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Inflation Warning – Taking More Shorts

We are starting to see more short trade setups working now in 2021. We did not see these setups at the end of 2020.

Bond yields are also moving higher as we consider inflation.

Michael Burry, one of the main characters in the Big Short, played by Christian Bale, shorted the housing market in 2007. He was very early on the trade and endured some pretty big drawdowns before capturing huge profits.

Just this weekend, he sent out the following tweet.

“People say I didn’t warn last time. I did, but no one listened. So I warn this time. And still, no one listens. But I will have proof I warned.”

We like to verify new opportunities with fundamental and techncial factors. In this video we see the opportunity for adding short signals to VSD Breakout. We started the year with a long only setup on this strategy. The long only side is profitable but adding the shorts is more than twice as profitable in 2021.

It can be difficult to manage regime changes. Often times have to use strategies with shorter track records to capture and anticipate a new market environment.

Michael Burry’s Twitter is a great resource for economic analysis of the markets. On his Twitter, he highlights the book, “Dying of Money” written about inflation in Germany in the 1920’s. He compares the behaviours in the United States to those in Germany 100 years ago in his anticipation of inflation.

Here are some recent highlights:

Dying of Money (1974) – Anatomy of Inflation in Germany in the 1920’s

As it collapsed the German economy took on

“…..unmistakable charcteristics. One was the great wealth, at least of those favored by the boom…..Many great fortunes sprang up overnight…. The cities, had an aimless and wanton youth. Prices in Germany were steady….”

“…..and both business and the stock market were booming. The exchange rate of the mark against the dollar and other currencies actually rose for a time, and the mark was momentarily the strongest currency in the world….”

“…..Side by side with the wealth were the pockets of poverty. Greater numbers of people remained outside of the easy money, looking in, but not able to enter. The crime rate soared…..”

“…..Accounts of the time tell of a progressive demoralization which crept of the common people, compounded their weariness with the breakneck pace, to no visible purpose….”

“…..and their fears from watching their own precarious positions slip, while others grew conspicously rich. Speculation alone, while adding nothing to Germany’es wealth, became one of its largest activities…..”

“…..The fever to join in turning a quick mark infected nearly all classes. Everyone from the elevator operator up was playing the market.

It all collapsed.

“All the [Deutsch] marks that existed in the world in the summer of 1922 were not worth enough, by November of 1923, to buy a single newspaper or a tram ticket….”

“…That was the spectacular part of the collapse, but most of the real loss in money wealth had been suffered much earlier.”

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