SBTCapital Clube de Investimento

Before you start reading, I want to explain that the term wonderland I used in the title above is much more in the sense of incongruous and defying common sense, than in some cynical reference to the splendid sense of the word.

I used to draw a lot when I was growing up. My thoughts would travel on overdrive while I sketched to the sound of classic rock on vinyl. It was introspective, but very entertaining.

Pondering On Inflation, Corporate Debt, Dollar Exchange Rates, Oil Prices, NYSE Margin Debt, T-Bonds, China and Past QEs.

Recurrent countercyclical monetary policies have given way to several distortions in the economy. It is believed that printed dollars have inflated both stocks and bonds in the US, but that is a misunderstanding! Still attractive, US Treasury Bonds may provide the basis for a sustained appreciation of the US dollar against foreign currencies. Once more, the widely anticipated interest rate hike by the FOMC may get postponed… further into oblivion!

When old grandpa Demographus entered the room and started speaking of the changing trends in business, with a growing number of workers retiring and his best clients spending less, attention was dispersed. Distraction and entertainment were provided by granny Janet.

Inflation is out of sight in terms of Treasury bond yields, dollar exchange rates and demographic outlook lets not even mention energy costs! Much of the FEDs monetary base expansion did not flow into consumption or, more importantly, entrepreneurial productive investments! Money multiplier is more like a fractional now, since not even credit increased the money available for Main Street the way it used to.

People got it wrong, Quantitative Easing did not lower long-term interest rates. The Federal Reserves money printing actually halted the plunge of yields and cheapened bonds. Yields fell when other institutions showed their hunger for long bonds, and that suggests trouble ahead.

The Dollar Index is approaching two important and converging barriers for its recent uptrend. The Shanghai Composite Index is also bordering the top of its channel. Brazil lost a good chance at recent elections to recycle its unsuccessful policies and government. But technical analysis may show some relief for optimism in Brazilian stocks and the EWZ ETF.

The similarity between the trajectory of this new indicator (Tocalino Index, or Indice Tocalino) and the behavior of the stock market index corrected for inflation is clearly visible and a surprise. Even more importantly, it shows clearly the benefit and necessity of taking the demographic profile into consideration when analyzing data that concerns the economy of a country and any reflections of it on the behavior of stock markets.