Inflation is moderating to the degree that even the herds are fully aware and anticipating the end of the Fed rate hike regime.Yet earnings are generally exceeding reduced estimates and the economy, especially from an officially reported employment view, is still okay.
In other words, it’s a Goldilocks situation of sorts. Disinflation is bringing good tidings to stock market players outside of some inflation sensitive cyclical sectors and markets, and of course, commodities and precious metals. Goldilocks is not positive for commodities because commodities are prime “inflation trades”, or for gold as casino patrons clamor for all those bargains that the 2021-2022 bear cycle in Tech produced. Tech was expected to be the leader in the ‘disinflation’ segment of the inflation>disinflation>deflation scare progression we are working to.
As the disinflationary view becomes more pervasive, commodities get kicked aside and now we are seeing the inflationist contingent in the precious metals do their selling, as if on cue. They never should have owned gold miners for inflation (or gold primarily for inflation) to begin with and now any of us holding gold stocks while they puke out may have to pay a price, in patience at least, and in declining stock prices to the extent we may hold gold stocks.
If our current plan holds true, the macro chain noted above should eventually proceed to the deflation scare phase and that is where the good stuff would end for the stock market segments that are still bullish. If the Fed is done hiking rates and due to start cutting them by July or September (according to an overwhelming percentage of those traders forecasting for CME Group) it is likely going to happen with markets having rolled over back into the bear and/or the economy decelerating with tanking inflation readings. Or put another way, they are not going to cut until they are sure they’ve killed the 2020 inflation cycle.
I continue to marvel at this chart showing the T-bill yield now finally aligned to end the bull market. The key signal is the 3 month T-bill yield (proxy for the Fed Funds rate) overshooting the 2 year Treasury yield to the upside, indicating a Federal Reserve that takes its hawkish stance too far, springing bear markets. There was something fishy about the 2022 bear market, as we noted at the time that the T-bill yield had not exceeded the 2yr. My view has been that the recovery rally in stocks that began in Q4, 2022 was all about correcting this non-confirmation of the bear market. Well, now it is confirming. But… patience.
Of the two previous signals in 2000 and 2007, the first saw the market roll over promptly with the signal, and the second took the better part of a year. We are several months into the current signal.
Bottom Line
Goldilocks now, and as she goes down the drain stocks more pervasively joining bearish sectors and commodities later. From this – if our view is correct – the gold mining industry will continue to gain fundamental strength (gold out-performs cost input commodities and from a macro-psych perspective, stock markets) and if the “everything bubble” really does end, a long-term bull phase for the miners.
If it is just another deflationary scare along the continuum of Inflation onDemand, it would be a shorter but likely rewarding phase in gold stocks after the Fed flips and damage to markets is done. But with indicators like the Continuum broken to the upside it is not likely that the implications of the past will match those of the future. The next effort to inflate the system – if that is what the chronic inflators attempt again – is likely to be a wild card, as indicated by the broken trend in our closely watched gauge.
