The inflationary theme for the first half of 2018 is getting off to a good start. Well, it has actually been going for a while now, but Day 1, 2018 is on message. The scenario I lean most toward right now is for an inflation mini hysteria to whip up in the coming weeks and months to be followed by a classic… Abort! Except that if this plays out as it has all along the Continuum ™ limiter (red dashed line on the chart below) a majority will be too busy jumping in instead of aborting. Wash, rinse, repeat.
We have been over it so many times I am sure I am driving you nuts with the themes of Amigos, Horsemen and Planetary alignments. I got a scathing email last week from some drive by malcontent who is sick of that last one in particular. Dude, if you don’t like the way I write don’t read me. I mean, come on.
Undaunted, I say to you that when inflationary hysterics are at a fever pitch in large media and small, and the inflationist pitch men (and pitch women, let’s not forget them) are one day promoting a new “commodity super cycle” with ‘buy gold!’, ‘buy copper!’ and ‘buy oil!’ all meaning virtually the same thing (per the pitch) it will be time to heed Amigos like the 10yr & 30yr yields at 2.9% and 3.3% respectively, the state of the yield curve (which, if it doesn’t steepen under pains of inflation now is likely to steepen under pains of the opposite condition later on) and other signs that the play is running out of steam.
But for now, it’s party on Garth as the inflationary bid lifts many boats. I actually had my best day in months because I am aligned with the near-term view. The time to abort will come, but I have learned through much grind and drudgery to have patience with macro themes.
Also, there is no law that says the limiter on the chart above must hold this time. I am only saying that it has held for decades and that unless we are going full frontal von Mises Crack Up Boom, it’ll be likely to hold again.
My plan will be to get very cautious if/as the bond yield limits are reached while the resources and commodity touts do their thing. But I’m gonna keep ole’ Ludwig in my back pocket just in case, since I can’t predict markets worth a damn; only take what they tell me and interpret them. Anyway as for today…
TIP/IEF is signaling rising inflation expectations…
…even as TIP/TLT remains locked down (is that weasel Mnuchin in there messing with 30yr bond supply?).
But as noted in this morning’s post highlighting Callum Thomas’s article, traditional economic drivers of inflation are pointing upward.
As we have been noting for years now, the economy is fine and a speculative asset mania has been instigated through inflation. Junk bonds continue to gently ease vs. higher quality bonds, which may actually just be a sign that the inflationary speculation is shifting its intensity from stocks and risk ‘on’ paper to more traditional inflation beneficiaries.
There are lots of boats in these waters like Industrial Metals and Materials, Energy and Precious Metals. On the latter, it will be especially important to think differently about this one asset class and sector when the inflation blows out. You know, it’s the old Planetary alignment thing. Ha ha ha.
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