Alan's Alert 8-5-2021

 

Weekly unemployment figures came out this morning. Initial claims dropped by over 20k on a non-seasonally adjusted basis. Continued claims also dropped. They are down by over 181k. This is good news on both fronts. We also had a reduction of nearly 77k off the pandemic assistance.

However, we are still a long way from getting back to pre-pandemic levels. This means the Fed will still have license to buy treasuries and mortgage-backed securities. Their day of taper is still well out in the distance.

I had previously reported that the market was pricing in an announcement at the Jackson Hole Fed meeting this month. I believe the market is going to be sorely disappointed. The continued slow pace of the unemployment picture will either cause the Fed to go off-script and taper early or delay their taper announcement until later in the year.

This brings me to the meat of today’s alert; crowded trades.

As a former follower of Robert Wenzel’s daily alert, I was well informed of the coming inflationary wave. By continuing to follow the cues from the money stock reports, we can be prepared for added inflationary pressure. Since this data is publicly available, anyone with a eye on the Fed can also be informed of the rapid expansion of the money supply. Many doubt the Fed’s transitory stance. The thinking goes; they’ve been wrong in the past, they are probably wrong on this, we should position for it.

When this happens, the market gets skewed. Players in the market can overplay their hand. Then the Fed can come in and remind everyone who the boss is.

In reality, I should add an 8th rule to my list of trading rules; don’t fight the Fed. The Fed has way more staying power than your portfolio. If you aren’t prepared to cut your losses and be patient, you could end up like this:

So, when is the best time to get off a crowded train? As soon as you can. When you are trading with the herd, you’ll get stomped when they stampede for the exits. So what’s a trader to do? Be patient. If you’ve been following along, you know that this inflation is going to stick around. We are slowly getting confirmation of this trend. Once the market comes to the same realization, we’ll know where to be; silver, oil, gold, and short interest rate ETFs.

Tony Greer sat down with Real Vision a little over two weeks ago. Tony does macro analysis at his website TGMacro.com. He is a momentum guy and has tons of market experience. His interview with Real Vision is worth a listen. At one point he talks about gold. It seems that he knows, gold is where to be in the future. Right now, he cautions to stay away because of the Fed. When the momentum guys see that the Fed is involved, they don’t want to fight that battle. All seasoned traders know not to go toe-to-toe with the Federal Reserve. His advice; soft commodities and oil. If the Fed is keeping their eye on interest rates and hard commodities, you need to go somewhere else to watch your market thesis play out.

Alan's Alert 6-14-2021

 

I have a difficult time going with the crowd.  I was once asked; would I jump off a bridge if my friends did.  It’s one of those Zen Koans like, “if a tree falls in the woods, would it make a sound” or “what’s the sound of one hand clapping” or “if nobody showed up to a politician’s speech, would they still lie”?  It is supposed to snap your brain into thinking for itself instead of going with the crowd. 

As I’ve grown older, I’m less interested in the news and more interested in their sources.  I’ve found that the news is more infotainment and less data (and I’m a data nerd).  Maybe this is why I’ve had a hard time with masks (they don’t work), lockdowns (they really don’t work), and hydroxychloroquine (Fauci, the definitive paper was written by the National Institute of Health that it works, right here!), but I digress.

 

The first book I read on investing was Benjamin Graham’s “Intelligent Investor”.  He is considered the father of value investing and had a very contrarian view on investing.  His goal was to find businesses that other investors weren’t paying attention to and which were trading at a discount.  He shaped many investors after him including Warren Buffett and Seth Klarman.

 

I say all this because I’m having a hard time as the mainstream press is getting involved in the inflation story.  Usually when the mainstream press gets on the boat, it’s time to get off.  It’s not just the mainstream press either, it is also some big hedge fund names, big-wig economists, and bank CEOs/CFOs.  It seems everyone is of the belief that inflation is going to be running higher. 

 

So, what’s a contrarian to do?  There’s a popular idiom in the investing world, “don’t fight the Fed”.  When the Fed wants something to go a certain way, you can be contrarian but you’ll lose your portfolio betting against them.  They have more money than anyone in the market (heck they print it) and it gives them the ability to force things in a certain direction.  

Over the weekend Michael Shedlock of mishtalk.com put out an important graph.

He’s of the mind that inflation is transitory but is a big believer in holding gold.  His theory is that negative real interest rates (in this case 3-mo treasury bills minus y/y CPI) lead to gains in gold.

 

I’m still a believer in the gold, silver, and oil story.  I’m nervous about the mainstream press and I’m of the mind that inflation is here, but can it be transitory, only time will tell.

 

If you want to see the source give Mish’s work a good look at his blog mishtalks.com.

 

 

 

Important and Potential Market Moving Events This Week

Tuesday, June 15
5.30am Retail Sales (May)
5.30am Producer Price Index (May)
6.15am Industrial & Manufacturing Production (May)

 

Wednesday, June 16
5.30am Housing Starts and Building Permits (May)
7.30am Gas, Distillates and Crude Oil Stocks/Production Changes
11am FOMC Economic Projects & Interest Rate Decision
11.30am Fed Press Conference

 

 

Alan's Alert 6-7-2021

 

I was going to talk about uranium today but after some crazy inflation comments coming out of the Fed members and one former Fed chair and current Treasury Secretary, all eyes are on the CPI release that is scheduled for Thursday.

 

The first comments came from Cleveland Fed President Loretta Mester addressing the poor labor report saying;

“Fed policy needs to be patient right now” and the “economy has more progress to make on hiring”. 

 

Next NY Fed President John Williams stepped up the rhetoric saying;

“I just don’t think the time is now to take any actions” and “The economy has improved and I think it’s on a good trajectory. But to my mind, we’re still quite a ways off from reaching the substantial further progress, you know, we’re really looking for”.

 

As if this wasn’t clear enough, Janet Yellen, the former Fed chair and current US Treasury Secretary had an interview with Bloomberg in which she stated:

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view.” And “We’re seeing inflation but I don’t believe it’s permanent. We at least on a year-over-year basis will continue, I believe, through the rest of the year to see higher inflation rates – maybe around 3%.”

 

Now Janet didn’t get to be where she is because she’s a dummy.  She’s a smart.  She’s well educated (Brown, Harvard), and has a work history that reflects a long tenure in government finance (Fed chair, SF Fed pres, chair of Council of Economic advisors).  The catch here is, she doesn’t work for us, the people.  Her employer is the big banks and the Biden administration.  Her goals are to pass these large programs (infrastructure, Biden’s budget).  Inflation worries are not her worries.  She’ll embrace inflation until it gets out of hand.

 

The same goes with the rest of the Fed.  They simply believe that all factors point towards “transitory” inflation.  They are willing to let things run hot for a while.

Now is Yellen right about inflation being good for society?  Inflation being good for the economy is a very Keynesian idea.  If there is a steady stream of inflation, all prices go up; producer prices, capital goods, land, wage rates, earnings on assets go up and those assets rise in value (which is what the big banks want).  The value of the dollar decreases, meaning imports are expensive but the export business is booming. 

 

Now you might be thinking, well Alan, this doesn’t sound so bad and Janet seems pretty smart but I warn you, this is a distortion of the true market forces which always prevail in the end.  You can only push on a string for so long before it comes snapping back.

 

Goldman Sachs put out their spin on the situation and raised their near-term inflation forecast.  The bank also analyzed returns in high and low inflation environments finding that the median real return was higher under a low inflation environment (1.1% & 1.3% vs .3% & .7% monthly returns).  They discovered that the best returns in a high inflation environment was health care, energy, real estate, & consumer staples.

 

Sorry that this was a Debby-downer/chicken-little kind of a post.  Be thankful that I didn’t wade into the deep waters of Austrian vs Keynesian business cycle theory.  I guess this is a warning of sorts, there is going to be a lot of tension in the market until the CPI is released Thursday pre-market.  Protect yourself and be positioned for the coming wave.