered around the dinner table this holiday season are sharing stories that reflect their fear of high prices. In its small way, Luckbox hopes to help allay those misgivings by presenting its annual forecasting issue. Perhaps salvation lies in probabilistic thinking. In that vein, let’s make a bold (long odds) prediction. Luckbox believes Biden will not nominate Jerome Powell for another four-year stint as chair of the Federal Reserve when his term expires in February. Yes, a realignment of Fed policy would take place in uncertain times but would buy Biden some time for political maneuvering. Meanwhile, we defy you to find another source of information that can do as much as Luckbox to prepare you for inflation that no longer appears transitory.

Ed McKinley Editor in Chief

Jeff Joseph Editorial Director

Two ways to send comments, criticism and suggestions to Luckbox Email feedback@luckboxmagazine.com Visit luckboxmagazine.com/survey A new survey every issue.

Luckbox | December 2021

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life. money. probability.

OPEN OUTCRY

WE AL L HAVE DATA SUES ISSU

A year from now, do you expect that economic conditions in the country as a whole will be… Better �� 17% About the same �� 27% Worse �� 56%

But DuckDuckGo is wrestling market share from dataexploiting competitors

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PLUS : MUSIC,

MICRODOS ING & MORE

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Public Opinions on Private Data

Spot on with the Data Privacy issue. Luckbox always has articles of interest to me, and I’m 69 years old and hard to please. —Rick Shepherd, Boston I don’t like the fact that we live in a world in which Luckbox would have to focus their attention on a Data Privacy issue. —Zac Buchanan, Lubbock, TX

Is Inflation Real? We asked Luckbox readers for their thoughts on inflation and its importance to them. I’ve put 75% of my wealth into bonds that provide less interest than what inflation will cost me, so as time goes by my wealth is constantly decreasing. Our government has been kicking the can down the road for the past 13plus years. They have used interest rates and bonds as a way to regulate our economy. This has caused the value of the dollar to decrease and made the gap between the haves and have-nots even wider. —Dan Raber, Lewistown, MT I am very concerned. Prices of routine purchases have gone up and the CPI is a completely useless number except to placate the public by exaggeration downward. … The real inflation is so much higher than the CPI indicates. —Randel Henry, Huntsville, AL

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Take our reader survey!

SCAN THIS

NOVEMBE R 2021

Generally speaking, would you say that things in the country are going in the right direction, or have they pretty seriously gotten off on the wrong track? Right direction . . . . . . . . . 17% Wrong track . . . . . . . . . . . 83%

Right direction . . . . . . . . . 38% Wrong track . . . . . . . . . . . . 62%

—Luckbox Reader Survey

—Morning Consult + Politico Poll

Do you believe it’s more important for the government to address: The economy . . . . . . . . . . . . . . . . 73% The spread of coronavirus . . . . 19% Don’t know / No opinion . . . . . . 8%

The economy . . . . . . . . . . . . . . . 50% The spread of coronavirus . . . 43% Don’t know / No opinion . . . . . . 7%

—Luckbox Reader Survey

—Morning Consult + Politico Poll

How concerned are you, if at all, about inflation? Very concerned . . . . . . . . . . 62% Somewhat concerned . . . . 28% Not too concerned . . . . . . . . 9% Not concerned at all . . . . . . . 1%

Very concerned . . . . . . . . . . 58% Somewhat concerned . . . . 31% Not too concerned . . . . . . . . 9% Not concerned at all . . . . . . . 2%

—Luckbox Reader Survey

—Morning Consult + Politico Poll

What would you say is the top set of issues on your mind when you cast your vote for federal offices such as Senate or Congress? Economy (taxes, jobs, spending) . . . . . . . . . . . . . . . . . . . . 80% Security (terrorism, foreign policy, border security) . . . . . . 46% Energy (emissions, cost of energy, renewables) . . . . . . . . . . 28%

There’s more to Luckbox than meets the page. Look for this QR code icon for videos, websites, extended stories and other additional digital content. QR codes work with all cell phones and tablets with cameras.

1 Open your camera

2 Hover over the QR code

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Luckbox is interested in reader forecasts for 2022 and your thoughts on this issue. Take the reader survey at luckboxmagazine.com/survey

4 Enjoy the additional content

11/12/21 2:27 PM

SHORT INTEREST

By all accounts, the threat that record inflation poses to the American people is not “transitory” and is instead getting worse. From the grocery store to the gas pump, Americans know the inflation tax is real and DC can no longer ignore the economic pain Americans feel every day. SEE PAGE 12

—Tweet by Sen. Joe Manchin shortly after the October CPI report on Nov. 10

Instead of inflation, we have been experiencing deflation. People are better off now than they were in the past. They will continue to improve their lives as innovation and automation drive productivity and lower prices … This deflationary phenomenon is here to stay.

We are committed to our longer-run goal of 2% inflation and to having longer-term inflation expectations well-anchored at this goal. —Fed Chairman Jerome Powell during a Nov. 3 Federal Reserve meeting SEE PAGE 18

Gold lost 8% over the past 12 months while bitcoin gained 437%. SEE PAGE 36

SEE PAGE 28

—The Inflation Myth and the Wonderful World of Deflation by Mark Mobius

The U.S. government said it expects households to see their heating bills jump as much as 54% compared to last winter. —The Associated Press SEE PAGE 26

Luckbox | December 2021

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DAILY EXPOSURE TO COLD TEMPERATURES FOR TWO HOURS A DAY OVER SIX WEEKS REDUCED TOTAL BODY FAT BY ABOUT 2%. —Journal of Clinical Investigation (2013)

SEE PAGE 43

SEE PAGE 48

Music ... has a reputation for not quite getting it right, and nowhere is that more apparent than in its marquee category, Album of the Year. —The Ringer on a wrong that The Rockhound seeks to right

SEE PAGE 46

Since the formation of the Supreme Court in 1789, there have been only 17 Chief Justices and 103 Associate Justices.

The supply chain crisis has been mismanaged—higher inflation is increasingly likely over the medium term. —Good Judgment Superforecaster SEE PAGE 45

December 2021 | Luckbox

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FAKE FINANCIAL NEWS

Fix the CPI or Bust A new century dawned a long time ago. When will the Consumer Price Index catch up to the way we actually live? By Vonetta Logan

have a framed print that I found at a local art fair. (No, it’s not Live, Laugh, Love. I’m not a psychopath.) It’s a picture of a Chihuahua with the caption, “I work hard so my Chihuahua can have a good life.” I don’t often think about inflation and the Consumer Price Index (CPI), but I do think a lot about what it’s going to take to keep my Chihuahua in the lifestyle to which she’s accustomed. I’m sure the same thought runs through the heads of sugar daddies as they log onto seekingsugarbaby.com: What’s it going to take to keep Kandiss in the lifestyle to which she is accustomed? In terms of plum writing assignments, “ramifications on consumer discretionary spending during sustained periods of inflationary pressure” ranks just above “first-person account of a root canal.” But we’re going to make it work. The U.S. Bureau of Labor Statis-

$1.48

In an age when everyone knows everything about you because your data is in the cloud, the U.S. economy is still using a rotary phone. tics (BLS) produces the CPI, the most widely used measure of inflation in the United States, and by some accounts, it’s the highest it’s been in 30 years. But if you Google “What’s wrong with CPI?” a litany of issues arises. Man, who knew economists could be so ornery? Their calculations vary wildly, and they don’t agree on whether the CPI is overstating or understating inflation.

When it was created, the CPI simply compared the cost of a fixed basket of goods between two time periods. OK, if my little basket of groceries last month cost $100 and then this month cost $125, that’s inflation, baby! But that doesn’t tell the whole story, so now CPI has evolved into a cost of living index. This method “takes into account changes in the quality of goods and

$4.99

substitution. Substitution [is] the change in purchases by consumers in response to price changes,” writes Investopedia. There’s a lot of nuance to consumer spending. The price of one good may not go up by a measurable amount because people stop buying the most expensive item and instead buy a cheaper one, thus substituting it. Or, consumers might spend a lot of money on a product or service at the onset, but that product or service is of much higher quality than was previously available so they don’t need to buy it as often. In his book The Inflation Myth, Mark Mobius writes that “it’s hard to define

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It’s hard to calculate the cost of living because manufacturers introduce new and improved products almost daily. exactly what is meant by new era of consumers, the cost of living when new so I’m pleased to present CONSUMER PRICE goods are introduced on a my own updated version INDEX (CPI) daily basis. One example of of CPI which I am calling COMPONENTS that would be the automoBaseline Observation Of Housing bile. ‘Today’s automobiles Buying Sprees, or BOOBS. 42.4% are ... much improved than That’s right, check out my Transportation in the past ... offering all BOOBS. kinds of conveniences that 15.7% did not exist before.” Last Step 1: Get modern. Food & Beverages It’s almost 2022, and year, I bought a new hybrid 15.2% SUV. So, some pencil-pushyou’re telling me that key ing economist would put the measures of economic Medical Care price of my car into a spreaddata are based on calling 8.9% sheet, but other factors, like some lady in Peoria on her Education & the 50% monthly reduction landline and asking what Communications in what I pay for gas and the she spent on Raisin Bran? 6.8% 30% reduction in my insurHedge funds are flying drones over Apple store ance premium (it has a lot of Recreation parking lots and aggresafety features) wouldn’t be 5.8% counted. The result is a CPI gating the data on Google Other Goods & Services that doesn’t actually account Maps to see how many for what’s happening. It’s not people are in line for the 3.1% just that CPI measures only latest phone. My banking Apparel app magically knows how what’s happening in brick2.7% and-mortar stores. Investomuch I spend each month pedia notes that it fails to on a wide array of goods Source: U.S. Bureau of and services. Why can’t consider “the spending habits Labor Statistics we anonymize the data of those living in rural areas, including farm families.” It but pull real-time spendalso neglects members of the armed forces ing info from people’s actual bank accounts? and leaves out nearly everyone in prisons or Instagram’s algorithm took two days to figure mental hospitals. Yes, the CPI covers approx- out I had a thing for bearded dudes wearing imately 93% of the population, but those flannel before it filled my timeline with hot groups seem too important to ignore. lumberjacks. Why can’t we do the same with According to Investopedia, the CPI’s basket real-time consumer data? of goods is filled with basic food and beverages such as cereal, milk and coffee. “It also Step 2: Expand your BOOBS. CPI has so many includes housing costs, bedroom furniture, biases and blind spots it just got its own cable apparel, transportation expenses, medical news show. Include rural families. Include care costs, recreational expenses, toys and online shopping because that’s all most of us the cost of admissions to museums,” the site are capable of. Normalize the data to account said. “Education and communication expenses for the higher cost of living for single people. are included in the basket’s contents, and the I guess economists get laid way more than I government also takes note of other, seemingly do because I couldn’t find anything that states random items such as tobacco, haircuts and that CPI is adjusted based on marital status. funerals.” But a lot gets left out. Spoiler alert: Single people spend more money We need a new measure of inflation for a because they can’t spread out the costs. Those

boxes of wine, pallets of cat food and sleeves of D batteries aren’t free, Milton. Step 3: Account for fake BOOBS. Investopedia notes that BLS freely admits that the CPI does not factor in the effects of substitution. When certain goods become significantly more expensive, many consumers find less expensive alternatives. For instance, they might buy the store brand instead of the name brand, or replace premium gasoline with regular. In the words of George Costanza, “cheapness is a sense.” American consumers are super savvy about sniffing out deals. Sleep in a tent to get $50 off a TV? OK! Hoard 15 pallets of paper towels in my garage and be forced to park on the street because I had an awesome coupon? Done! Get thrifty! Get schwifty!

Here are a few categories I would expand as a metric of BOOBS: • Plants — they’re the new pets • Pets — they’re the new kids • Sin — booze, weed, frisky time (how is this not included in our GDP?) • Online shopping • Inclusion of rural, military and incar cerated populations—and, oh yeah, single people (that’s a lot of ramen going unaccounted for) • The coupon conundrum — Americans rock at sniffing out deals In an age when everyone knows everything about you because your data is in the cloud, the U.S. economy is still using a rotary phone. The treasury secretary says inflation is nothing to worry about, but my banking app makes the saddest sound when I open it. There’s a disconnect between Wall Street and Main Street, and the way we’re currently measuring inflation isn’t working. Can my BOOBS save the economy? Maybe. But new metrics are real, and they’re spectacular. Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan

December 2021 | Luckbox

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Luckbox | December 2021

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RISING PRICES, DECLINING CONFIDENCE I l l u s t r a t i o n by JA S O N S C H N E I D E R

12 14 18 20 24

JUST TRANSITORY? RAINBOW’S END

STAGFLATION, NO STAGFLATION, YES PRICE APPRECIATION

26 28 34 36 38

GIMME SHELTER EMBRACING DEFLATION MEASURING MISERY PERFECT HEDGE? CHINA UPDATE

December 2021 | Luckbox

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Rising Prices, Declining Confidence

UNCERTAINTY PREVAILS AS INFLATION UNNERVES CONSUMERS AND PERTURBS ECONOMISTS By ED MCKINLEY

rices are soaring and necessities are scarce as annual inflation of 6.2% grips the nation. While economists differ on how much of the blame to assign to monetary policy, labor shortages, supply-chain disruptions, working from home or the spread of the Delta variant, a consensus is emerging among the experts that this round of inflation doesn’t seem transitory. “It’s the classic inflationary scenario of having too much money chasing too few goods,” said Alan Cole, former senior economist for Congress’s Joint Economic Committee and author of the Full Stack Economics newsletter. That nearly unprecedented shift in spending increases demand for goods and puts pressure on supply, causing prices to rise, noted James P. Sweeney, chief economist for Credit Suisse. “About two-thirds of consumption and half of GDP is services spending by households,” Sweeney said. “It almost never contracts. In fact, it’s only contracted two or three times in 75 years. And this time, it absolutely plunged.” The resulting inflation has prompted legions of economists to abandon their laissez-faire attitude toward controlling prices, observed Carol Corrado, former chief of industrial output at the Federal

Reserve Board and now research director in economics at The Conference Board. Meanwhile, some economists argue that inflation is merely masking the deflationary forces at work in the economy. Technological advances like robotics and artificial intelligence will continue to force prices and reduce the need for human labor, said entrepreneur and author Jeff Booth. (For more on deflation, see pp. 28 and 49.) Whatever position economists take on inflation and deflation, they tend to agree that demand for merchandise has remained strong during the pandemic, at least partly because the federal government has kept income at or even above pre-pandemic levels despite staggering levels of joblessness. The first wave of federal relief came with the Coronavirus Aid, Relief and Economic Security Act, better known as the CARES Act, which pumped $2.2 trillion into the economy as direct payments, augmented

unemployment benefits and forgivable business loans. President Trump signed the bill into law in March 2020, after the Senate passed it unanimously and the House passed it on a voice vote. It was the biggest stimulus package ever but only marked the beginning of the effort to keep America whole despite the ravages of the pandemic. A year later, President Biden signed the American Rescue Plan Act, pushing another $1.9 trillion into the economy. That measure passed the Senate 50-49 and the House 220-211. But economic stimuli could do nothing to prevent changes in spending habits wrought by the virus. People could no longer congregate in bars, restaurants, theaters or music venues because of quarantines, lockdowns, layoffs and social distancing. They became shut-ins, working from home and entertaining themselves with electronics. As a direct result, they cut their spending on services, leaving them with the funds to increase the amount they spent on merchandise. Meanwhile, the supply of goods was shrinking because the pandemic was preventing workers from going to their jobs and making things. A shortage of workers was also creating bottlenecks in supply chains, making goods more difficult to obtain. Container ships from China waited outside U.S. ports because not enough longshoremen were available to unload them. Trucks sat idle across North America, waiting for drivers. As if to prolong the problem, workers furloughed by the pandemic have been slow to return to low-wage jobs, and many with higher incomes are choosing early retirement. Before COVID, America employed nearly 153 million workers, but by October the number had climbed back up to just 148 million. Viewed another way,

By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” JOHN MAYNARD KEYNES, 20th-century economist

Luckbox | December 2021

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$40t

The amount of money in circulation in the world, including all of the physical money and the money deposited in savings and checking accounts

81% of prime-age workers were employed before the virus struck, and now 61% have returned to the workplace. If employers are forced to raise wages to attract workers, inflation would naturally result. And as employers take on inexperienced new workers in the face of labor scarcity, the inefficiency of those new hires also raises the prices of the goods they produce. Even after the pandemic, the labor market could remain tight and continue to fuel inflation for another 10 years, some economists believe. Wages may continue to rise because they have been depressed because of the decline of unions, automation that eliminated jobs and increases in employment overseas. But there’s reason for cautious optimism. After the initial shock, supply-side issues tend not to get worse and thus prices won’t increase again after the initial adjustment. Sometimes the unfavorable situation improves, and prices can fall. For example, a new worker tends to gain efficiency and thus become less of a force for inflation. On the other hand, some types of inflation have already occurred and have not been taken into account. The U.S. Bureau of Labor Statistics (BLS) bases measurement of rents on leases, some of them signed before COVID raised prices. So how will this all sort itself out? The world seems unlikely to return to anything resembling the runaway inflation of the 1970s, according to Cole, the newsletter author and former Congressional staffer. The world’s aging population is saving for retirement, he said, which leaves less money to bounce around and drive up prices. But even if inflation doesn’t reach record highs, Americans would do well to prepare for a wild ride that might last through 2022, a growing number of economists agree.

AUTO CORRECT A breathtaking bout of inflation is roiling the market for new and used cars as increased demand meets pandemic-induced supply issues. No one’s ever seen anything like it. “Prices are at their highest ever,” reported Jonathan Smoke, chief economist for Cox Automotive, which owns Kelley Blue Book, autotrader.com and Manheim Inc., reputedly the world’s biggest wholesale auto auction. Pre-COVID, new car buyers paid an average of 94% of the manufacturer’s suggested retail price for cars, but now they’re shelling out a jaw-dropping 101%— more than the sticker price on the window, according to Smoke. In September, the average price paid for a new car surpassed the $45,000 barrier for the first time, and that was when the average sticker price was $44,400, he said. But that’s nothing compared with what’s happening with used vehicles. In October, used car prices were up 37% year over year, and that followed a year when they increased 14%, according to Smoke’s stats. In normal times used cars lose about 10% of their value every year because of wear and tear, Smoke noted. But shortages of used cars remain so acute that some two-year-old vehicles are selling for more than they cost when they were new, he said. Today’s $15,000 used car has typically clocked 40,000 more miles on the odometer than a car that sold for that amount pre-COVID, Smoke noted. It’s happening because some urban workers are choosing to drive private vehicles to the job instead of risking COVID on public transit. Meanwhile, working remotely is enabling some employees to move farther from city centers and thus increase their commitment to private modes of transportation. Before the pandemic, the number of vehicles in the United States typically grew by about 5 million annually. Last year, the nation experienced the first contraction in its stock of vehicles since the Great Recession, Smoke said. In other words, automotive manufacturers have yet to catch up from COVID-related shutdowns and semiconductor shortages. When will it end? Used car prices should begin falling next spring after the rush to buy them with income tax refunds subsides, he predicted. “The new vehicle market may see abnormal price increases for longer than that—as long as supply continues to be relatively constrained,” Smoke warned, “through at least next year and into 2023.”

December 2021 | Luckbox

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I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments.” FRIEDRICH AUGUST VON HAYEK, economist

THE TECHNIC IAN A V E TE RA N TRA DE R TAC K LES T EC H N ICALS

The End of the Rainbow?

PROSPECTS FOR CONTINUED INFLATION MAY INTERFERE WITH FINDING A POT OF GOLD By TIM KNIGHT

he word “inflation” may not mean much to anyone who wasn’t around in the 1970s and early ‘80s. Ever since Paul Volcker successfully broke inflation’s metaphorical back during the first Reagan administration, the cost of goods and services has generally inched up only a couple of percentage points each year. Sure, a few lurches—both up and down—have occurred along the way, particularly with news-sensitive commodities, such as oil. But for about 40 years, citizens of the United States really haven’t suffered the kind of angst about inflation that roiled the populace in the 10 years preceding Volcker. That may be changing, however, with trillions of dollars in COVID relief reshaping the American economy. Some prices are surging, and when they’re not,

the products themselves are simply getting smaller. Some call it “shrinkflation.” One of the best sources for long-term data on the corrosive effect of price inflation on purchasing power is, ironically, the Federal Reserve, and the charts accompanying this article provide insight into trends stretching back to the creation of the Fed in 1913.

COMMODITIES IN A SAUCER

The government doesn’t provide a single, straightforward inflation number. Instead, it juggles all manner of historical data, with different granularities (monthly, quarterly, yearly), different calculations and different exclusions.

For example, the most frequently cited government report on inflation omits food and energy because their price changes are so volatile. It might seem important to convey such data, volatile or not, but most members of the public don’t dig any deeper than the headline number. One important flavor of inflation data— the producer price index for commodities— draws upon data going back nearly three full decades to 1994. The chart’s price action from 2015 to the present looks awfully similar to what was happening between about 1996 and 2004, when prices began a powerful ascent. Still, a single instance of a certain pattern yielding a certain result is far from conclusive evidence that the same thing will happen. What’s more, the powerful move in commodities from 2004 to 2008 occurred almost entirely because of extraordinary demand from the BRIC nations, a situation unlikely to repeat itself. Yet this analog is worth keeping in mind as long as it remains intact—in other words, as long as prices don’t slip below the saucer formation already completed.

A TRIMMED CALCULATION

The U.S. government tracks a wide variety of inflation measures, and one of the most useful bears the clumsy name of 16% Trimmed-Mean Consumer Price Index. This calculation, a creation of the Federal Reserve Bank of Cleveland, starts with a basket of products and “trims” the top 8% and bottom 8%, thus eliminating the outliers and retaining the other 84% to produce the trimmed CPI. This seems more balanced than the more popular calculations that blithely ignore the

In 2001, economists began grouping the BRIC nations—Brazil, Russia, India and China— because they had achieved a somewhat similar state of development.

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rising costs of such outlandish luxuries as food and energy. The first chart of the trimmed CPI shows monthly change. It may look wildly volatile, but it ranges from 0.0% to only about 0.5%. Those numbers might seem small, but they add up. In fact, a 0.5% monthly change implies a yearly change of 6%, which is quite high. For the past decade, month after month, the figure came in between 0.05% and 0.25%, and usually around 0.1%, which is a remarkably tame CPI. Recent data, however, clearly shows the economy has left the shaded area behind, as the CPI has lurched out of this decade-long box into some of the highest levels of this time series. Month-to-month data rolls up into long, sweeping trends, which is what the next graph represents. This is the same 16% trimmed CPI except on a rolling annual basis. Just before the financial crisis, the trimmed CPI was at about 3%. From 2007 through 2010, however, that figure plunged to nearly 0%, and the Fed became terrified of the “D” word: Deflation. Throwing open the financial spigots to combat COVID, the Fed succeeded in reigniting inflation. Its oft-cited goal of 2% has already been reached, and it’s using other measuring sticks to show inflation has not quite achieved its target.

GDP AND INFLATION

The dreaded saucer The pattern that preceded 2004’s spike in inflation has just recurred. Will it prove the precursor for another round of alarmingly higher prices? Time will tell. 220 210 200 190 180 170 160 150 140

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Some prices are surging, and when they’re not, the products themselves are simply getting smaller. All the trimmings The Fed lops off the commodities with the biggest changes in price to create a trimmed index. It’s supposedly more instructive to view inflation without the outliers.

Combining two data sets lends perspective to a view of the long-term economy. Let’s divide the nation’s gross domestic product (GDP) by the inflation accumulated over the years, as measured by the Consumer Price Index. The resulting eye-opening chart breaks down into three time periods.

0.55 0.50 0.45 0.40 0.35 0.30

⊲ 1947-1968: The graph pushed steadily higher because GDP was growing powerfully enough to render inflation moot. It reflected genuine, not just nominal, prosperity and productivity. ⊲ 1969-1982: The chart went into free fall as surging inflation handily beat GDP. Although not shown here, the stock market Continued on page 17

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A CENTURY OF RAINBOWS Does it seem like everything costs twice as much as it should? Well, prices have actually climbed a lot more than that in the last 100 years. In fact, they’ve risen an average of 3.12% annually since 1913 for a total increase of 2,670.8%. Charting that price explosion yields rainbow patterns. That imagery may seem fanciful, but it reflects the smooth curves of long spans of time and emphasizes the particularly strong or weak extremes within those curves of broad overall movement. Readers can view the long chart included here as representing six distinct eras of inflation. ⊲ 1913-1918: The consumer price index went

nearly vertical in 1913 when the Federal Reserve Bank was established and U.S. spending on World War I kicked into high gear. Before then, no one gave a thought to inflation. Generally speaking, prices in 1910 were about the same as in 1870—or 1830. But with the creation of the Federal Reserve, the money supply ballooned and buying power plummeted.

⊲ 1919-1932: Relatively undamaged by the

ravages of World War I, the United States became an industrial powerhouse and the breadbasket of the world. Technology brought efficiency and productivity, helping America produce cars, radios and agricultural products at a dizzying pace. That sent prices lower for everyday purchases, particularly food. As pleasant as that sounds, it was devastating for American farmers, who felt the pain of the Great Depression long before it registered with the general public.

Chasing rainbows A graph of the last century reveals six bouts of worrisome inflation. 260 240 220 200 180 160 140 120 100 80 60

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⊲ 1933-1945: One of Franklin Delano Roosevelt’s first acts as president was to ban gold and untie its value to the dollar. That released the inflationary genie from the bottle. Without gold as a balance, there was no theoretical cap on how many dollars the Fed could print. It made as much sense as walking out to the driveway in the morning to see if the car was 10% larger. Coupled with substantial government stimulus and the industrial juggernaut of World War II, inflation pushed higher.

⊲ 1946-1968: This was the most prosperous

and profitable era in American history. The economy grew persistently, thanks to efficiency and innovation. Although inflation was a yearly reality, it was always a little behind the everexpanding prosperity of the general public.

⊲ 1968-1982: Inflation’s steady pace hit an

inflection point late in the 1960s, and by the mid1970s it was often the top story on the evening news. President Richard Nixon took radical steps, such as federally mandated wage and price controls, but they were as ineffective as President Gerald Ford’s “WIN” buttons, which stood for Whip Inflation Now. Inflation ran rampant until the Fed finally halted it by ratcheting interest rates up to a heart-stopping 20%.

⊲ 1983-present: Once red-hot inflation has been snuffed out, the growth of the U.S. Consumer Price Index returned to a pace that would have been familiar to consumers of the 1950s and 1960s—steady but not devastating to household budgets. This era may already have ended, but it will be years before that’s entirely clear.

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Continued from page 15 performed poorly for most of those years, and by the early 1980s investors were becoming uninterested in trading stocks. But they were making money as prices soared for assets like gold and agricultural commodities.

Lurching higher Opening the financial spigots to combat the economic effects of COVID helped reignite inflation. 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5

⊲ 1982-present: It’s sobering that the graph has been meandering up and down in a relatively tight range for a full 40 years. In spite of a stock market that’s literally thousands of percentage points higher than the early 1980s, the nation’s productivity has remained terribly flat when inflationary forces are taken into account. Surging asset valuations have masked the reality that America’s explosive industrial growth ended before most of today’s traders were born.

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WHERE THE FUNDS FLOW

The real question isn’t about inflation in the 19th century or how GDP compares to the CPI. Americans simply want to know if prices are going to keep going up. It’s impossible to know for sure because of a wealth of uncertainties. One of the biggest is where those extra trillions in COVID cash are going to wind up. A tremendous stockpile of undeployed cash is sitting around in digital bank vaults, immaterial to the day-to-day economy. The Fed maintains that recent inflation will prove “transitory.” Others suggest the trillions of dollars in relief and stimulus will continue to inflate not just asset prices but also the cost of meat, gasoline, sugar, clothes and the countless other goods and services that ordinary people use in their everyday lives.

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America’s explosive industrial growth ended before most of today’s traders were born. Feeble growth The stock market has climbed thousands of percentage points higher since the early 1980s, masking the nation’s disappointingly flat productivity. 135 130 125 120 115 110

Tim Knight has been using technical analysis to trade the markets for 30 years. He’s the host of Trading the Close on the tastytrade network and offers free access to his charting platform at slopecharts.com. @slopeofhope

20%

The interest rate that finally curbed 1970s inflation

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To me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.” JANET YELLEN, U.S. Secretary of the Treasury

No, It’s Not Stagflation YES, PRICES ARE UP AND GDP IS DOWN COMPARED WITH EARLIER THIS YEAR, BUT THE ECONOMY ISN’T ENTERING A ’70S-STYLE MALAISE By CHRISTOPHER VECCHIO

The economic woes of the 1970s, a decade marked by runaway inflation and painfully slow growth of gross domestic product, came to be known as stagflation. Could a similar fate befall America in the near future? In this article, a currency expert says he doesn’t foresee a return to those conditions—at least not yet. A story that begins on p. 20 presents a different view.

he U.S. economy seems to have fallen into a bit of a quagmire. Inflation, as measured by the consumer price index (CPI) or the Fed’s preferred gauge of inflation, the personal consumption expenditure index (PCE), is running at its highest level in 30 years. Meanwhile, growth rates appear to be sagging. The Q3 report on U.S. gross domestic product (GDP) showed a +2% annualized real growth rate. The sharp slowdown comes after two strong quarters to start the year, with Q1 and Q2 U.S. real GDP coming in at +6.5% and +6.3% annualized, respectively. Some commentators and market

This year’s U.S. GDP growth

+6.5 (Q1) +6.3 (Q2) +2.0 (Q3)

observers are suggesting the slowdown in the third quarter marks the onset of stagflation, defined as “persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.” The state of the economy, so they say, could be creating a policy dilemma that would push the Federal Reserve into a corner as it prepares to taper asset purchases and ultimately raise interest rates. And with President Joe Biden’s fiscal stimulus plans mired in Congress, thanks to divisions between progressives in the House and centrists in the Senate, the threat of a fiscal cliff—a sudden drop in government spending—looms large as a potential albatross around growth’s neck in 2022. However, ample evidence suggests this isn’t your father’s stagflation. In fact, it may not be stagflation at all. Indeed, price pressures are high, the highest seen in decades. But the other conditions of stagflation haven’t been met. In fact, quite the opposite is true. Consider the labor market. The unemployment rate (U3) is back below 5%, and while job gains have been inconsistent in recent months, the pre-pandemic labor force is returning more quickly than after other downturns in the post-World War II era. About 18 months after the start of the pandemic, the economy is still approxi-

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Christopher Vecchio, a senior currency strategist for DailyFX, forecasts economic trends in a number of countries. @cvecchiofx

Spending rebounds Consumer spending has returned to its pre-pandemic upward trend

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mately 3.5% below its peak employment in 2020. After the global financial crisis of 2007 and 2008, it took approximately 50 months before the economy was only 3.5% below its pre-recession peak employment. It ultimately required 78 months to recover all of the lost jobs. The labor market is recovering jobs at a breakneck pace, considering the pandemic provoked the largest drop in employment in economic history. So, the labor market isn’t suffering from stagflation. The case for calling the current situation stagflation becomes even weaker when one considers the demand side of the equation. Personal consumption expenditures are at their highest level ever and, according to data from the St. Louis Federal Reserve’s economic database, consumption is actually above its pre-crisis trend. The inflation Americans are experiencing comes from strong demand amid a supply shock to supply chains left in disarray by the pandemic. Plus, the economy has history on its side. Typically, inflation caused by supply shocks fades over a few quarters. Sure, the economy is experiencing slower real GDP growth now than earlier in the year. But the labor market is proving resilient, if not strong, and consumers—many with the assistance of government financial support during the pandemic—are spending more money than ever. Will backlogged ports create more problems in the short term for businesses and consumers? Most likely. But the economy isn’t facing stagflation. It’s an economic boom limited by supply constraints that should fade in 2022 and beyond.

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CPI-U Typically, inflation caused by supply shocks fades over a few quarters. Year

Annual Average

Annual Percent Change (rate of inflation)

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90.9

10.30%

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136.2

4.20%

2001

177.1

2.80%

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224.9

3.20%

2021*

271.4

4.80% Source: Federal Reserve Bank of Minneapolis

*An estimate for 2021 is based on the change in the CPI from second quarter 2020 to second quarter 2021.

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Yes, This is Stagflation BUT IT STILL MIGHT BE TRANSITORY B y JA M E S S TA N L E Y

omething new happened in the 1970s and it’s apparently coming back to haunt the nation again. It goes by the name “stagflation.” The word, a portmanteau of “stagnant” and “inflation,” stands for slow growth (stagnation) combined with high prices (inflation). It creates a host of problems for central banks: Do they hike rates to stem inflation and risk even slower growth? Or do they cut rates to spur the economy and risk fueling inflation? There’s no right answer. What’s more, stagflation hasn’t happened very often, so there’s no playbook to go by. But the decisions central bankers make about stagflation produce market winners and losers.

THE “ME DECADE”

Some remember the 1970s as the “Me Decade”—a time when Americans cast aside the social movements of the ‘60s and refocused their attention on their own personal well-being. Some prefer to forget the ‘70s altogether because of the decade’s economic tribulations. Inflation was already high when the decade began, running 6% for 1970 and 4% for 1971. To stem those price increases, President Richard Nixon instituted wage and price controls and suspended the gold standard in August 1971. But inflation climbed higher when OAPEC—the Organization of Arab Petroleum Exporting Countries—embargoed shipments of petroleum and thus created the 1973 oil crisis. The price of gasoline skyrocketed and motorists lined up to fill their tanks. Stations posted signs when they ran out of gas. Stock prices plunged, losing nearly 50% of their value in 20

THE 1970S BY THE NUMBERS

20% Interest Rates

50%

Drop in Stock Prices

months. Interest rates rose to nearly 20%. Listlessness prevailed.

ENTER, PAUL VOLCKER

President Jimmy Carter appointed Paul Volcker chairman of the Federal Reserve Bank in the summer of 1979. Home mortgages were carrying doubledigit interest rates as inflation grew by about 1% per month. The dollar was considered nearly worthless. The prevailing wisdom was that paper assets—currency, stocks and bonds—were terrible stores of value. Instead, many viewed commodities as optimal investments because they wouldn’t be as badly debased by a weakening currency. Stocks underperformed, largely because they were denominated in dollars, a currency that didn’t inspire confidence among investors at the time. Metals and commodities did well because inflation didn’t erode their value. Before Volcker, the Fed was run by Arthur Burns, whom Nixon appointed in 1969 with one directive: No recession. Nixon even made a remark to Burns about “the myth of the autonomous Fed.” So the central bank kept interest rates low, and that helped Nixon win re-election in 1972. Burns followed Nixon’s directive and ran expansionary monetary policy for much of the decade despite lackluster results. After he left office, Burns said it was “illusory” to expect central banks to curb inflation, implying that the political pressure behind low rates and expansionary policy was too much for a central banker to resist. Six days after Burns cast doubt on the idea of the Fed’s independence, Paul

Inflation is not caused by the actions of private citizens, but by the government: by an artificial expansion of the money supply required to support deficit spending. No private embezzlers or bank robbers in history have ever plundered people’s savings on a scale comparable to the plunder perpetrated by the fiscal policies of statist governments.” AYN RAND, developer of the philosophical system Objectivism

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Volcker made a radical announcement: The bank would target the volume of bank reserves in the system, as opposed to interest rates, allowing rates to go as high as needed to reduce reserves. The move was designed to shield Volcker from political pressure because he was instituting a formula to fix the problem of stagflation instead of making a subjective decision on how to adjust interest rates. Volcker expected interest rates to spike because the system was awash in excess credit. The Fed Funds rate jumped from 11% in 1979 to 19% in 1981, causing a recession. Volcker knew what had to be done and devised a way to gain enough political cover to do it. Along the way, Jimmy Carter lost his bid for re-election to Ronald Reagan in 1980. By 1983, inflation had moved back below 4%. In 1986, it fell to 1.9%. Volcker’s plan had worked. It induced a mild recession to temper the excess credit, which enabled Americans to focus on consuming rather than hoarding or guarding their investments against runaway inflation.

Snapshot of a decade The S&P 500 monthly price chart for the ‘70s documents the tribulations of an era of stagflation.

Nixon imposes wage controls, removes the gold standard

Oil shock S&P drops by 49.93% less than two years

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Correlation The rate on the 10-year Treasury, shown in blue, moved roughly in tandem along with the inflation rate (as calculated by the CPI), shown in red.

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STAGFLATION TODAY

The greatest similarity between today’s economy and that of the ‘70s is artificially low interest rates. The Fed holds rates down to prevent recession and drive economic growth. That isn’t really the Fed’s job, as the bank has two mandates: price stability and employment. Congress should be responsible for economic growth, but after the global financial collapse of 2008, the Fed had to step in with multiple rounds of quantitative easing (QE)—the policy of buying longer-term securities on the open market to increase the money supply and encourage lending and investing. That put the responsibility on the central bank, and it’s stayed there. Some feared QE could bring the return of runaway inflation because the bank was looking to flood the system with excess credit. When that didn’t happen, the Fed continued to indulge in QE, covering for politicians who were unable or unwilling to risk assuming responsibility for the economy. When COVID-19 struck, the Fed went

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Good as gold In the ‘70s, the price of the precious yellow metal began the decade at $35 per ounce and ended at $533.60 for a return of 1,426.75%. Then it continued to climb, reaching $900 in January 1980.

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Stagflation helped to bring a major move to gold prices in the 70s, growing by 1,426.75% from Jan. 1, 1970 to Dec. 31, 1979.

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Should the Fed hike rates to stem inflation and risk even slower growth? Or cut rates to spur the economy and risk fueling inflation? Silver explosion Silver outpaced gold in the ’70s, increasing in value by 1,446.96%, versus gold’s 1,426.75%. 36.000

Silver ramped up during stagflation, increasing by 1,446.96% during the decade.

0.382(34.025)

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0.764(18.218

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1.910 0.000

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THE STAGFLATION INVESTOR

The S&P 500 produced a return of 19.85% in the ‘70s, with investors valuing precious metals and commodities much more than paper assets. Much of the pain in stocks was relegated to the bear market that ran from 1973-1974 and accounted for a 50% loss to the index. But that’s when the oil shocks were happening as OAPEC constrained supply—clearly an extenuating factor. The rest of the decade was more stable, with the S&P 500 returning 77% from the 1974 low into the end of the 1980 open. Inflation ran rampant, so there’s not a strong correlation between weak stock prices and strong inflation, although precious metals did easily outperform stocks. Stocks aren’t necessarily a no-fly zone during stagflation, but sector and style of equity become important considerations given the macroeconomic backdrop.

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back to the emergency playbook to institute carte blanche lending that, like in the ‘70s, left the financial system awash with excess credit. As in the ’70s—but unlike the period after the global financial collapse—inflation has started to pick up. With inflation rates moving over 6% throughout 2021, the inflationary aspect of stagflation is already in place. While growth for 2021 has been relatively strong, the question remains: How much of that growth is pandemic-related bounce-back and how much is legitimate and organic? Real rates have been negative for more than a year, and the Fed wouldn’t dream of hiking them anytime soon. The Fed has warned that it may raise rates one time in 2022, but if history is any guide, it will back down unless the economic backdrop is absolutely perfect for a “lift-off” in the second half of next year. So, yes, the nation has a form of stagflation today, although it may last for only a few years.

BONDS IN THE ‘70S

Interest rates were elevated and continued to climb as the Federal Open Market Committee led by Burns failed to temper

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rising prices. But, real rates were negative much of the time, so holding a bond to clip the coupons was a losing proposition. With the prospect of higher rates, bondholders faced deeper depreciation of principal (rates and prices move inversely)—a confounding scenario for anyone looking for returns through Treasuries or other fixed-income investments.

Phenomenal growth Bitcoin is increasing in value rapidly and seems to be replacing gold as the best hedge against inflation, some economists believe. 60000.00

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PRECIOUS METALS IN THE ‘70S

The prevailing economic wisdom during the stagflation of the 1970s was that investors should avoid paper assets and seek commodities, and it was a very good decade to be long gold. After starting January 1970 at approximately $35 per ounce, gold prices pushed up to $533.60 by the end of the ’70s. That amounts to a return of 1,426.75%. A wild January 1980 saw prices top out at just under $900 per ounce before reversing and falling by 66.29% into the summer of 1982. It was no coincidence that the gold trend reversed as Volcker started to hike rates. This pivot may offer lessons for market participants now. Silver outpaced gold in the ’70s, albeit by a minimal margin with silver putting up 1,446.96%, versus gold’s 1,426.75%. Like gold, silver spiked and burned shortly after the 1980 open as Volcker kicked rates higher.

BITCOIN’S RAMPAGE

The creation of bitcoin was still far in the future when the ’70s ended, but given its impact in markets today, the original cryptocurrency bears mention. Many speculate that bitcoin is the world’s new inflation hedge. Given the near-term performance of gold and silver, with both largely underperforming over the past 12 months, that

PRICE FOR AN OUNCE OF GOLD

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in 1980

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idea seems to be gaining traction. Cryptocurrencies in general are interesting, but let’s focus on bitcoin because the limited supply of 21 million coins can have a monumental impact as an inflation hedge. Bitcoin can never surpass that number. As inflation erodes purchasing power, the value of one bitcoin will always be one bitcoin, and a depreciating dollar can make that an even stronger equation for holders of the cryptocurrency. Notably, gold prices have remained relatively weak since topping out last August when bitcoin was trading below $12,000. As inflation has ramped up recently, gold has continued to show weakness while bitcoin has jumped by 80% from the June low and a whopping 880% from last year’s low. Perhaps there is a new inflation hedge in the equation.

egy today? That’s worth pondering as a social media-connected world with financial markets on watch 24 hours a day is unlikely to let someone like Volcker implement a strategy that would cause a recession. The public scrutiny would be too much, and as with the relationship between Fed chair Jerome Powell and former President Donald Trump, politicians continue to influence central bankers who are supposed to operate with independence. Volcker’s strategy saved the Fed’s independence, and he probably saved the dollar, too. But the cavalcade of central bankers that have come in his wake has seemed prone to honoring public sentiment and carrying out the directives of elected officials. That makes the prospect of another Volcker-like central banker doing what needs to be done a distant prospect. So, position accordingly.

TODAY’S TAKEAWAYS

James Stanley, a senior strategist for DailyFX, helps direct educational content and produces articles and web seminars. @jstanleyfx

Would Volcker be able to pull off his strat-

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It is a way to take people’s wealth from them without having to openly raise taxes. Inflation is the most universal tax of all.” THOMAS SOWELL, senior fellow at the Hoover Institution, Stanford University

Price Appreciation INFLATION FROM 2000 TO 2020

Cumulative price change: 50.30% Average annual inflation rate: 2.06%

MISERY INDEX 7.4% 2000

9.4% 2020

10.2% now

MEDICAL CARE AVERAGE COST FOR MEDICAL CARE SERVICES $40

Is someone manipulating government inflation numbers for political gain? That’s what a lot of Americans say about the most common yardstick, the consumer price index (CPI), which tracks the cost of a basket of household goods and services and often makes headlines. If they’re paying close attention, they may say the same about the more obscure personal consumption expenditure measurement (PCE), a model based on CPI that the Federal Reserve uses to target inflation. But honorable public servants compile that data, according to former Congressional staff economist Alan Cole. “The U.S. Bureau of Labor Statistics indices for inflation are trustworthy in the sense that these people are serious, they are unbiased, they’re not trying to push an agenda,” Cole said. “Their personal honor, their integrity, is solid.” But that doesn’t mean their jobs are easy. “The very act of defining, much less measuring, inflation is actually much, much more of a judgment call than a lot of people realize,” he noted. In any case, government tallies show cumulative prices rose a little over 50% in the past two decades—as the accompanying graphics illustrate.

2000

2020

Now

DOW JONES U.S. HEALTH CARE INDEX

360.2 1258.2 1477.9

2000

2020

Now

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HOUSING

TRANSPORTATION 1 GALLON OF REGULAR GASOLINE

MEDIAN PRICE OF A SINGLE FAMILY HOME

$1.48 $2.17 $3.42 2000

2020

Now

$363,800 for 2,261 sq ft

HONDA CIVIC

$225,000

$10,750 to $20,000 to $21,250 to $17,630 $36,995 $43,995

$400k

for 2,333 square feet

$119,600

300k

for 2,266 sq ft 200k

2000

2020

Now

100k

2000

2020

EDUCATION

Now

AVERAGE STUDENT LOAN DEBT FOR GRADUATING STUDENTS

$17,297 $30,030 $30,600

MUSICAL CHAIRS

2000

2020

FOOD & BEVERAGE

Now

FED CHAIRPERSON $60k

Alan Greenspan 2000

Jerome Powell 2020, now

ANNUAL PER CAPITA PERSONAL CONSUMPTION EXPENDITURES (PCE)

$23,983 (2000) $42,635 (2020) SOURCE: ELITEPERSONALFINANCE.COM

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2000

Harvard College Tuition & Fees

$6 $5

University of Virginia out-of-state Tuition & Fees

2020

University of Virginia in-state Tuition & Fees

$4 $3 $2

$1 10k

2000

2020

Now

2% milk

Fresh eggs

Ground beef

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December 2021 | Luckbox

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Inflation is taxation without legislation.” MILTON FRIEDMAN, economist

Higher Housing Prices Ahead EVEN IF FOOD AND ENERGY COSTS DECLINE, RISING RENTS COULD SUSTAIN INFLATION B y DA N I E L D U B R OVS K Y

s 6.2% a lot? That was the year-overyear inflation rate in the United States in October, as measured by the Consumer Price Index (CPI), the most popular price gauge. That means average prices rose at their fastest pace since 2008. The Federal Reserve, which manages the production and distribution of money, seems mostly unperturbed, but trends brewing in the housing market could keep policymakers on alert. The central bank has a dual mandate to maintain price stability and pursue maximum sustainable employment. The former means the Fed is trying to target inflation that averages 2% over time. In the interim, policymakers have been arguing that recent inflationary trends are transitory and that price growth should return to levels closer to the target by next year as post-pandemic effects fade. Still, some economists have noted upside risks of inflation.

18% 9%

Home price appreciation year-over-year

Rent increase in the same period

Prices for energy, food and shelter have been soaring. Recent housing market trends could hint at upward pressures on the CPI and core Personal Consumption Price Index (PCE), the Fed’s preferred gauge of inflation. The central bank is expected to complete asset purchase tapering by the middle of 2022. If price pressures persist, then subsequent rate hikes may follow more quickly. This risks bringing volatility back into the Dow Jones, S&P 500 and Nasdaq Composite.

HOME PRICES

To get a better idea of why U.S. housing may keep CPI and core PCE above the Fed’s target, let’s look at data from Zillow, an online real estate marketplace. It reports that home values appreciated more than 18% year-over-year in September. However, CPI and core PCE rely on rent to gauge housing market trends, so it makes sense to look at similar data. In the same month, Zillow reported rents up 9.16% year-over-year, well above pre-pandemic rates of inflation. Now, let’s take a look at how that compares with traditional government data. Shelter accounts for about 33% of the CPI gauge and includes renters and owners’ equivalent rent of residences. That makes it the largest component of the index. In the PCE gauge, housing has a smaller weight, about 22.6%, according to the U.S. Bureau of Labor Statistics. Zillow data indicates the rent slowdown bottomed in October 2020. Meanwhile, CPI shelter bottomed in February 2021 and PCE housing did the same in March. The lag between the timely Zillow figures and traditional gauges seems to be about four to five months. Moreover, the shelter components of CPI and PCE remain below pre-pandemic trends. The lag in traditional gauges makes sense. Rising rents can take time to make their way into consumer prices for reasons that include the length of leases and the delay in raising rents as property values increase. Moreover, CPI also samples rent about once every six months. Given that Zillow rents are still increasing

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year-over-year as of September, the housing components of CPI may have some catching up to do.

Slower rise Zillow rents are increasing dramatically but not as quickly as house prices. The Zillow rent index bottomed in October 2020. 20%

THE UPSIDE RISK TO HOUSING

A closer look at the data reveals that not only are traditional housing inflation gauges lagging behind Zillow data, but momentum is also underperforming. After seven months from the bottom, the Zillow rent index climbed about 5.32%. In other words, average rental prices increased 5.32% in the seven months after October 2020. That’s as the urban consumers’ shelter component of CPI climbed just 2.5% from February through September 2021. This is not comparing apples to apples, but this data might indicate a greater chance of upside surprises in the shelter components of traditional inflation gauges in the coming months. Put another way, if energy and food prices subside, rising rents may still keep CPI and PCE above the Fed’s target. This stickier inflation may open the door to a Fed that is more eager to raise rates once asset purchase tapering is potentially completed by the middle of next year. This is something that Wall Street may not take too well because it will bring volatility into the stock market. Daniel Dubrovsky is a strategist for DailyFX, the research and analysis arm of retail trading platform IG. @ddubrovskyFX

Zillow U.S. Home Values Index YoY Zillow U.S. Observed Rent Index YoY 15 Rent slowdown bottoms in October 2020 10

Jan19 Mar19 May19 Jul19 Sep19 Nov19 Jan20 Mar20 May20 Jul20 Sep20 Nov20 Jan21 Mar21 May21 Jul21 Sep21

Source: Zillow

Differing views Zillow compares its observed rent index to its home value index, with the data changed to a year-over-year basis from January 2019. 3.5% Shelter CPI component bottoms in February 2021, 4 months after Zillow rent data

3.0

2.5 U,S. PCE Index Housing YoY U.S. CPI Urban Consumers Shelter YoY

2.0

1.5

Jan19 Mar19 May19 Jul19 Sep19 Nov19 Jan20 Mar20 May20 Jul20 Sep20 Nov20 Jan21 Mar21 May21 Jul21 Sep21

Source: Bloomberg

The central bank is expected to complete asset purchase tapering by the middle of 2022. If price pressures persist, then subsequent rate hikes may follow more quickly.

Indexing the indexes This chart places Zillow, CPI and PCE data at the same starting point of 100, where the 100 represents when the three gauges individually bottomed in the preceding charts. Each point along the time period represents the change in rent and shelter since Month 0. 109.00

Zillow US Observed Rent Index (100 = 2020 Bottom) U.S. CPI Urban Consumers Shelter (100 = 2021 Bottom) U.S. PCE Index Housing (100 = 2021 Bottom)

106.25 After seven months, U.S. CPI urban consumer shelter is increasingly underperforming Zillow rent data

103.50

100.75

Source: Zillow, Bloomberg

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How I Learned to Stop Worrying and Love Deflation BY GARRETT BALDWIN

WHY DO MAINSTREAM ECONOMISTS FEAR LOWER PRICES? INVESTORS CAN EMBRACE DEFLATION BY BUYING TECH STOCKS AND BITCOIN.

nemployment recently dipped to 4.6% as the economy added 531,000 jobs, according to the monthly jobs report issued in November by the United States Department of Labor. Those top-line numbers always make headlines, but a truly startling statistic is buried deep in the report. For 14 straight months, more than 100 million able-bodied Americans have been out of the workforce. That means only 61.4% of the labor pool is on the job. That percentage has declined steadily for two decades, and it’s continuing to decrease even now with 10.9 million jobs open. To be fair, the 100-million figure includes retirees, students, family caregivers and discouraged job seekers no longer looking for employment. But most of the jobless don’t fit those categories. Armchair economists and political pundits have been trading barbs and assigning blame for the trend since at least 2001, when 66.7% of potential workers had jobs. They trace the decline in participation to everything from low wages to an understandable reluctance to uproot a family and move to where jobs are available. They blame Amazon’s domination of retailing. They blame Biden. They blame Trump. And now they blame COVID-19. But what about the march of technology and the U.S. monetary system’s commitment to debt-based growth? Don’t they deserve some of the blame?

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JEFF BOOTH ON DEFLATION

In January 2020, just as the pandemic was beginning to ravage the global economy, Canadian entrepreneur Jeff Booth released his book The Price of Tomorrow— Why Deflation is Key to an Abundant Future. Booth serves as chairman of CubicFarm Systems, which develops equipment for year-round indoor vertical agriculture. He has started companies that specialize in agribusiness, real estate and technology. Through it all, he has promoted the principle of “more for less.” He offers a simple thesis for understanding a debtbased financial system like the one in the United States: A government that creates debt to counteract the deflationary influence of technology could eventually wreck its economy. While the U.S. may not have reached that extreme, recent trends suggest an unwillingness to embrace deflation that will aggravate chronic structural problems. The pursuit of inflation causes many of the challenges facing the U.S. and other nations, Booth maintains. The policy centralizes wealth and power while abetting inequality, polarization and the rise of opportunistic fringe candidates. Pursuing inflation reinforces a system that leaves many citizens feeling impoverished even though technology is raising their standard of living. In his book, Booth asks a fundamental question: “What if, instead of trying to stop deflation at all costs, we embrace it? As technology spreads, deflation happens at the rate it should. Deflation becomes something celebrated because it means that we are getting more for less. We allow ourselves to accept abundance.”

1930’s-STYLE FEAR OF DEFLATION

Why are mainstream economists so fearful of deflation? Keynesian-influenced professors taught them never to question inflationary policy. The argument goes that when prices fall, consumers will wait for MORE TECH FOR LESS

$2,500 $1,299 PowerBook G3 (2000)

MacBook Pro (2020)

PRICE COMPARISONS OF 14-INCH APPLE LAPTOPS

prices to fall further, thus precipitating a collapse in demand. Booth argues that artificially induced inflation ends up increasing the cost of essentials, such as food, rent and transportation. Deflation, however, tends to link to things that don’t matter. Technological progress has spawned deflation everywhere. Cell phones used to cost $2,000, but now they’re 10 times as powerful for a quarter of the price. The price tag for a television set has declined 98.7% in inflation-adjusted dollars since 1977. “Does technology reduce price? Yes. That is undeniable,” Booth says. “Do we all benefit from the fact that technology gives us more freedom? Yes, that’s why we use it.” Booth declares that as rational beings, consumers want more for less. That’s why technology companies win. “It’s why we use Google and Amazon,” he writes. “They give us more value, we get more choice, we get cheaper products versus the status quo. Technology does that faster at an ever-increasing and exponential rate.” Smartphones create value and provide benefits by eliminating the need for other products, including cameras, scanners, entertainment systems, banks, email networks, calendars, board games, and printed books, magazines and newspapers. Those displaced products have effectively become free. Consumers benefit from free or reduced-priced goods, but the economic system is built on credit and would collapse with deflation, Booth asserts. Case in point: Since 2000, governments around the world have created $185 billion in new debt. But the return on that debt hasn’t generated significant economic growth. So despite all that stimulus, the increase in the money supply produced only $46 trillion in global growth over those two decades. History shows that every single new dollar of debt has created less economic growth than the dollar that preceded it. But even with diminishing returns from newly created money, America remains committed to what amounts to fiscal madness. Today, every new dollar of debt creates an uptick in GDP of fewer than 35 cents, according to the Federal Reserve Board and Hoisington Investment Management. That’s well below the 70-year average of $0.61 and continuing to decline. So, a question arises: Can we still enjoy abundance when prices and wages deflate? If they fall in unison, it shouldn’t be an issue. How does this truism go ignored, and why do Americans fear deflation? Well, many economists blind themselves to reality by persistently looking back upon the 1950s, when

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returns from debt were substantially higher. Meanwhile, many of today’s economic policies harken back to the 1930s and 1970s while failing to adjust to the structural impact of technology over the last 40 years. Even when they’re wrong, central bankers tend to stick around a while. Then they move on to jobs in banks where they profit from the prevailing system or retire to universities to teach another generation of economists to seek inflation. Their memoirs chronicle their bravery in confronting the problems they helped to create.

OTHER DEFLATIONARY VOICES

Robert Shiller has written extensively on the deflationary influence of technology. In a 2003 Wall Street Journal column, he suggested that technology linked to deflation can cause “revenge effects” in an economy. Shiller worried that economies faced “a cascade of consequences from recent advances of information technology like the World Wide Web, which became available to the public in 1994.” That was 18 years ago, long before Google emerged as a public company. But the debate about technology and deflation has been on display over the years between academics and technology-focused entrepreneurs. In 2015, for example, venture capitalist Marc Andreessen suggested that technology creates higher living standards and lower prices but isn’t measured effectively in the nation’s economic statistics. “While I am a bull on technological progress,” Andreessen wrote, “it also seems that much of that progress is price deflationary in nature, so even extremely rapid tech progress may not show up in GDP or productivity stats, even as it equals higher real standards of living.” Former Treasury Secretary Larry Summers challenged Andreessen. “It is...not clear how one would distinguish deflationary and inflationary progress,” Summers replied. “The price level reflects the value of goods in terms of money, so it is hard to analyze without thinking about monetary and financial conditions.” Summers speaks to how price levels are measured: In nominal currencies. But what’s the real issue at hand? Is deflation so bad that government should confront it with policy that reinforces

We’re getting more for less ... accept abundance. 30

Thanks to the spread of electricity and other such wonders in the final quarter of the 19th century, prices dwindled year by year at a rate of 1.5% to 2% per year. People didn’t call it deflation— they called it progress.” JIM GRANT, Grant’s Interest Rate Observer

structural problems? In a 2017 essay called “The Illusions Driving Up U.S. Asset Prices,” Shiller tackles the origins of monetary policy that result in the consequences Booth described. Shiller notes that the Fed, like other central banks, has been debasing its currency. A Google search by Shiller indicated the term “inflation-targeting” started appearing more often in the 1990s. He says the pursuit of positive inflation— or price stability—began after the 1991 recession. He also cited Summers, who said Americans would display “irrational” resistance to falling nominal wages if the Fed targeted a “zero-inflation regime.” Technology had a significant deflationary impact while the Fed’s 2% target rate, which Shiller called “feel-good policy,” took hold. The Economist noted in 2019 that the U.S. had experienced only a small increase in consumer-goods prices, except for food and energy, since 2000. Booth maintains that inflationary policies not only fail to stop tech-driven deflation but also concentrate power and wealth. Academics and economists—the people driving 20th-century monetary policy—don’t seem to comprehend the exponential impact of deflationary technology. In a recent example, Bank of England Chair Mark Carney compared artificial intelligence to harnessing the power of electricity. “Electricity was never going to be smarter than humans,” Booth noted, adding AI’s path to superseding humans may take 20 to 50 years, but along the way it will drive exponential deflation. To understand exponential growth, imagine putting a single drop of water on the 50-yard line during the first minute of an NFL game. A minute later, add two drops. Keep doubling the number of drops every minute. The stadium would fill with water in about 44 minutes—approximately the end of the third quarter. Booth provides another alarming example in his book. To understand compounding growth, suppose that a single sheet of notebook paper can be folded seven times. How big would a piece of paper have to be to fold 50 times—the size of the Empire State Building? Nope. It would have to stretch the 93 million miles from Earth to the sun.

HOW THE SYSTEM WORKS

Booth notes that society can continue down the path of denying deflation exists and “pretend to get paid less to save jobs.” But he argues that humankind can progress by adopting a deflationary system that would enable

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technology to create and broadly distribute abundance. Otherwise, people are simply focused on the risk of a brave new vision. “Printing more money is just concentrating that risk,” Booth says, adding that in the inflation-based economy people are actually paid less in real terms than they would be after the acceptance of deflation. The concentration of power in various sectors, combined with the effort to chase inflation, forms a negative feedback loop that drives inequality of wealth. Here’s how it works: Apple and its cell phones, computers and other devices wield deflationary power by displacing bank tellers, boardgame makers and manufacturers of everything from compasses to cameras. Next, the government offers dramatic unemployment benefits to those displaced workers and provides even more significant capital to bail out investors who owned the companies facing obsolescence. Booth notes that America bails out rich corporate failures and socializes their losses. Refusing to allow unsuccessful businesses to fail compounds the structural problems. In the next phase, new capital enters the system. This inflation reduces consumer purchasing power while driving up the cost of food, rent and energy. Finally, money flows to the investor class, including other deflationary companies engaging in the same cycle as Amazon, Tesla and Alphabet. These companies with monopoly power now invest in deflationary technology like artificial intelligence that will displace more workers, and the cycle begins again. Now, while Congress sharply focuses on fiscal policy, observers might want to give monetary policy a second look.

When there’s deflation, it means that although most markets are shrinking, and people have less to spend, the 1% that hold 99% in debt are getting all the growth in wealth and income. Deflation means that income is being transferred to the 1%, that is, to the creditors and property owners.” MICHAEL HUDSON, Wall Street financial analyst

INEVITABLE INFLATION VERSUS DEFLATION

Competition between inflationary and deflationary forces will drive greater instability in the future, Booth suggests. He notes that technology has driven down the costs of products and services but that the financial system relies on the old definition of economics—“the

Inflationary policies not only fail to stop tech-driven deflation but also concentrate power and wealth.

management of scarce resources.” But that scarcity occurs because of the debt-based system. And consumers will feel the dramatic advance of technology in the next decade in virtually every sector of the economy with the introduction of 5G, the growth of artificial intelligence and the proliferation of robotics. Meanwhile, it remains to be seen how governments will manage three industries that have experienced incredible inflation over the last four decades thanks largely to dramatic debt-based support by the U.S. government: Education, healthcare and housing. From 1977 to 2021, the price of new houses increased 385.4%, medical costs rose 820.8% and college tuition soared 1,421.5%. So, how will a tech-driven, deflationary economy respond to those hikes in the cost of education and housing, two bedrock institutions? Americans anticipate that the value of their homes will never stop appreciating in value, and politicians are aware that 25% of household “wealth” is linked to a primary residence. (It’s 75% in China, where the state firmly holds centralized power.) However, Booth notes that housing prices could fall because of technological advances in construction and 3D printing, offsetting the increasing cost of labor in the industry. Booth also focuses on the bigger picture and the declining returns based on new government debt. “People who think their house goes up forever don’t realize that it took $185 trillion of stimulus against $46 trillion of economic growth,” he says. “Now, if you believe that the next 20 years could have $400 trillion of credit growth, to grow economies by $40 trillion, then housing might be an excellent place to [invest].” And what about education? In today’s tech-driven world, education is largely free with the right internet connection, but getting credit for educational achievement is not. “Certification only comes because people believe they are going to get a higher paying job because of the certification,” says Booth. “And that’s not true today. It certainly won’t be true in five years.” The 1999 film Good Will Hunting suggested one could receive the equivalent of a Harvard degree with just a library card and late fees. Today, YouTube and countless open-source online programs offer access to a world-class education. Post-COVID, fewer younger Americans are enrolling in universities and community colleges. When people pay for a college degree merely to advance in the system itself, the government-university pact begins to look more like a multi-level

December 2021 | Luckbox

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marketing platform than a reliable source of economic advancement. So, a shift in education appears inevitable, and the price model will likely change. That could enrage graduates with massive student loan debt. Meanwhile, healthcare remains a heavily financed “rail” of American government. Costs should be declining in the sector because of technological innovation, but the government is incentivizing rising costs and aging baby boomers are availing themselves of more medical care. Those factors make it difficult to roll back the inflationary pressure in a healthcare system that represents 16% of the U.S. economy and is a significant source of wages. One can debate the U.S. economy’s future as systemic forces collide. It’s free-market economics versus what feels like technological feudalism, centralization of power against decentralization, and inflation against deflation. Not many leaders have recognized those conflicts, and some might even be using them to gain advantage in the political tribalism that lies ahead. “Think about what technology looks like in five years,” Booth suggests. But doing so requires an ability to comprehend the exponential impact of artificial intelligence, robotics, cryptocurrencies and deflationary forces. He’s forcing a conversation, one sorely needed as so many forces collide. The time is at hand when emerging technologies make most people as useless as horses, the only choice is to play by the established rules of employment and investing. That might be the best-case scenario.

You should not be afraid of deflation. You should be afraid of policies attempting to fight it.” MISH SHEDLOCK, Sitka Pacific Capital Management

THE PATH FOR INVESTORS

So, what’s an investor to do in an economy where deflation drives down prices to meet the expectations of consumers and businesses? Some experts suggest that guarding against inflation requires exposure to rising commodity prices, growing bank deposits, foreign markets and foreign currencies. Companies like Chevron (CVX) and EOG Resources (EOG) have strong balance sheets and have appreciated, thanks to the recent surge in oil prices. If JPMorgan Chase’s suggested supply-demand imbalance accelerates in 2022 and beyond, produc-

America bails out rich corporate failures and socializes their losses.

ers with low debt and significant amounts of reserves will benefit. Then there’s the suggestion that combining exposure in foreign markets with gold, a historical inflation hedge, offers a defensive play. But gold remains below its all-time highs from a decade ago, and foreign currencies in resource-rich nations face macroeconomic challenges. Meanwhile, most of the challenges to supply-demand balance stem from supply chain bottlenecks that could disappear in the second half of 2022. Then there are the regional and community banks. While mergers and acquisitions continued at a pace of 3% to 5% annually before the pandemic, banking loan books have been anemic over the last 18 months. Since Booth penned his book, the SPDR S&P Regional Banking ETF (KRE) has risen from $56 to $75 (33.9%). But the Nasdaq 100, led by companies that have fueled tech-driven deflation, has surged from $222 to $390 (or 75.6%). This suggests a relatively simple alternative strategy. The deflationary approach is to own stock in companies that have been replacing workers with robots. Despite their higher valuations, investors can continue to benefit from owning stock in robotics companies, A.I. firms and semiconductor producers like Qualcomm. The same goes for FAANG darlings Meta (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOG) (formerly known as Google). And according to IBM’s U.S. Retail Index, the impact of COVID pulled the consumer curve of e-commerce forward by five years and kicked off even greater investment in digital supply chains and payment systems. Booth has also argued in favor of bitcoin because of its deflationary nature. “Bitcoin is already the best store of value on the planet measured by stock returns, or price returns over the last 13 years,” Booth says. “Everything measured in bitcoin is coming down in price. It’s telling you the truth. It is a free market. When I say deflationary currency, that allows for deflation. If we have real growth, we have real growth, and prices should rise, the price should rise. We shouldn’t manipulate them.” In the next decade, the number of able-bodied Americans out of the workforce may surpass the number working, while the debt-based system continues to drive asset prices higher and enrich wealthy shareholders in companies that are replacing workers with robotics.

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LUC KBOX LE A N S I N W I T H

ED YARDENI

Measuring Misery

BY J E F F J O S E P H

Yardeni, an investment industry veteran known as the “Wall Street Seer,” has held positions with the Federal Reserve Bank of New York, the Fed Board of Governors and the U.S. Treasury Department. He served as the chief investment strategist at Prudential Equity Group and Deutsche Bank and as chief economist at Prudential-Bache Securities and EF Hutton. He’s currently president of Yardeni Research and has written seven books on the markets and the economy. His latest, In Praise of Profits, is profiled on p. 49. The Misery Index, one of the indicators that helps Yardeni analyze the economy, combines unemployment and inflation rates. Higher readings indicate increased economic and social woes. Just before press time, Luckbox leaned in with Yardeni to discuss October’s inflation numbers and the latest Misery Index reading.

You’ve observed the Misery Index for decades. What is it telling you right now? It’s clearly flashing orange. It’s always better to see the Misery Index near its historical lows. And now, we’re seeing wages going up, costs going up, supply disruptions and, as a result, the CPI inflation rate has been moving higher. The inflation rate is a very regressive tax on everybody. It’s important to see wage increases in nominal terms, but if they’re eroded by rising inflation, it doesn’t do anybody any good—all you get is a wage-price spiral. For the stock market, a falling unemployment rate should indicate a very solid improvement in earnings. On the other hand, a rising inflation rate tends to be negative for the valuation multiple. So

now we may see the market challenged by concerns about inflation because the Fed cannot continue to maintain ultraeasy monetary policy when inflation is clearly accelerating. If the Misery Index is flashing orange, what would cause it to flash red? If it begins to appear that the inflation we are seeing here is similar to what happened in the 1970s instead of just a passing problem related to the pandemic. But we have had experiences where soaring energy prices caused recessions, so I would be concerned about that possibility. We clearly have seen fossil fuel prices increase dramatically in China and Europe and even in the United States. If prices continue to

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Mere inflation–that is, the mere issuance of more money, with the consequence of higher wages and prices may look like the creation of more demand. But in terms of the actual production and exchange of real things, it is not.” HENRY HAZLITT, business and economics journalist

go higher, we could get a recession, which then would cause a bear market. Are you surprised that the Fed’s prior tapering announcements didn’t precipitate a market adjustment? Not really. The Fed has provided so much liquidity in the system that even when they start to taper they’re still buying bonds—just at a slower pace. They’re still adding liquidity to the system, and they’ve added so much liquidity since the start of the pandemic. There has never been so much liquidity. So much of it is sitting in bank deposits earning absolutely nothing. The Fed is only talking about adding More Misery rum punch into the And other economic punch bowl at a indicators slower pace. They’re

not taking the punch bowl away. Do you view the Consumer Price Index (CPI) as an adequate and appropriate measurement of inflation? Do you think it overstates or understates inflation? Considering all the components of the CPI, the one that has the most immediate impact on whether we’re more or less miserable is the price of gasoline. We all pass a gas station, one way or the other, and we all fill up our tanks and see what that price is doing. October’s 6.2% CPI number is the highest reading in 31 years. What does it tell us? There was a morsel of good news. The yearover-year comparisons saw base-effect slowing in some segments such as airline fares. But rent costs and new car prices picked up substantially. The bottom line

Misery, the Markets and Presidents Market technicians and economists note the inverse correlation between the Misery Index and the stock market. Former Presidents Nixon, Carter and Trump could attest to its ability to predict political shifts. 25

5,000

Misery Index S&P 500

4,500 4,000

3,500

is that October CPI confirms that inflation isn’t transitory. It’s persistent. What else does the recent increase in the Misery Index suggest? Well, when the Misery Index is rising, political incumbents become more vulnerable. This could have a tremendous impact on who’s in the White House. Jimmy Carter arguably lost largely because inflation was viewed as out of control. If there is no change come midterms, the Democrats are vulnerable to losing their majority in both houses. And if Biden runs again he’s vulnerable to losing to a Republican. Assuming energy prices do not move materially higher, does the market continue to advance? Yes, I believe so. I’ve got 4,800 [for the S&P 500] by the end of this year, 5,200 by the end of 2022 and 5,800 by the end of 2023.

19.5%

The highest two-year average for the Misery Index since the Great Depression occurred in 1979/80 during Jimmy Carter’s administration.

3,000

2,500 2,000

1,000 1,000

500

1970

1973

1976

1979

1982 1985 1988

1991

1994 1997 2000 2003 2006 2009 2012 2015 2018 2021

Source: Misery Index

10.8% The Misery Index (as of 11/25/21)

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CRYPTO CURRENTLY THE STATE O F C RYPTOCU RREN C IES AN D D EC EN T RALIZED FIN AN C E

Inflation Has a New Hedge

BITCOIN OFFERS INVESTORS A WAY TO OFFSET THE DECLINING VALUE OF ASSETS By MARK HELFMAN

he best hedge against inflation? Bitcoin. Because no matter what happens, the world will never have more than 21 million bitcoins. Plus, no one has shown that the price of bitcoin is tied to any other asset class. With growth averaging 200% annually since its inception in 2009, bitcoin occupies a unique place in the world. It defies comparison with just about anything, including inflation. Think of it as an entity onto itself, uncorrelated with any realworld asset or even any financial asset. What’s more, there’s no way to produce more bitcoins to meet increased demand. Once miners have created enough bitcoins to reach the cap of 21 million, they’ll have no way to produce more. That’s not the case with gold, the go-to inflation hedge of the 1970s. The supply of Au, as it’s called in the periodical table, is virtually infinite. Latter-day ‘49ers will always be able to extract more of it from the earth. That’s true because mining gold that might seem inaccessible right now will become worthwhile if the price of the

precious metal climbs high enough. That will never happen with bitcoin. So, stripping out the volatility, the value of bitcoin will increase in price as long as governments print money and investors continue to move some of that money into bitcoin. It’s programmed to do that, and no one can change it. However, investors should bear in mind that the supply of most other cryptocurrencies isn’t capped. Anyone can sit down at a laptop and magically create a new cryptocurrency with infinite supply. As long as people buy it, the price will continue to go up. Cryptocurrencies like that don’t neces-

Institutional investors appear to be returning to bitcoin, perhaps seeing it as a better inflation hedge than gold.” JPMORGAN, October 2021

sarily provide a hedge against inflation because more tokens can keep coming into the market. That’s exactly what can happen with some of the big names in crypto—like Dogecoin. But don’t disparage the thousands of cryptocurrencies now circulating just because they weren’t designed with inflation-resistant ceilings on the number of possible tokens. Some have other advantages. To program a decentralized-finance crypto that facilitates borrowing and lending, for example, the creator could build in inflation by increasing the number of tokens outstanding by 1,000% annually. That results in a high APR (annual percentage rate) for those who lock the tokens into liquidity pools to build capital. The problem is those tokens can lose value quickly. Using another tokenomic model— called pre-mining—someone manufac-

Luckbox | December November 2021

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One of these not is like the others

60000 50000

2000

Gold

272.5 270.0

Bitcoin

While the Consumer Price Index has increased 7%, bitcoin has increased dramatically and gold has remained relatively flat. Consumer Price Index

tures a huge quantity of tokens and keeps a lot of them. Ripple, a currency exchange, did that by minting 100 billion XRP tokens, retaining 65 billion and paying itself up to a billion tokens each month for years. So how good a hedge against inflation is that? Meanwhile, institutional investors and even a few countries, such as El Salvador and Bulgaria, are buying bitcoins or investing in funds that track bitcoins. Endowments that include the Houston Firefighters Relief and Retirement Fund are taking positions in bitcoin, too. Often the investment in bitcoin remains small relative to total portfolios. The Houston Firefighters, for example, have $5.5 billion in their pension fund, and about $25 million of it is in bitcoin and ethereum. Inflation has made those cryptos more attractive to investors, but other factors are at work, too. In the modern investment landscape, it’s so difficult to generate safe

1900

267.5 40000 265.0 30000

262.5

20000

260.0 257.5

10000

1800 1700 1600 1500

Mar2020 May2020 Jul2020 Sep2020 Nov2020 Jan2021 Mar2021 May2021 Jul2021 Sep2021 Nov2021

yield that investors should have exposure to new opportunities to grow or at least preserve wealth. Having a little bitcoin does that.

Mark Helfman, crypto analyst at Hacker Noon, edits and publishes the Crypto Is Easy newsletter at cryptoiseasy.substack.com. He is the author of Bitcoin or Bust: Wall Street’s Entry Into Cryptocurrency. @mkhelfman

HOOKED ON THE MARKETS?

Visit DailyFX.com for continuous updates on global markets in currencies, commodities, and stock indices.

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How China “Controls” Inflation

THE MIDDLE KINGDOM’S COMMAND-STYLE ECONOMY IS KEEPING CONSUMER PRICES ARTIFICIALLY LOW. IT CAN’T LAST.

B y A N D R E W P R O C H N OW

Luckbox | December 2021

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s most of humanity grapples with inflation, China finds itself in an unusual position. Consumer prices have barely inched up there, while the cost of doing business has increased substantially. The divergence, rooted in the nature of the Chinese economy and the country’s system of governance, demands a closer look. The price of household goods in China—as measured by the Consumer Price Index (CPI)— came in at 0.7% in September and is expected to average about 1.4% for all of 2021. That’s remarkable compared with the 6.2% CPI for the year in the United States. But that doesn’t tell the whole story. In China, the Producer Price Index (PPI) has skyrocketed this year to nearly record highs. The PPI records prices of industrial goods produced for the domestic market, a key metric in an industrial country like China. By August, the PPI in China rose 9.5% compared with a year earlier. That’s the third highest reading since the Chinese PPI was first published in 1996. It was higher only in July and August of 2008, when it reached 10% and 10.1%, respectively. Taken together, the CPI and PPI suggest inflation has taken hold in China but indicate that businesses, not consumers, are shouldering the burden.

CHINA’S COMMAND-ISH ECONOMY

In the United States, the difference between the CPI (5.4%) and PPI (8.6%) seems a lot less extreme. That balance suggests U.S. businesses are absorbing some of the shocks of rising prices but passing along part of the problem to consumers. Chinese businesses are apparently bearing a much bigger load. That disparity arises because China doesn’t operate as a free-market economy. Instead, it mixes free-market principles with characteristics of command economies. Ultimately, China leans toward the latter, which means the government exercises heavy control over how the nation uses land, capital and resources— in other words, just about everything. In the United States, the private sector holds sway to a great degree. So in China, the government decides—to some degree—who pays more when prices are rising. Moreover, it has been cracking down this year on what some see as the excesses of free enterprise, calling upon domestic businesses to embrace “common prosperity,” as opposed to pure profits. And because of the country’s totalitarian system of governance, Chinese leaders can order factories and businesses not to raise consumer prices, which

China’s burgeoning debt Businesses in China owe so much that economists fear too much additional borrowing there could trigger a financial crisis. $ tn 40 Cumulative TSF increase since 2002 Cumulative GDP increase since 2002

2009 - 2020 $1 debt = $0.45 GDP

25 20 15

2002 - 2008 $1 debt = $0.41 GDP

10 5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: pH Report, China National Bureau of Statistics

$21t U.S. GDP (world’s highest)

$15t

China’s GDP (world’s second highest)

is undoubtedly what transpired this year. This arrangement causes problems because most Chinese businesses are competing in global markets for raw materials and other commodities. After all, the Chinese government can’t order foreign suppliers to charge lower prices—especially in highly efficient markets where demand outweighs supply. Hence, the current inflationary environment is forcing Chinese businesses to operate on thinner profit margins—if not at a loss—and that’s not sustainable. Chinese corporate debt is already extremely high, which means increased lending would aggravate an already tenuous situation. The challenge of rising costs, combined with a slowdown in corporate lending, might explain why some parts of the Chinese economy are starting to exhibit signs of distress. Chinese property developers have been under pressure in recent months as they struggle to service mounting piles of debt. The China Evergrande Group, one of the most often cited examples of a company circling the drain, reportedly has liabilities in excess of $300 billion. Economists warn that onerous debt in China could

The price of household goods in China is expected to rise about 1.4% for all of 2021, compared with 6.2% in the United States. December 2021 | Luckbox

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By order of the Chinese Communist Party, businesses—not consumers— are shouldering the burden of inflation. Annual U.S. inflation American consumers are feeling the pain of rising prices, but China is forcing its businesses, not consumers, to bear the brunt of higher costs. 6.2

4 3

2.1 1.7

2.1

2.3

THE PRICE OF SOY SAUCE

1.9

1.5

1.4 0.8

0.7 1

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

U.S. Bureau of Labor Statistics

trigger a financial crisis. That fear is based on red-lining levels in the Chinese ratio of debt-to-gross domestic product. The debt-to-GDP ratio measures a country’s total debt (government, corporate and consumer) relative to what’s produced in the country. That metric is commonly used to evaluate a country’s financial health and ability to make good on its debts. In the last quarter of 2019, the Institute of International Finance estimated the public debt-to-GDP ratio in China at 302%. And by May of 2020, it had risen to an estimated 318%—the largest quarterly increase on record for the Middle Kingdom. For context, the World Bank has characterized debt-to-GDP ratios above 77% as suboptimal and warned that the resulting debt service could threaten a country’s economic potential. By comparison, the U.S. debt-to-GDP ratio is roughly 98%, based on estimated net public debt of $20.3 trillion divided by estimated GDP of $20.6 trillion. With Chinese corporate debt already high, the government probably wouldn’t want to combat rising inflationary pressures with additional lending.

Those hard realities may help explain why the Chinese stock market has been under pressure in recent months. For reference, the KraneShares CSI China Internet Exchange-Traded Fund (KWEB) is down more than 50% from its 52-week high, currently trading at about $50 per share. With the system straining under these pressures, it seems likely the Chinese government will soon be forced to capitulate and allow manufacturers to pass along a higher portion of rising costs to consumers. In fact, those changes may already be in motion.

Inflation is essentially antidemocratic.” LUDWIG VON MISES, Austrian School economist

One sign of a shift in the Chinese inflation story can be tied back to one of the country’s most iconic inventions: soy sauce. Soy sauce, a staple in every Chinese household, might be compared to table salt in the United States— it’s ubiquitous. Soy sauce, brewed by fermenting soybeans, grains, mold cultures and yeast, is believed to have been created in China 2,200 years ago. In October, one of the best-known soy sauce manufacturers in China, the Foshan Haitian Flavouring and Food Company, announced it was raising prices by about 7% across the board. Besides soy sauce, Foshan Haitian also produces and distributes vinegar, chicken stock and cooking oils. The company cited the rising cost of raw materials, transportation and energy in the announcement. With soy sauce such a staple in China, it appears that the government has finally agreed to pass on some portion of inflation to consumers. Foshan Haitian could not have made such a move without the government’s tacit approval. So cracks are now forming in the protective shield for consumers, who will apparently be shouldering a larger share of the inflationary burden. That shift should help alleviate some of the pressure building in the Chinese business sector. But the government will still need to resolve the country’s long-ignored problem of corporate debt or else international equity and debt markets might do it for them. Andrew Prochnow, an avid, longtime options trader, has written extensively about professional tennis and contributed articles to the Bleacher Report and Yahoo! Sports.

December 2021 | Luckbox

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trends

life, luxury & the pursuit of happiness

FINANCIAL FITNESS

Ice Ice Barrel Find comfort in the uncomfortable by plunging into frigid water By Jim Schultz

PHOTOGRAPH: AUTUMN SCHULTZ

ICE BARREL

5 out of 5 $1,200, icebarrel.com Cold therapy is hot!

urning the dial, I sent my body into shock and changed my life forever. My immersion in cold water and even colder air began in January 2016 when I moved to Chicago. That’s where I began taking ice-cold showers as part of the hustle and bustle of my new early morning routine as I scurried from the gym to the tastytrade TV studio. And when you match the city’s sub-freezing weather with what feels like sub-freezing showers, it changes you from the inside. Fast forward to the present and I’ve moved to St. Petersburg, Florida, where the climate’s nearly the exact opposite of what Chicagoans face. How could I maintain my connection with the cold? Drawing up an ice-cold shower on demand during the eight-month winters in the Windy City never presented a problem, but mustering anything cooler than a lukewarm shower stream seemed nearly impossible in the Sunshine State without completely gutting the bathroom, hiring an electrician and obtaining building permits from the city. Still, the boundless energy and acute alertness I cultivated with years of cryogenic showers in Chicago left me eager to find a way to continue the tradition. So, 14 hours down the YouTube rabbit hole, I discovered Cold Therapy (didn’t know that was a thing), learned about Wim Hof (the Iceman himself) and knew I had to become part of the worldwide cold-plunger community. Soon, I secured a chest freezer for immersion purposes only and began plunging daily. But that seemed inconvenient in too many ways. Then I found a product that revolutionized my search for the freeze. I was sent an Ice Barrel, a device that makes it easy to plunge into the cold. The Ice Barrel The Ice Barrel’s black color helps set the dark mood that enables the ice to seep through the cracks of your soul and penetrate your innermost

December 2021 | Luckbox

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trends

thoughts and feelings. It leaves you desperately wanting a Binky—in the best way possible. The device stands about 3-1/2 feet tall and weighs around 60 pounds empty. It’s sleek and compact on the outside but roomy on the inside. It looks much better than the rusty $60 1978 Kenmore chest freezer I had been using. The goal for the first immersions was simple: get into the water, try to survive for a minute or two and get out. You’re not trying to enter a zen-like state—you’re just trying not to die. But as the body adapts, the mind begins to crave the challenge. You look for ways to improve the experience—and this is where the Ice Barrel really delivers. After plunging into sub-50-degree water for months on end, I can attest to the fact that there’s something special about the experience. But by adding your ice to the Ice Barrel, you end up with cubes, mounds or chunks floating on the surface that form a thick sheet of ice that you must gently break through. It’s like jumping into a pond in the wilderness at night. There’s something mysteriously primal about descending into the Ice Barrel and feeling the combination of ice and water chill your entire body in seconds. Then you More Ice Barrel emerge ready to shoulder any task that awaits. Watch the video If you’ve ever wondered how Aquaman feels, this is probably it.

2112_TRENDS_financial fitness.indd 44

COLD THERAPY,

the act of plunging into icy water, constricts blood vessels and thus brings blood flow closer to vital organs. It offers physical and psychological benefits, according to cold plungers worldwide. The physiological results, such as better immune health and greater metabolic capacity, vary among individuals, but the psychological benefits of mental acuity and alertness appear indisputable, advocates say.

Attention to details Using the Ice Barrel requires turning on the garden hose, adding a few big bags of ice and opening the drain valve a couple of weeks later when it’s time for new water. My DIY chest freezer took months to put together and required a stack of 60-grit sandpaper, several tubes of silicone caulk and an hour of my electrician’s time. Bottom line: Who wouldn’t want to endure an icy bath if it increases energy and sharpens alertness? Consider taking the plunge. You won’t regret it. Jim Schultz, Ph.D., a derivatives trader, fitness expert, owner of fitness website livefcubed and the daily host of From Theory to Practice on the tastytrade network, was named a 2017 Novice Bodybuilding Champion. @jschultzf3

11/12/21 10:32 AM

trends

THE PREDICTION TRADE

Is Inflation Transitory? You can bet on it. Literally. By Mike Reddy

y now, just about everyone has heard about—if not felt—the rise of inflation. And as the top-of-mind question evolved from “Will inflation happen” to “How long will this last,” some were quick to offer answers. “I believe, as we get beyond the pandemic, that these pressures release and, in that sense, I believe inflation is transitory and we don’t have an economy that is in a longerrun sense overheating,” U.S. Treasury Secretary Janet Yellen said at a November news conference. But “transitory” merely means “not permanent,” and in an economy plagued with supply-chain disruptions, labor shortages and an ongoing global pandemic, who can predict what the future might look like? Well, Good Judgment’s more than 150 professional Superforecasters do just that—and with notable success for global corporate and government clients. In fact, UC-Irvine professor Mark Steyvers found that the Superforecasters anticipated events 400 days in advance as accurately as regular forecasters could 150 days ahead. So Luckbox asked the Superforecasters if they believed the current pickup in inflation was transitory. Here’s what some had to say:

Inflation is transitory “It’s easier to slow down production than it is to ramp it up. Demand does not have the same constraints, especially when backed by a vast expansion in the money supply that isn’t corralled by regulation. Production is tripping over itself to catch up.” “Excess savings are likely to be gone before the end of the year. Demand will stabilize, go back to normal. More people will be back at work. Supply chain issues will be mainly resolved by the first half of 2022. Commodity prices will also start normalizing.” Inflation is not transitory “The Fed knows how to fight inflation better than deflation, so the risks of a policy error are tilted toward inflation.” “Supply chain issues are showing up in new areas, so there’s more going on than first appeared when inflation accelerated earlier in the year.” “Many saw rampant inflation coming after the financial crisis, but much of the new money was locked up with capital requirements. That money couldn’t chase goods (nod to Milton Friedman). Now the trillions dumped by the Fed and Congress are chasing goods, leading to inflation, and trillions more to come.”

PLACE YOUR INFLATION BETS Got a hunch about the country’s financial future? Put your money where your mind is with these prediction markets.

Will the Consumer Price Index rise more than 0.3% in November 2021? Yes . . . . . . . . . 89¢ No . . . . . . . . . 14¢ —Resolves 12/9/21, kalshi.com

Whom will the Senate next confirm as Chair of the Federal Reserve? Jerome Powell . . . . . . . . 72¢ Lael Brainard . . . . . . . . . 28¢ Raphael Bostic . . . . . . . . . 7¢ —Resolves at confirmation, predictit.org

Will CPI - Overall finish higher than .4? Coming soon! —nadex.com *Disclaimer: Prices as of Nov. 10, 2021

TUNE IN to Season 2 of The Prediction Trade podcast from Luckbox for all-new ways to make money forecasting the financial markets, politics, crypto, sports and other events. December 2021 | Luckbox

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trends

ROCKHOUND

Top 5 Rock

Albums of 2021

JUBILEE BY JAPANESE BREAKFAST Japanese Breakfast has a knack for transporting listeners to a different realm, era and life, simply through its electro-rock notes. The band’s latest album, Jubilee, is no exception and remains true to its name by delivering a moment of joy after years of deep reflections on grief by frontwoman Michelle Zauner. With brighter synths, horns and strings, Jubilee, which was released June 4, shoves listeners into a time machine and brings them back to the days of bright ‘80s glam rock—practically placing them in the middle of a scene out of Pretty In Pink. Relating to the likes of The War On Drugs and Lush, the 10-track album is a compilation of dreamy electro pop-rock tunes, all blanketed in layers of synth.

ROCK ALBUM OF THE YEAR

HOT SASS BY LIZ COOPER

iz Cooper combines deeply personal lyrics with a strong punk attitude, owning up to her own baggage on her latest album Hot Sass. After an extensive touring run for her first studio album Window Flowers under the band name Liz Cooper & the Stampede in 2018, Cooper found herself emotionally and physically drained. Her attraction to folk/country music helped her create the acclaimed folk-psychedelic album she worked so hard to make but left her cooped up in the Americana bubble. Nearing the end of her 20s, Cooper was evolving emotionally and spent two years working on her most self-revealing record yet. Hot Sass was released Sept. 3 through Thirty Tigers Records and marks a new era for Cooper and her band. They dropped Stampede from their name, and they’re running with a psychedelic openness and guitar-driven heavy rock. By straying from the constricting expectations of folk and Americana, Cooper and her band are pursuing sounds inspired by Courtney Love, David Bowie and Lou Reed. With Hot Sass, Cooper proved she is capable of so much more, whether it be heavy guitar solos or elongated interludes reminiscent of The Doors—and she’s not afraid to throw it in your face. Start with the song Lucky Charm and you’ll hear a drawn-out intro that brings to mind The Doors’ Light My Fire. Pay attention to how the guitar slide drops after the long interlude in Lucky Charm, allowing Cooper’s voice to prevail as the main attraction.

The Beatles, Stones and Zeppelin were awesome—but rock lives on. Why not break out of the classic rock cocoon and give new rock a chance? Rockhound is here to help. Think of it as a bridge from 1967 to today and beyond. 46

Start with the song Be Sweet, and you might hear the dreamy guitar chords that Fleetwood Mac employed in Dreams. Pay attention to the band’s use of sub-genres to augment their sound.

Luckbox | December 2021

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trends

DELTA KREAM BY THE BLACK KEYS

LONG LOST BY LORD HURON The mixture of Ben Schneider’s smooth, deep voice and Lord Huron’s folk-rock sounds can make listeners feel nostalgic even when it’s the first time they’ve heard the band. Long Lost, the band’s fourth studio album in nine years, is its most cohesive piece of work to date. Staying true to the group’s soft Americana and folk-rock sound, the album, which was released May 21, deserves to be listened to in chronological order. Lead singer Schneider often paints a picture in words, creating thoroughly crafted storylines with fictional characters and backstories. He even includes short breaks between songs with snippets of a fictional radio show host speaking—reeling people in to listen to the entire album. Riding on homey vibes similar to The Avett Brothers and My Morning Jacket, Long Lost is timeless, earning it a place in the timelessness of rock music. Start with the song Not Dead Yet, and you might hear Neil Young’s Cinnamon Girl. Pay attention to the warmth of the music, which relies on acoustic instruments.

More Rockhound The Rockhound reviews Courtney Barnett’s new album

The Black Keys are no strangers to the rock scene and have made a name for themselves with 10 studio albums. Meanwhile, both members of the duo, Dan Auerbach and Patrick Carney, have also been accumulating solo works of their own. With their latest album, Delta Kream, released May 14, the group returns to the roots of what inspired them to start creating music in the first place with a compilation of covers they learned to play when they were younger. The album honors the Mississippi hill country blues tradition with covers of songs by Junior Kimbrough, Big Joe Williams, John Lee Hooker, Bernard Besman, R.L. Burnside, Ranie Burnette and Mississippi Fred McDowell. Delta Kream is an ode to Delta blues and classic rock ‘n’ roll. It’s not meant to outshine the band’s other studio albums, but rather to bring their music back to the very beginning while still exploring new textures and grooves. Start with the song Crawling Kingsnake by John Lee Hooker and Bernard Besman, acclaimed bluesmen who were early inspirations for The Black Keys duo. Pay attention to how the song is built around the instruments and their true capability. The duo doesn’t augment the sound electronically to “improve” the music.

LITTLE OBLIVIONS BY JULIEN BAKER Julien Baker has always been a multitrick pony, writing and performing her own lyrics and playing piano, acoustic and electric guitars. Her niche is interpersonal lyrics that reflect her own thoughts and trauma. But she takes it even deeper with her third studio album, Little Oblivions, which was released Feb. 26. Departing from her usual acoustic alternative-folk, Baker brought in a full band to deliver an emotional declaration of ruin and the search for an escape. Her knack for smooth rock gets kicked up a notch with the inclusion of more instruments, but her music is still more lyric-driven. It requires delicate and compassionate listening, and understanding—it’s not just simple background sound. Her notes follow the direction of her words. Start with the song Faith Healer and you might hear a lyrical declaration that could have come from Joni Mitchell’s Both Sides Now. Pay attention to the deep emotion in Baker’s voice and how she puts every piece of herself into each word. Kendall Polidori is Luckbox’s resident rock critic. Follow her reviews on Instagram @rockhound_luckbox and Twitter @rockhoundlb

December 2021 | Luckbox

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trends

SENTIMENT

SHOULD WE EXPAND THE SUPREME COURT? invites some of the world’s brightest thinkers

38% 42% 21%

to debate issues of the day. The organization

–AUDIENCE OPINION BEFORE THE DEBATE

I N T E L L I G E N C E S Q U A R E D U.S.

FOR

AGAINST

was founded in New York in 2006 to promote intellectual diversity by fostering respect for differing opinions. The debates are organized in the traditional Oxford style. The side that convinces more audience members to embrace its arguments wins. The excerpts below come from a debate in September about expanding the Supreme Court.

FOR

THE NUMBER OF TIMES THE SCOTUS JUSTICES HAS CHANGED

1869 17 YEARS

UNDECIDED

SIX TIMES

THE YEAR THE SUPREME COURT SETTLED ON NINE JUSTICES

THE AVERAGE TENURE OF SCOTUS JUSTICES OVER THE PAST 100 YEARS

AGAINST

LITHWICK: Court-packing—the shift in the structure of the court or the expansion and contraction of the court—happened in 2016 when a seat was held open for almost a year. It happened again in 2020 when a justice was rushed onto the court in violation of the Senate’s own new rule about not seating someone in a presidential election. So, the idea that we want to do a new thing that has never been done before or has not been done since the New Deal, is actually predicated on a false assumption.

AMAR: So, the fundamental problem is not a constitutional problem. The number nine doesn’t appear in the document. We haven’t always had nine justices. And the size of the court has changed over the years for various reasons. So, we could do it. But it would be a bad idea because when you change the size of the court for purely partisan advantage, then what goes around comes around. When the other side comes in, it is going to try to add. You add six, they add 12, then you add 18, and the thing spirals out of control. That’s just an obvious argument.

BRUMMER: I’m telling you—and what Dahlia is telling you, and what millions of Americans are telling you—is that the system is broken and that we have every right to fix it. And we can fix it by adding seats. And do you know who can’t wait for us to add seats, or who can’t tell us that we’re being too radical? The people in Texas who no longer have access to an abortion and the millions of Americans who are facing eviction in the midst of a global pandemic. They cannot wait, and they’re not too radical for change.

PHILLIPS: The reality is that the Supreme Court doesn’t decide just a handful of cases. It decides 80-90 cases on a good day in good years, and Dahlia doesn’t care about at least 85 of them. And it does an extraordinarily good job. If you start to play with the system as it operates today, it will do a less effective job at the run-of-the-mill kinds of cases. But with respect to the point of it being broken, it’s a snapshot in time. I’m not saying there aren’t ways to improve it, but you’re making a fundamental change in the institution.

Dahlia Lithwick Legal commentator and host of Slate’s Amicus podcast

Akhil Reed Amar Professor of law at Yale University

Tamara Brummer Political organizer and strategist

Carter Phillips Supreme Court and appellate litigator

More Debate See who won the debate

Luckbox | December 2021

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trends

BOOK VALUE

The Luckbox Bookshelf New and not-so-new books that captured our attention this month The Inflation Myth & the Wonderful World of Deflation By Mark Mobius

The Price of Tomorrow: Why Deflation is the Key to an Abundant Future By Jeff Booth

Jeff Booth, who’s served as CEO of e-commerce and technology companies, addresses two major ideas in his book The Price of Tomorrow: Why Deflation is the Key to an Abundant Future. He believes that technology and price deflation will ultimately cause long-lasting widespread unemployment and that the global economy is held back by a mountain of debt. Technological advances are occurring at such a rapid rate and producing such efficiency and abundance that they are bound to be deflationary, he asserts. He argues that economic systems were built for the world as it existed before the explosion of technology—when economists could count on growth and inflation, labor and capital were inextricably linked, and inefficiency made money. That era is over, and Booth argues that society should acknowledge that reality and fully accept deflation. He advises embracing abundance in an impending age of deflation unlike anything seen before. Amazon Ranking: #5 in Free Enterprise & Capitalism

The COVID-19 pandemic sparked speculation that economies might slip into recession, and the world witnessed shortterm price fluctuations in stock and bond markets. But investor Mark Mobius’ book The Inflation Myth & the Wonderful World of Deflation focuses on longer-term trends, including the rise and fall of economies and markets. He notes that the pandemic is a small factor in the larger picture. The book describes an everchanging world where rapid technological innovation leads to better and more affordable products, thus producing a deflationary economy instead of an inflationary one. Mobius makes the argument that everything we think we know about inflation is actually wrong and that Americans should be paying attention to deflation. He maintains that governments manipulate and exploit inflation numbers, explains the difficulty of gathering data to measure inflation accurately, and notes that advances in technology and automation lead to a decrease in the costs of goods and services. Mobius, a founding partner of Mobius Capital Partners with experience in economic research and analysis in emerging markets, offers an original view of inflation and deflation, and he challenges readers to question conventional wisdom.

Predicting the Markets: In Praise of Profits! Topical Study #6 By Edward Yardeni

In this topical study, Edward Yardeni argues that sloppy analysis has misstated the role of corporate profits in economic growth. He focuses his argument on progressives, whom he believes hold an unbalanced view of the problem. Progressives “claim that the profit motive results in income and wealth inequality,” he writes. In his view, that’s not only pessimistic but also wrong. Instead, market-driven profit spawns widespread prosperity. As an entrepreneurial capitalist and a conservative who champions what he views as progress, Yardeni wants to preserve the system because it provides what he considers the best opportunities. Far too often, book reviews drive away readers. But reviews present just one stranger’s view, and taking them to heart leaves great books undiscovered. The Luckbox Bookshelf offers profiles instead of reviews. Don’t look to these pages for opinions. Think of Bookshelf as a place to discover books that educate, entertain and challenge entrenched beliefs.

December 2021 | Luckbox

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trends

TRADER 1 tastyworks platform, SPY chart 2 tastyworks platform, SPY options chain

3 Opening Bell morning show on tastytrade LIVE with Tom Sosnoff and Tony Battista 4 Two books from the shelf: Brian O’Driscoll’s autobiography, The Test, and Tiger Woods’ How I Play Golf

5 JBL Bluetooth speaker

MEET

DEREK MULLEN

Home/Office location

Dublin, Ireland Age

tions. I do adjustments regularly, so around five to 20 trades a day sounds about right, but this is mostly making adjustments to existing trades, rather than new trade entries or trade exits.

Years trading

What percentage of your outcomes do you attribute to luck?

How did you start trading?

I was lucky enough to be working for a company that issued stock to its employees. This sparked an interest in learning about how markets worked. I took every course I could find. Once I started learning, I couldn’t stop. Favorite trading strategy for what you trade most?

Iron Condors on liquid high implied volatility ranked stocks or exchange-traded funds (ETFs). Mostly $20-wide wings and using the tasty mechanics all the way from entry to exit with profit. Average number of trades per day?

It depends upon the market condi-

Luck helps with everything, but for trading long-term, high probability of profit at trade entry with the right strategy, along with trade management through the duration of the trade until the exit, is much more important than luck! With good trade mechanics, solid positive results are normal. Favorite trading moment?

Looking at a positive profit and loss statement while closing a trade always feels good, but it feels even better when my profit target is exceeded overnight. I recently did a bullish trade on Boeing (BA). I sold a naked put 45 days to expiration, and the stock jumped almost 14%

the next day. I had a 50% profit expectation in around 21 days or fewer but received 65% in just one day. Worst trading moment?

I had what looked like a perfect entry on a strangle on what was a little-known stock at the time: GameStop (GME). The speed and size of the move that followed just felt violent. The trade went so bad so quickly. That was probably the biggest test of all my skills and temperament. Trading small saved me, along with defensive tactics (tasty mechanics). I was glad to be out of that trade. After that, normal trading conditions are so much fun and feel easier. Recovering and becoming a better trader than ever after unusual events has been particularly satisfying. I can say this about the recent sell-off because of the COVID-19 pandemic and for those who can recall trading during the financial crisis of 2008.

FAVORITE TRADING BOOK Business Adventures: Twelve Classic Tales from the World of Wall Street By John Brooks 400 pages $12.39, paperback

Want to be featured as the next issue’s trader? Have story ideas? Let us know: tips@luckboxmagazine.com

Luckbox | December 2021

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trends

CALENDAR

DECEMBER 4 Big 12 Championship Arlington, TX 4 Liz Cooper Coast Is Clear Festival Key West, FL

6 Last night of Hanukkah

6-10 The Night We Stole Christmas Chicago 8-12 Ullr Fest Breckenridge, CO

10 National Lager Day 10 November CPI data

11 Santacon NYC

14 November PPI data

14-15 Fed (FOMC) Meeting

20 National Sangria Day

21 Winter Solstice

25 Christmas

CPI & PPI Data The Consumer Price Index (CPI) and Producer Price Index (PPI) are key economic indicators published by the Bureau of Labor Statistics and used to measure inflation in the United States. While both indexes measure price-change trends month by month, each serves a distinct purpose. The CPI tracks goods and services—including imports—purchased by urban U.S. households. At a more granular level, it measures price changes in food, housing, medical care, and personal goods and services. The PPI, on the other hand, tracks the entire marketed output of U.S. producers—including manufacturing, agriculture, natural gas and electricity. National Sangria Day Little is known about National Sangria Day, including when it originated or why the summery drink-themed holiday is celebrated in December. But far be it from Luckbox to complain about a good thing. Here’s a seasonal twist on the classic sangria:

The Luckbox Holiday Sangria 1 bottle of merlot 1 cup of bourbon ¼ cup Grand Marnier ½ cup sparkling water 2 Granny Smith apples 1 sliced orange Cinnamon sticks for taste > Slice the fruit, add to large pitcher > Add the spirits and cinnamon,

26 Kwanzaa

allow to sit for one hour > Refrigerate for two hours > Before serving, add ice and top

with sparkling water

PHOTOGRAPHS: SHUTTERSTOCK

31 New Year’s Eve

December 2021 | Luckbox

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Trade the Stocks Behind Crypto! Small Cryptocurrency gathers innovators in the space for a unique opportunity to invest, speculate, and manage risk in securities driven by growth in cryptocurrencies with one easy trade. GO.SMALLEXCHANGE.COM/SCCX © 2021 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information presented here is for illustrative purposes only, and is not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Trading in derivatives and other financial instruments involves risk.

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trades&tactics actionable trading ideas

THE NORMAL DEVIATE

Watch These 3 Inf lation Indicators By Tom Preston remember seeing the “WIN” buttons when I was a kid and having my parents explain inflation to me. The buttons, distributed at the behest of President Gerald Ford in 1974, stood for “whip inflation now.” Inflation was bad and whipping it was good. I also asked them what “burn the bra” meant, but they were more reticent about that one. But having a basic idea of what inflation was and what it does to prices helped me understand how the economy works. As time passed, I noticed when inflation was high or low. And since the early ’70s, inflation really hasn’t been an issue in the U.S. until now.

A return to ’70s inflation? From 1973 to 1974, when “WIN” buttons proliferated and politicians campaigned on inflation fears, the average price of a gallon of gasoline rose about 31%. Inflation helped force Richard Nixon from office, and it pushed the Fed to raise the federal funds rate from 6% in January 1973 to 11% the following August. How does that compare with today? From September 2020 to September 2021, the price of a gallon of gas rose 40%. Prices for other consumer products have risen, too, but gasoline is a convenient metric, and it’s arguably one of the most psychologically important prices. So, with gas prices up and the public feeling the pinch of higher rent and higher prices in general, inflation has become a political talking point. The question is whether inflation will pose a long-term problem

PROBABILITY OF AN INTEREST RATE HIKE

20% (March 2022) 34% (May 2022) 60% (June 2022) –Chicago Mercantile Exchange projections for Federal Open Market Committee meetings

As inflation goes up, interest rates tend to go up, too. December 2021 | Luckbox

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trades& tactics

the way it did in the ‘70s. Will the country suffer through stagflation and a bear market in stocks, or adjust quickly and ramp up the economy? The right thinks inflation will be around for a while and blames the Democrats. The left thinks it’s just temporary and blames the Republicans for stoking inflation fear. Economists don’t know because today’s government policies, political issues, money supply, debt—and even psychology—differ from conditions during past bouts of inflation. The past doesn’t have much predictive value. So, let’s turn to the collective genius of the markets. Rising interest rates The markets show us that expectations of inflation drive up interest rates. As inflation goes up, interest rates tend to go up, too. The rationale is that having too much currency in the hands of consumers is one of the causes of inflation. To reduce it, the Fed increases the interest rate to make buying T-bills, CDs, notes and bonds more attractive. When consumers buy bonds instead of products, the Fed takes in the money and doesn’t spend it. The amount of currency in the wild is then reduced. And with less currency for consumers to spend on goods and services, prices should fall, which should reduce inflation. Three factors indicate the market thinks interest rates are going higher, which could bring higher inflation in the future, or lower, which could indicate lower inflation. And right now, they’re pointing toward higher inflation.

% The increase in gasoline prices from 1973 to 1974

% The increase in gasoline prices from Sept. 2020 to Sept. 2021

Having too much currency in the hands of consumers can cause inflation.

up bond prices go down, look at the prices of options in the 10-year Treasury note (/ZN) to compare the probabilities of it dropping (rates going up) or rising (rates going down). The trick is to convert the price change of / ZN to a change in yield. To do that, one needs to know the dollar value of a basis point, known as DV01. The easiest place to find that is on the CME’s Treasury Analytics page. For /ZN, DV01 is $79. That means if the yield on the 10-year Treasury note rises .01% (e.g., from 1.54% to 1.55%), the total value of the /ZN future, which is its price times $1,000, would drop $79. If the price of /ZN is 130, its value is $130,000. A 25 basis point, or .25% increase in yield, would move /ZN down 2.00 to 128, and a .25% decrease would move it up to 132. Looking at the 128 put and 132 call in the January 2022 expiration, the probability of /ZN being below 128 is 26%, and the probability of /ZN being above 132 is 21%. That means the options markets say a .25% increase is more likely than a .25% decrease. With three indicators suggesting the market sees higher rates and inflation, readers may want to stock up on gasoline. Tom Preston, Luckbox contributing editor, is the purveyor of all things probability-based and the poster boy for a standard normal deviate. @fittypercent

Three signs of inflation The first factor to watch is the breakeven inflation rate, which is the yield of a Treasury note, say the 10-year yield, minus the yield on an inflation-indexed note of the same maturity. The difference in the yields is the market’s expectation of future inflation, and as of the time of this writing, that spread is the highest it’s been in 10 years. Second, look at the Fed Funds rates to see the probability of a rate hike at upcoming Federal Open Market Committee meetings. According to the Chicago Mercantile Exchange (CME), the probability of a rate hike at the March 2022 meeting is 20%, but by the May 2022 meeting it rises to 34%, and by the June 2022 meeting there’s a 60% probability of a rate hike. Those odds point to the Fed raising rates, maybe in response to inflation. Third, remembering that when rates go

Luckbox | December 2021

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trades& tactics

CHERRY PICKS

R I PE & J U I CY T RADE IDEAS

Straddle Up When you’re expecting a big price move but aren’t certain of the direction By Michael Rechenthin mplied volatility is one of the most useful metrics to consider when looking at a stock’s movement. Symbols with higher implied volatility have higher expected movements, and higher expected movements translate into more expensive options prices. For a real-world example of the relationship between implied volatility and the cost of options, check out the table to the right. As a reminder, a straddle is an at-the-money call and put. The options in this example expire 1-1/2 months away. The price of a straddle in Boeing (BA) is approximately 9% of the price of the company’s stock. Traders who think Boeing will move less than this would sell the straddle and capture the credit. Those who expect the price to move more than 9% would buy the straddle for a debit. Notice that as the implied volatility increases, so does the cost of the straddle as a percentage of the underlying costs. Some major takeaways emerge. First, as the implied volatility increases, the value of the option increases. A stock with an implied volatility of 15 will have a straddle that costs roughly half as much as one with a value of 30. Second, the market is pricing low movement in Coca-Cola (KO), Proctor & Gamble (PG), Verizon (VZ) and McDonald’s (MCD) as judged by the lower values of the straddles, and higher movement in Boeing, Disney (DIS) and Salesforce (CRM) as seen by the higher prices of the straddles as a percentage of the underlying prices. As long as the market does not move up or down in price, the short straddle trader is perfectly fine. The optimum profitable scenario involves the erosion of both the time value and the intrinsic value of the put and call options.

Michael Rechenthin, Ph.D. (aka “Dr. Data”) heads research and development at tastytrade. @mrechenthin

Symbol

Implied volatility

Straddle value

Underlying price

Straddle value as percentage of stock price

$20

222.68

DIS

$14

176.87

CRM

$25

309.96

56.33

144.95

52.33

MCD

$11

253.1

As implied volatility increases, the value of an option increases, as well as the cost of the straddle as a percentage of the underlying.

THE STRADDLE Traders can execute a neutral options strategy called a straddle by selling both a put option and a call option for the underlying security with the same strike price and the same expiration date. Use a straddle when high volatility is combined with uncertainty in the price movement. It’s best to use a straddle with an option that has a long time to expiration.

December 2021 | Luckbox

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trades& tactics

FOREX

F R E E- F LOAT I N G M AC RO I N S IG HTS FRO M G LO BAL CU R R ENCY T RADERS

Expect a Rising Dollar if Inflation Sticks With price growth exceeding expectations, could stimulus withdrawal be in sight? By Ilya Spivak

n the April issue of Luckbox, this column argued that inflation may prove stickier than the “transitory” blip envisioned by the Federal Reserve, citing a sharp rise in transport costs along frayed supply chains. At that time, the central bank’s official projections saw no interest rate increases on the menu through 2023. Policymakers have since changed their tune, acknowledging in June that price growth has exceeded expectations and advising markets to be ready for the start of stimulus withdrawal by year-end. That helped arrest a precipitous decline in real interest rates and the dollar from the COVID-19 panic peaks in March 2020. The greenback has attempted a cautious advance against this backdrop, trading up close to 7% by late September before a modest pullback. Real yields have languished, however, pinned in a narrow range near the lows of the year. That’s because the rise in priced-in inflation expectations has outpaced the rebound in nominal rates.

Hot prices It appears that markets expect Fed officials to fall behind the curve on tightening, letting prices run hot. But a mismatch between investors’ expected path for the oncoming rate hike cycle and that of the Fed itself may force some rethinking. Fed Funds futures indicate that the markets are now priced for 140 basis points (bps) in cumulative interest rate hikes through the end of 2024. Because increases almost always come in increments of 25 bps and the Fed targets a range instead of a single level for the target lending rate, that could mean a policy

Inflation’s steep climb Inflation has reared its ugly head this year while bond yields lagged, holding down real interest rates. T5YIE 1.00 US 5-year TIPS yield (real interest rate)

.50

3.00 2.91

3.000

2.50

2.500

0.00 2.00 U.S. 5-year Treasury yield (nominal interest rate) -0.50 US05Y

U.S. 5-year Breakeven (expected inflation)

2.000

1.500 1.50

-1.00

1.211 1.000

1.00 -1.50 DF115 -1.71 -2.00 2018

2019

2020

2021

2022

0.500 0.50

Source: TradingView

setting of 125-150 bps in just over three years. By contrast, Fed Chair Jerome Powell and company envisioned rates finishing 2024 in the 175-200 bps range, putting them 25-50 bps ahead when official projections were last updated in September. While that seems modest at the outset, it reflects the view of a central bank that still sees rapid reflation as short-lived.

The Fed still holds the view that rapid reflation is short-lived ...

Underestimating inflation? The jury is out on whether the Fed is predicting the right level of inflation. The Fed is almost certainly right to expect that base effects will cool inflation somewhat as the normalization from pandemic-made extremes

Luckbox | December 2021

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The Fed’s view The markets are now priced for 140 basis points in cumulative interest rate hikes through the end of 2024, according to Fed Fund futures. 139.50

December 2024 - December 2021 Fed Funds futures implied rate spread (basis points)

120.00

100.00

80.00

60.00

40.00

20.00

0.00 16

2021

Mar

May

Jul

Sep

Nov

Source: TradingView

... and may still be underestimating how long this inflationary period will last. Dollar vs. euro If the gap between inflation rates and borrowing costs narrows, the dollar may mount a spirited advance. 1.60000

1.50000 Euro/U.S. dollar, monthly 1.40000 1.30000 1.26690 1.22310 1.20000 1.16390 1.10000 1.08792 1.05157 1.03403 80.00 RSI 49.29 40.00 2006

2008

2010

2012

2014

2016

2018

2020

2022

Source: TradingView

plays out. It also makes sense when it argues that rising vaccination rates will help even out economic reopening worldwide and improve supply chains. However, officials see these forces pulling inflation down from 4.2% this year to just 2.2% in 2022. That seems like a tall order given the structural inflationary influence of de-globalization. Trade barriers erected amid the trade war preceding the COVID-19 outbreak remain in place, and hardened positions on all sides suggest they will continue. Add to this the improbability of the full reversal of price increases after consumers’ sticker shock wears off, as well as the rebalancing of terms within contracts and wage agreements being negotiated now. Taken together, this warns the Fed may still be underestimating how long this inflationary period will last. Euro may suffer That could mean room for further steepening in the expected rate hike path, warning that current market pricing may be lagging more than meets the eye. In fact, it may be that the slower the Fed is to curb price growth in earnest, the harder it will eventually have to slam on the brakes. Crucially, credible speculation about such a scenario might prove sufficient to animate price action long before it could be realized. If the gap between expected inflation rates and nominal borrowing costs narrows in this context, rising real yields may animate the dollar to mount a spirited advance. The greenback’s most liquid expression on global currency markets—its pairing against the euro—may be setting up for such a move already. Prices tellingly finished in September below 1.1639, a key monthly inflection level in play for nearly 15 years. If follow-through materializes, a drop to test below the 1.09 figure may be in the cards. Ilya Spivak is head strategist for Asia-Pacific markets at DailyFX, the research and analysis arm of retail trading platform IG. @ilyaspivak

December 2021 | Luckbox

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trades& tactics

DO DILIGENCE

QU I E T FOU N DAT I O N HELPS INV ESTO RS FIND NEW T RADING O P P O RT UN I TI ES

Crude Oil Bets Soaring prices for oil and natural gas may provide trade opportunities By James Blakeway

lobal supply shortages and inflation continue to roil the economy, emptying the wallets of consumers and businesses alike. In a world of rising prices, energy costs stand at the forefront, occupying people’s thoughts and breaking their budgets. In April 2020, U.S. oil futures collapsed at expiration, turning negative as global demand for oil dried up. Just 18 months later, oil futures were approaching $85 per barrel for the first time since 2014. Much like crude oil prices, natural gas prices steadily climbed higher for much of the spring and summer before exploding as fears of short supplies set in with the impending cold weather. Traders who want to bet on the price action of crude oil and natural gas as the nation heads into winter can use the United States Oil Fund (USO) and the United States Natural Gas Fund (UNG). Both are exchange-traded funds (ETFs) that use futures contracts to provide access to the price action of oil and gas. Both have listed options contracts, giving traders derivatives for the oil and gas markets without using futures or options on futures.

(Opposite page) Luckbox used the Alpha Boost trade generation system to find both bullish and bearish trades in the oil and gas funds. James Blakeway serves as CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment analysis and trade ideas for selfdirected investors @jamesblakeway

More than one option Two ETFs with liquid options provide traders access to the Oil and Natural Gas markets.

Name

Symbol

Three-month price change

Three-month correlation with S&P 500

United States Oil Fund

USO

22%

0.32

United States Natural Gas Fund

UNG

28%

0.04

S&P 500 ETF (US Stocks)

SPY

1.00 Note: Data as of 11/8/21

Alpha Boost, a free trade idea service, delivers strategic options strategies via email three times a week. Each email includes five to 10 trade ideas for stocks and exchange-traded funds (ETFs). An algorithmic trade generation system finds the trades.

More Alpha Diversified trading ideas in your inbox

Luckbox | December 2021

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trades& tactics

UNG Short Put Spread

USO Put Broken Wing Butterfly

Bullish trade in natural gas that makes money if UNG stays above 15 by January expiration.

Bullish trade in oil that can be profitable even if USO falls.

USO Short Call Spread

UNG Call Boken Wing Butterfly

Bearish trade in oil that makes 54% return on capital if USO stays below 59.

Bearish trade in natural gas that is still profitable with a 56% increase in UNG.

December 2021 | Luckbox

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trades& tactics

FUTURES

A SAV V Y F U T U R ES T RA D ER’S TAK E O N T HE M AR K ETS

Crypto & Cannabis Contrarians The repeated highs of recent years don’t guarantee stock prices will never again dip, crash or go sideways By Pete Mulmat ome investors prefer to buy a stock or option that’s up 100%, while others grab up a security that’s down on the year. It’s the classic debate between following the trend or taking the contrarian view, and it’s playing out in two of this decade’s most novel markets: cannabis and crypto. Both bitcoin and MJ, a pot stock exchangetraded fund, rose 100% early this year only to fall back to unchanged; the former has eclipsed those elevated levels in recent trades, while the latter is sitting near its lows. Though the two surprisingly have a positive correlation, it might not be prudent for contrarians to play convergence between cannabis and cryptocurrencies or for trend followers to play further divergence. Focusing on cannabis as a standalone oppor-

Cannabis and crypto Surprisingly, the prices of bitcoin and MJ, a pot exchange-traded fund, have a positive correlation. 1.00

BTC/MJ rolling three-month rolling correlation

0.75 0.50 0.25 0.00 -0.25 -0.50 -0.75 May 2019

Sept 2019

Jan 2020

May 2020

Sep 2020

Jan 2021

May 2021

Sep 2021

-1.00

Source: TradingView

A pot ETF languishes MJ, a pot stock exchange-traded fund, has been stuck near its low point this year.

Efficient capital Futures enable traders to put up less money to take control of stocks.

Margin requirement for bitcoin, stock and pot futures

Pot stock performance by month

Micro Bitcoin Futures

Micro S&P 500 Futures

Smalls Cannabis Contract

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

$3,800

$1,200

$187

28%

17%

-5%

-7%

-1%

-5%

-13%

-7%

-13%

tunity could show potential for both sides as a simple price extreme play. The do-or-die moment for pot stocks might pose an asymmetric return relative to risk, given that they haven’t posted a positive month in the last seven and many single names are under $10. Micro futures vs. small futures What’s better than buying a market (potentially) on the cheap? Doing so with the capital efficiency of futures. Small cannabis futures not only share a +0.9 correlation to MJ shares but also require

capital equal to only 20% of the product’s size. Inventorying this out-of-fashion stock sector while waiting for it to reach in-vogue status once again can be much less costly than doing the same thing with hot crypto or tech stock markets. Every so often, trend followers and contrarians can set aside their rivalry and get on the same side of a major market extreme. Who knew pot could promote peace? For less than $200, a trader can control nearly $900 in pot stocks. Even if being right on the cannabis resurgence requires time and

patience, the Smalls futures product makes holding out a relatively affordable endeavor. Think pot stocks have further to fall? That’s the beauty of the Smalls futures product— contrarians and trend followers alike have access to the same manageable, capital-efficient markets. This allows traders to express their outlook on the future of the pot sector, regardless of their bias. Pete Mulmat, tastytrade chief futures strategist, hosts Splash Into Futures on the tastytrade network. @traderpetem

Luckbox | November 2021

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trades& tactics

BASIC

Big Moves in Small Bonds

Talking heads were so taken with the price appreciation of bitcoin that they missed the impressive move in interest rates By Michael Gough

xperts often disparage bonds as a second-rate asset class because they’re not as relatable as Apple (AAPL) or as flashy as bitcoin. But bonds have recently presented some opportunities and may continue to make waves as the public worries about inflation and the Fed becomes more active. Last year’s price action alone may be enough to warrant adding them to a watchlist for investors and traders alike. While most people hear bond and think of the associated interest rate, these products have traditionally been traded in terms of their price. Yet, converting the 30-year bond price of 160 to a 30-year yield of 2% is no easy math. Add in the fact that bonds and yields move inversely, and it starts to become clear why so many traders have stayed away from this market. Jargon aside, a confluence of factors has prompted interest rates to creep up from unprecedented lows to levels not seen since before the start of the COVID-19 pandemic. Since the beginning of 2021, for example, two-year U.S. Treasury yields have increased from 10 basis points to more than 50 basis points. Remember that one basis point represents 0.01%, thus 100 basis points equal 1%. That’s an increase of 400% for interest rates, much greater than the 100% increase in the price of bitcoin over the same period. With extraordinary moves in such a critical asset class, why is there so much hesitation to trade treasury yields? Part of the hesitancy to try rates is that for the longest time the products were designed for institutional participants. Outside of a few floor

Not correlated Percentage return for 2-year U.S. Treasury yield and bitcoin since the start of 2021. 350% 300% 250% 200%

2-year U.S. Treasury Yield

150%

Bitcoin

100% 50% 0% Jan 21

Feb 21

Mar 21

Apr 21

traders in Chicago, these instruments were reserved for large portfolio managers and bulge bracket banks because of their humongous size and obscure quoting conventions. Just this year, however, the Small Exchange introduced a suite of interest rate futures products for the do-it-yourself investor. The small interest rate suite includes two-year, 10-year and 30-year rate futures that look and feel like stocks while providing pure-play exposure to these critical benchmarks. For day traders and investors alike, these smaller contracts afford manageable size and pure-play access to some of the most pertinent rate benchmarks. To trade the previously mentioned two-year interest rate with the Small Exchange futures contract requires just $88 in margin. While that 400% increase over a 10-month period may seem daunting, the profit for an investor who bought on the first day of January and sold on

May 21

Jun 21

Jul 21

Aug 21

Two-Year U.S. Treasury bond yields have soared this year by 400%, much more than the 100% increase in the price of bitcoin.

More Interest Trade Rate Futures

Sep 21

Oct 21

Nov 21

Source: Unt voluptate sum

the last day of September would have been just $163, an amount appropriate for accounts of varying sizes. This small sizing makes rates an interesting new product for investors and swing traders, but also a neat scalping vehicle for the day trader who wants to try futures. With affordable margins, manageable daily moves and unique market exposure, these smaller-sized interest rate futures fit nicely in a wide range of portfolios. Investors can take a long-term position on the direction of rates across the short, medium and long term, while day traders can scalp around binary events such as Federal Open Market Committee meetings in an asset class completely distinct from stocks. Michael Gough enjoys retail trading and writing code. He works in business and product development at the Small Exchange, building index-based futures and professional partnerships. @small_exchange

December 2021 | Luckbox

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trades& tactics

ADVANCED

Smart Inf lation Hedges Looking to take the sting out of an investment’s shrinking value? Ethereum and bitcoin have been anything but stable. Think gold. By Michael Rechenthin

s cryptocurrency the new inflationary hedge? Not for anyone who worries about a 5% drop in purchasing power. Ethereum has had losses that big roughly once every two weeks (or 10% of the time). What’s more, hedging is supposed to reduce risk, and ethereum and bitcoin have been anything but stable. See “Going down,” right, for more stats. The table shows the percentage of days ethereum, bitcoin and gold have fallen by a given amount during the past two years. Value at Risk (VaR), a statistical measure of the risk of financial instruments or asset portfolios, shows significantly more risk in the cryptos as well. VaR is defined as the maximum dollar amount (or percentage) that investors can expect to lose during a one-month period with a high degree of confidence. Looking at ethereum over the course of a month, a loss of $2,500 on a $10,000 investment would not be out of the ordinary. For gold, the VaR is only $500. See “Measuring riskiness,” right. For those seeking relative stability or asset preservation during inflation, gold is the better bet. Investors have two popular choices: the SPDR Gold Trust ETF (GLD) or the slightly less popular iShares Gold Trust (IAU). They have similar constructions, and both are based on the price of gold. IAU’s lower price makes it a better choice for smaller investors. But instead of just purchasing gold, try the following covered call strategy. It provides a high probability of success and the advantage of additional cash flow. The cash received on the short call amounts to an annualized return of 13%, and that helps reduce any drawdowns gold may have. Take a look at the trade and stats in “The covered call,” p. 63. For another view on hedging inflation, see p. 36.

Going down Bitcoin and ethereum may beat gold in the long run, but both cryptos have bad days in the market more frequently than the precious yellow metal does. Ethereum

Bitcoin

Gold

Percentage of days when prices fell 2%

26%

21%

26%

Percentage of days when prices fell 5%

10%

Rarely Happens

Percentage of days when prices fell 10%

Rarely Happens

Instead of buying gold to keep pace with rising prices, try a covered call strategy. Measuring riskiness Value at Risk, or VaR, denotes riskiness and indicates crypto’s not for the faint of heart. One month Value at Risk (VaR) VaR as a %

VaR as maximum drawdown to expect on a $10,000 account

Ethereum

- 25%

$2,500

Bitcoin

- 20%

$2,000

Gold

- 5%

$500

Michael Rechenthin, Ph.D., aka “Dr. Data” is the head of research & development at tastytrade. @mrechenthin

Luckbox | December 2021

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trades& tactics

The covered call The trade

Buy 100 shares of iShares Gold Trust (IAU) at a price of $34.10. Sell the 35 call in January for 0.60.

Maximum gain

$150, which would occur if the stock is at $35 or higher by January’s expiration. This would be an annualized 20% return on capital. The probability of achieving max return on the trade is roughly 35%.

Breakeven

The breakeven would be the current price, minus the money received from selling the call. In this example, it would be 34.10, minus 0.60 = 33.50. The position would experience a loss below that price.

Maximum loss

Theoretically, gold could go to zero, which would result in a loss of $3,350 (or the cost of the position). Realistically, there is only a 20% probability of experiencing a loss greater than $100 on this trade.

Money required

In a cash-secured (non-margin) account, it would be 34.10 - 0.60 x 100 = $3,350. In a margin account, investors could accomplish this for $1,700.

Listen Here Truth or Skepticism

Tom Sosnoff, entrepreneur, options trader and co-CEO of tastytrade, joins Dylan Ratigan, businessman, author and former host of MSNBC’s The Dylan Ratigan Show, for a weekly podcast covering everything from sports and investing to politics and monetary policy. One’s an iconoclast, and the other’s a contrarian. Tune in each week find out who is who. It’s unscripted and unpretentious—some like to think of it as rants, but refined.

The Prediction Trade

If you can trade it, or bet on it, you can bet they will talk about it on The Prediction Trade—the only podcast for gamblers, traders, investors, math freaks, data geeks and superforecasters devoted to the intersection of probability, prediction and profit. Each episode features expert guests with proprietary forecasting models and insights into the outcomes of prediction market events. So whether you live to bet or bet to live, check out the next episode of The Prediction Trade.

Truth or Skepticism and The Prediction Trade are available on your favorite podcast platform.

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Bear Market Forecasting The polls overwhelmingly pointed to a Joe Biden victory in the 2020 presidential election, but the prediction markets gave Biden only a 42% chance of winning and pegged Donald Trump’s prospects for victory at 59%. The resulting uncertainty prompted some to turn elsewhere for prognostications. A week before the election, Buyan, a brown bear pictured above in Russia’s Royev Ruchey Zoo, correctly forecast a Biden victory by

choosing to eat a watermelon with his likeness carved on it and ignoring the Trump version altogether. Two other animals at the zoo, including a Bengal tiger and an Amur tiger, concurred with Buyan’s prediction. Russian collusion? Unlikely. But the episode raises serious questions. Namely, what’s required for accurate forecasting, and how can people improve their forecasting abilities? Look for answers in the upcoming annual forecasting issue of Luckbox. We predict you’ll like it.

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THE LAST PICTURE

Luckbox | December 2021

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PHOTOGRAPH: ROYEV RUCHI ZOO PRESS OFFICE/TAS VIA REUTERS CONNECT

Naked or Covered, It’s Your Call. Learn Trading Learn Trading Inside Inside And And Out. Out.

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December 2021

Articles inside

Ice Ice Barrel

Fix the CPI or Bust

How I Learned to Stop Worrying and Love Deflation

LUCKBOX LEANS IN WITH ED YARDENI: Measuring Misery

Straddle Up

Smart Inflation Hedges

Big Moves in Small Bonds

Crude Oil Bets

Fix the CPI or Bust

Watch These

The Top 5 Rock Albums of 2021

Is Inflation Transitory?

December 2021

Ice Ice Barrel

Meet Derek Mullen

The Luckbox