How To Out-Smart Wall Street
I’m writing this near the Market Close on Wednesday, April 10. Currently, the Dow Jones Industrial Average is down over 400 Points, all in reaction to the report this morning that the Consumer Price Index, our most widely watched measure of inflation, advanced by an annual rate of 3.5%, up from 3.2% the month earlier.
Wall Street is shocked. Stocks and bonds were hit heavily, commodities were up, anticipating rising inflation, and cryptos were higher.
What made today so very interesting was an apparent large bet gone wrong. It all began yesterday when a thoroughly lackluster session had an hour left. Traders felt they might even leave early, but nothing was happening. Suddenly, a series of buy orders hit the tape. In that last 60 minutes of trading, the Dow rose nearly 200 points, and the NAS was up 120. Someone appeared to know something.
And that something was undoubtedly the direction of inflation. The monthly Consumer Price Index (CPI) report was due on Thursday. Someone was placing a large wager that CPI Inflation would be tame. This likely means the Federal Reserve could begin lowering interest rates, which would be a big positive for stocks. So, anyone who purchased shares yesterday would benefit today if, and it turned out to be a big IF, inflation was lower.
To the whole world, it looked like someone had insider information. They knew what the rest of us did not know: the direction of inflation. Interestingly, Zero Hedge published an article later this morning confirming our worst suspicions. The title was:
“Scandal Rocks Biden’s Labor Dept For Lying About Sharing Non-Public Inflation Data With Secret Group Of Wall Street “Super Users”
There was one problem: whoever made this colossal bet, a bet large enough to drive the Dow up nearly 200 points, needed to be correct. That’s right. Billions of dollars were put into play in anticipation of lower inflation, and surprise, surprise, inflation rose.
It wasn’t enough to cause someone to go bankrupt or out of business. But it is just the sort of thing that some fund managers would do early in the quarter to gain an advantage over all the competition. Had the manager made the right bet, they would lead in whatever sector they invest in. That kind of performance drives billions of dollars in new assets under management (AUM) into any fund that bets right.
Even though they have all the tools, from analysts to AI, modern portfolio managers have incredible ways to gain economic insight. However, they’re only sometimes on the right side of the trade. And if Zero Hedge is correct, some may even use unethical means to gain an advantage.
But as we’ve been telling them for months, if you want to know where inflation’s going, there is a straightforward measure: the gas pump. Follow the price of gasoline, and you’ll see the direction of inflation.
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