Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

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