Looking ahead to 2021, it’s important to consider how surprises could affect the stock market.

The pandemic was the surprise of 2020 and that was completely unpredictable. The biggest surprise of this year is also probably likely to be unpredictable. But there also seem to be some predictable crises in plain sight.

Let me explain…

Crisis On The Horizon

Latin America and Africa seem to be on the edge of crises as the chart below shows. This chart shows countries where the annual inflation rate exceeds 10%.

Source: Cato.org

Hyperinflation can lead to a refugee crisis. As citizens flee Venezuela, for example, they could make conditions in Colombia more difficult, leading to a northward push in migration. The same process could unfold in Africa.

High inflation increases the risk of migration crises in the United States and the European Union. And previous migration crises in those regions sparked political change.

The presence of Iran on the list is troubling since that could trigger an outburst from the country’s leadership. The same is true in Turkey.

This is data that’s worth watching in 2021 since it points to possible problems. Inflation is also a concern for the United States.

Recently, inflation expert Steve Hanke highlighted data showing that money supply is growing at an unprecedented rate.

He recently noted…

“As Milton Friedman correctly told us back in 1963: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” If we look at the growth in the U.S. money supply measured by Divisia M4, a precise metric developed by William A. “Bill” Barnett and reported monthly by the Center for Financial Stability in New York, we see that it is surging at a stunning 27.7 percent per year. That’s one of the highest rates on record. And, it’s a rate that means more inflation is around the corner.”

Source: Center for Financial Stability

What This Means Going Forward

Hanke is the Director of Troubled Currencies Project and described as the “leading world expert on measuring and stopping hyperinflation.”

His view is worth paying attention to. In order to put his warnings into practice, I believe it’s important to stay focused on the short term.

For now, the short-term outlook remains bullish on the price action. SPDR S&P 500 ETF (NYSE: SPY) ended the year at a new all-time high on a closing basis.

The Profit Amplifier Momentum (PAM) indicator for SPY is shown at the bottom of the chart.

PAM is specifically designed to change from bearish to bullish slowly. This reduces whipsaw signals, which are quickly reversed. Instead, it focuses on the longer-term trend. This means it is unlikely to turn exactly at a top or bottom but is likely to be on the right side of significant trends.

PAM is very close to the neutral level of zero and has been for the past three months. The pattern in PAM is similar to the pattern seen at the beginning of the bear market, when a narrow range in the indicator was followed by a large move in the stock market. At the time the bear market began, PAM was slightly bearish.

Its range increased as the decline began. This is how the indicator typically behaves with narrow ranges preceding large market moves. I’ll be watching PAM closely and expect to see a strong signal in the next few weeks.

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