Notes From the Rabbit Hole

Did Someone Say Inflation?

Well yes, we’ve been saying the word “inflation” a lot lately.  Especially as part of the term “inflation trade”.

Post-Jobs

“What does it mean?  Well for one thing, the Fed is not under any pressure right now to hawk it up.  We’ll have to carry the information forward and keep an ever so close eye on the Semis and see what develops over the summer.  The seeds are being sown however, for a big time ‘inflation trade’ in my opinion.”

‘Inflation Trade’ Alive and Well

“The bottom line is that in a span of a week we have gotten key positive data on the Semiconductor sector, the ‘equipment’ segment of which is a leading indicator and speculated this could come with an inflationary growth phase.  We have also gotten very negative May employment data following up a poor April report.

This puts the Fed on hold at a time when an economic indicator is actually going positive beneath the surface.  Think about it; how many people watch the Semi equipment sector?  You?  Me?  The other guy?  How many people (and machines) watch Payrolls?  The world?”

Mixed Signals or a Clear Path Forward?

“The analysis should stay on the inflationary path because the forward looker (Semi Equipment) is ramping up and the backward looker (Non-farm Payrolls) has put the multitudes back on economic contraction alert, possibly putting the Fed back in its box, at least temporarily.

This comes against a backdrop of rising prices, which has now become a trend from the February lows just as it has in stock markets and commodities… all of which followed the leader, gold, which bottomed and turned up first to start the new year.”

But there is so much momentum and so many misperceptions wrapped up in this, it’s not even funny.  As but one example, fuel-intensive gold mining operations are probably not a wise bet beyond the momo (just have a look at the gold-oil ratio).  As we have noted in NFTRH repeatedly, actual metal, royalty companies or exploration probably represent a better bet for this environment.  I beg you to tune out the gold (and silver) obsessed promoters who operate as if they are the only two inflatable materials on the planet.

Also, we are entering blow off dynamics; not bull ending dynamics, but pure momentum (as indicated by the CRB index’s “channel buster” upward, as noted in yesterday morning’s update).  Crude oil has gone from manic depressive to manic momo.  Here is the DBC commodity fund’s version of the channel buster.  Notice the channel break to the downside?  Today’s upside momo is the evener outer of that.  What will be the evener outer of today’s momo one day?  Hmmm?

At the heart of it all is poor old Uncle Buck, threatening to break down from what we noted as critical support.  Had Unc maintained, the ‘inflation trade’ could have ended sooner.  If it follows through to the downside as appears likely, the ‘inflation trade’ will blow off to the upside.

Just remember that blow offs have limits (often higher than we might think possible), but when they reverse there will be hell to pay.  That is amplified by the thought of the Semi sector’s potential economic surprise to come and the fact that everyone is now expecting the Fed to stand down.  Fun stuff.  Just don’t think like a robot and certainly don’t follow other robots pretending to be unbiased analysts.

[edit] We also noted in the update that the stock market would likely benefit from a weak dollar as well.  So <insert here> standard verbiage about tuning out gold bugs who also predict doom and gloom for stocks in the current eviro.

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