Originally Posted by joshuanip
Stock market is taking a rest from a remarkable run since elections (which feels like a correction in a one way bull market). Since elections, its been the reflation trade - rising commodity/energy prices, higher inflation expectations, and indigestion in the long end of the yield curve. All based on extreme fiscal stimulus, continued accommodative monetary conditions, commodity infrastructure underinvestment, supply chain disruption (ie semi chips), and pentup demand from reopening. You factor in 5% gdp expectations this year and above normal next, people are expecting increased velocity of $, pushing inflation higher.
I believe we will see transitory inflation for reasons above. But we are nowhere close to full employment, and the uneven distribution of wealth from asset reflation is an unbalanced economy that will not allow a level of sustained inflation over the short/intermediate term that would force the fed to change course over the next 3 years. And sure we are finally seeing a rise in real yield (nominal less inflation), but for perspective we rose from negative real yields to zero, a step away from Japanification, but not an endorsement of a secular rise in real yields. Bottom line asset/commodity prices are rising, wages are not, squeezing the have nots and keeping the system accommodative.
Bringing it back cards, from the last couple of cycles since the 90’s card bubble, real yields, demand for liquidity and employment are arguably equally (if not more) strong coefficients to vintage card prices than from the stock market’s wealth effect and speculation factoring.
Cards is a non-income producing, store-of-wealth asset. In that sense, moderate inflation is positive and real rates are negative to card prices. And while real yields have increased from negative rates, it’s still zero... while inflation expectations are rising dramatically (the fed is welcoming this as they want to run hot over their 2% target). This is supportive for cards.
Demand for liquidity is another factor on supply. Cards are used as a source of funds and as the demand for funds increase so does supply of cards. Right now, the Fed electronically flooded the system with liquidity and the excess liquidity spilled over into the card market. Fed has telegraphed accommodative conditions to 2024 (and the other central banks are in concert with that timeline - a race to zero in their respective fiat currencies), and probably yield curve control thereafter (because of our unbalanced risks). So I expect general liquidity to continue to be extraordinary (as we follow the longer term paths of Weimar/Argentina, where debt can be only repaid thru reflation, or dimished purchasing power of the currency used to pay back the debt). To put into perspective, we tried to unwind the fed’s balance sheet in 2013, had to do a course correct as the market threw a tantrum, and again in 2018. The fed’s balance sheet in 2013, 2018, and now was 3 Trillion, 4T and 7.4T, respectively. Add the trillion dollar annual deficit the treasury will run - putting us deeper in the hole and making it more impossible for us to get out conventionally.
Employment is a distorted signal right now. In the past, it is a factor for liquidity demand and cards a source of liquidity. But in our situation, we have a moratorium to pay rent or student loans, receive expanded unemployment and stimulus checks, and loan forgiveness. There is suppressed demand for liquidity in a time where the system is flooded for liquidity. More intermediate term, our employment rate has improved, but we still have tons of slack from an elevated rate and lower labor force participation. We have a long way to go to bring us back to full employment, so the fed will continue to be accommodative, and possibly resort to yield curve control (which suppresses the real yields not inflation), once the stimulus sugar highs wear off. This is also supporting card prices.
But will a market correction have a significant adverse affect on vintage card prices? The market has experienced significant market multiple expansion since 2018 - all the way to 2000 dot com bubble levels. We can be in a flat and skinny scenario, where the stock market stalls as the earnings grow into its valuation, but the conditions for card prices (and assets) remain supportive as we continue to transfer private debt into public debt, run hot on inflation with suppressed real yields.
I’m not saying we will not correct in a stock market correction. There is too much speculation right now fed from this environment that will get sapped. But that’s more micro to to have different impacts within the card market (ie prewar versus modern). I do believe certain prewar card prices have transitioned into new levels for the reasons above, which will prove to be more stable than we would expect if we have a small correction in the market. That said I’m taking this extraordinary demand and liquidity to reposition my collection even more so to key players that would retain liquidity and value over the longer term. By the end of this, I’ll probably just end up owning nothing but Cobbs and Ruths.
-biased viewpoints from a HODL(er)
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