Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Reflation and Stagnation Are Next for the Economy

Economics / Recession 2008 - 2010 May 16, 2009 - 07:56 AM GMT

By: Justice_Litle


Best Financial Markets Analysis ArticleMr. Market has begun to show clear signs of split personality disorder in recent weeks. Now that investors have exhaled in relief that a deflationary apocalypse has been avoided, the new reality of reflation and stagnation is sinking in…

“Mr. Market” is starting to show clear signs of split personality disorder.

On the one hand, certain areas of the market - the ones much favored in the big run-up - have started to wilt and fade as the much-lauded “green shoots” turn brown. On the other hand, other areas of the market - which didn’t participate so much in the rally at first - have started showing signs of life.

Take the grain markets for example. Foodstuffs like corn, wheat, soybeans and sugar have been red-hot in recent days.

DBA, which is NOT built around “total return swaps” like other inverse/leveraged funds, is essentially a basket of futures contracts - primarily wheat, corn and soybeans, with sugar thrown in for good measure.

Commodity after commodity has roared back to life, thanks to a combination of renewed inflation expectations, a cratering U.S. dollar, and newly bullish fundamentals. Let’s take a closer look at some of DBA’s components to see what I mean.

Prices as High as an Elephant’s Eye

Corn prices surged to a six-month high,” Bloomberg reported earlier this week, “after the U.S. government said domestic demand will exceed production for the third time in four years, slashing reserves by 28 percent.”

Corn inventories are expected to fall even as the various demand sources for corn - food, livestock and fuel - rise an estimated 3.5% next year.

Soybean prices, meanwhile, recently hit seven-month highs on the CBOT (Chicago Board of Trade) after U.S. stockpile forecasts dropped. Beans were also boosted by word that the Brazilian National Agriculture Confederation, a major farm lobbying group in Brazil, would press for limited soybean acreage in the coming planting season to help keep prices firm.

And finally Sugar, not to be outdone, recently hit 34-month highs - their highest level in nearly three years - on “poor crops and robust demand,” according to the Financial Times. A failure of India’s local sugar crop was seen as a big price booster. “Swings in Indian sugar output, which move the country back and forth from exporter to importer, are a critical factor in global prices,” the FT reports.

Wheat is the one area with potential for disappointment, relating to large India stockpiles that could be released onto the market later this summer - hence Macro Trader’s willingness to take some gains off the table and watch closely as further developments unfold.

Reflation and Stagnation

Agriculture is thus one area where the market is doing well. Other foodstuffs not mentioned, like cotton and coffee, have also seen big gains in recent weeks. On top of that, various agriculture-related equities have been performing well and look to have strong potential upside in the coming months.

Along with base metals, ag has been showing signs that the “reflation trade” is on. There is a new and aggressively bullish stance emerging on hard assets and inflation-themed plays, including everything from base metals, to gold and silver, to crude oil and natural gas... and well-run companies related to all the above.

China, too, has had a hand in pumping up the reflation trade with its aggressive stockpiling of base metals. (A few weeks back we wondered aloud in these pages if good Dr. Copper, the “metal with a PhD in economics,” was being goosed by China buying. That hunch was more or less correct, as Beijing doubles down on industrial inflation hedges with a vengeance.)

But all is not rosy and cheery for the recovery-minded bulls, as other, weaker areas of the market can attest. At the same time that inflation-linked themes are hopping, other econ-related data points are dropping.

“U.S. railroad freight traffic is running about a fifth lower than a year ago,” The Wall Street Journal reports, adding that the news “is one of several less-obvious indicators that all isn't well, despite the financial-market rally since early March.”

The underlying reality, as the dismal freight numbers point out, is that a change from “bad” to “less bad” on the economic data front doesn’t mean things are necessarily getting better. It only means we aren’t free-falling quite as fast as we were.

Think of the skydiver hurtling towards the Earth at an astonishing rate. A few thousand feet above the ground he pulls the ripcord and - hooray! - his rate of descent has been arrested, to the point where he is pleasantly drifting rather than free-falling now. But in which direction is he still headed? And where exactly is he going to land? (Let’s hope it’s not an alligator swamp...)

The budding hope that U.S. consumers would come bouncing back with wallet intact also took a hard knock this week. April retail sales were down for the second month in a row, coming in below expectations and breaking the bulls’ happy winning string of positive upside surprises.

Brian Bethune, chief U.S. economist at IHS Global Insight in Lexington, Mass., believes the “green shoots” talk was premature. “There are some preliminary signs (of improvement) in certain areas of the financial markets,” Bethune tells Reuters, “but in terms of the real economy, we are still a long ways off.”

To which we try (and fail) to resist the temptation to say: “Well, duh.”

A Classic Combo

The environment we are headed into - and the view Mr. Market seems to (perhaps) be acknowledging now - is a classic combo of wearisome economic stagnation and creeping paper-fueled inflation. One acts as a fearsome headwind, blowing in the face of consumer-oriented names reliant on economic recovery to justify their newly bid-up valuations. The other acts as a powerful tailwind, further bidding up the price of inflation hedges and hard assets.

The main worry that has wracked markets these past few months, a relentless deflationary downward spiral leading to Great Depression 2.0, has now more or less been put to bed (at least in the mind of investors at large). Upon coming to the realization that we’re not all going to die, a massive post-apocalypse bear market rally ensued as investors audibly exhaled and the “green shoots” meme excited suggestible minds far and wide.

But now the follow-on reality is slowly sinking in that, while we may not be dead ducks, we’re still far (quite far) from being out of the woods. And that means an unpleasant combo of debt-hobbled economic growth, budget-busting government deficits, and persistent fiat currency erosion as far as the eye can see.

Macro Trader’s special recipe for an environment such as this is two-pronged. We are scanning the landscape for bearish trading opportunities in overhyped and overinflated consumer discretionary-type names, still pumped up from the short-covering aspects of rally and vulnerable to fresh disappointment, while simultaneously ferreting out bullish opportunities to play the “reflation trade” (in everything from ag to energy to metals) on the long side.

Warm Regards,

By Justice Litle

Copyright © 2009, Taipan Publishing Group

Justice Litle is editorial director for Taipan Publishing Group. He is also a regular contributor to Taipan Daily, a free investing and trading e-letter, and editor of Taipan's Safe Haven Investor, which helps guide readers to new global investment frontiers and safe harbors.

Justice_Litle Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules