Contrarian or the Herd?

Following is the Opening Notes segment of this week’s edition of Notes From the Rabbit Hole (NFTRH 560). In this segment I tend to let some thoughts stream out before buttoning down to the analysis.

Opening Notes: Contrarian or the Herd?

To this point, with Treasury bonds getting a bid that seems as strong as the bearish sentiment was in H2 2018, it has felt like having an inflationary forward view has been the right and contrary way to be. That is the view I am carrying, opposite to H2 2018.

Everybody’s in Treasury bonds after all, and you theoretically own bonds if you expect little inflation or even deflation. You don’t own longer-term bonds if you expect inflation to eat away at their value over time.

So why am I questioning the inflationary orientation? Well for one thing, I always question everything. I question my own assumptions especially closely because I write a market report that is read by others and that carries the responsibility not to be a hubris-addled know-it-all who’s churning product as usual. I often think aloud and hope that is to your benefit even if it is just to think to yourself ‘there he goes again, making doubly sure of things and boy that guy must’ve been aggressively toilet-trained as a kid’.

Sometimes my ridiculous sense of humor comes out. It’s better in person, I think. The point though is that we in the ‘inflation’ camp are growing in numbers and indeed the long bond has started to roll over and the TIP ratios (inflation expectations gauges) have bounced pretty well. But are we there yet?

The answer to that question, even if the inflationary view proves correct as currently expected, is no. It has been forward projection after all based on a contrary view of the horns blaring in the media and from the president’s Twitter account that there “is no inflation”. Inflation signals have gotten a little bump over the last month in the aforementioned TIP ratios, long-term yields, yield curve and commodities to varying degrees. Plus growing hype (I’ve chipped in there as well) about a currency war.

I think we are among the first projecting a new inflationary phase, but looking at trends in base metals, the Silver/Gold ratio and CRB/Gold ratio, in the TIP ratios and especially in that southward burrowing index known as the TSX-Venture Index (CDNX), we might want to be nimble enough to periodically be able to lightly tap the breaks on that view until some of these trends start to break. Shall we? For after all once it gets going…

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