I started to have ideas that consumer price inflation – suddenly a very hot topic – would likely start to ramp up last Spring/Summer when the US grains (Wheat, Corn, Soybeans) were plumbing new lows and on the verge of an explosive rally and nobody seemed to be alert to that possibility. You hardly saw a mention of the ‘I’ word in the MSM, or even among the pros back then. After all, it has been a standing joke that the US CPI had been registering data points well below the Fed’s stated target rate of 2% for years, despite the massive QE funny money entering the economy since 2008. That lulled most into the belief that consumer price inflation was dead.
That refusal of inflation to respond to the wall of money printing induced a deep sense of complacency that we were in an extended period of low inflation – possibly for ever? That most sensitive of commodities – crude oil – was assumed to be on a permanently low plateau as demand would decline as the EV revolution took over. But as one old time trader observed; Beware sleepy conditions and quiet markets and never short them – they will surprise when you least expect it.
And then, out of the blue, commodities started their latest explosive rally phase when most everyone was looking the other way. Because that’s what markets do – they are there to punish the majority. After all, herding is a basic human impulse and when the herd gets too big, the predators have a field day. That is why groupthink comes unstuck eventually.
But now with the ‘I’ word on everyone’s lips, we are suddenly seeing decent pull-backs in many commodity prices. So, with everyone on board the roaring commodity bull, the mischievous trading gods decide to take away the punch bowl and create a little fun with the late-comers – but only for those who spotted the opportunity early and took profits near the highs. Here is one of the star markets that has smashed records on the way up – Corn
It rose from our initial entries around $3.50 to the 7 May high at $7.40. But in the last few days, it is has entered a severe correction ($6.50 as I write). Luckily, I advised VIP Traders Club members to lighten up near the high. That decision was prompted partly by the COT data that shows hedge funds (mainly trend followers) have dominated the long side since last year. So much so that latest figures show they are almost a staggering 10/1 long/short. That is unsustainable – and the current correction shows why. We see similar corrections in soybeans and wheat – as well as crude oil.
And other essential commodities such as lumber (up a stunning 450% in a year), copper (up 200% in a year) and iron ore (up 130% in a year) have rocketed in price as demand is high especially with Biden’s new gargantuan trillion dollar spending programme. Many users have been stockpiling supplies, putting even more upward pressure on prices.
Another tailwind for inflation is the rising level of US wages and salaries. We are seeing reports of hiring bonuses being offered to those on furlough just to sign on. But why should they? They make more take-home pay with their stimmie cheques on the sofa at home bingeing on Netflix than suffer the inconvenience of actually going to work. That is why the latest jobs figures were so weak.
So with upward pressure on commodities and wages/salaries, can inflation stay low? Of course, if the stimmie cheques stop arriving, most will be forced back into employment, but what politician would dare suggest curbing that programme? Unless forced by the markets in a crash. And bond yields continue heading north at a rate of knots.
The Fed is caught in a trap of its own making – a whiff of an imminent increase in rates to curb inflation would surely put the fox into the chicken coup. They maintain the current inflation is ‘temporary’. But how much longer can they resist the pressure if wages and prices continue to climb? This summer will surely see something hitting the fan.
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Stocks finally took a hit
Suddenly, after blissfully ignoring the mounting inflation danger signals for months, stocks finally cracked as bond yields spiked up (previously, stocks and bonds were both advancing in their perverse way). Here is the S&P which please note peaked at 4245 right at my upper tramline on Monday morning 10 May. It then dropped by 200 pts (a loss of 1800 pts in the Dow) to Thursday’s low. It has rebounded strongly since and here is my EW roadmap
I have a potentially complete set of five impulsive waves up to Monday’s ATH at 4245 (35,100 in the Dow). and the rebound off Thursday’s low should terminate early this week and set the market off in a third wave down. Only a strong push above the 4245 mark would cancel out this forecast. Note the rebound is already on borrowed time with the severe overbought momentum (arrow).
For perspective over the long term, here is the monthly chart
The action since the Corona Crash lows of March 2020 has been nothing short of spectacular with an almost vertical ascent in the final fifth wave. The CAPE P/E ratio has climbed to a near-record 37 and currently, the momentum is severely overbought. All of this means that the rally is living on borrowed time – and should have peaked on Monday.
Meanwhile under the surface, IPOs are in trouble as are SPACS, Tesla – that darling of the specs – is off by 38% off its $900 ATH set in January, and Bitcoin – the other poster child of the specs – is off by 30% off its $65k ATH set a month ago. The desire for rampant speculation is coming off the boil, except for a few new cryptos such as the jokey Dogecoin and others.
All it would take to set the house of cards tumbling down is a growing realisation that interest rates are headed higher sooner rather than later – and just a slip of the tongue from the Fed could do it. Lately, Janet Yellen did just that and the hedge fund’s algos rapidly snapped into action and sent shares flying.
I have been ambivalent about Gold – what now?
I have had great difficulty reading the charts for gold (and silver) recently. But I believe both are set for a major leg up
The rally off the 2018 low is a clear five up to the ATH at $2,080 last August, but since then, it is clear the correction is a three to the major trendline. The current rally is likely a push up in a C wave above the small trendline.
One drawback is the COT data show hedge funds 3.5/1 long and small traders 2.5/1 long with the commercials taking the other side (as usual)). While these are not extreme readings, they bear watching (to coin a phrase).