Global authorities are ramping up the stimulus… the Authorities hit the accelerator, the ECB plans to buy bonds, the Chinese announced big infrastructure spending programs, the Fed looks set for QE3 come Sept 13, and the BOJ will likely add to the joy come Sept 19.
Market reaction: Gold rallied over $150 since mid-August to its best level in 6 months, the S+P 500 had its best weekly close since 2007, the recently suspect EURUSD rallied to a 4 month high and the CAD closed over 1.02 for the first time in a year.
Trading: US Stock Indices: I’ve been on the sidelines since selling out Sept 21. Gold: I missed the rally, I’m tempted to sell short here but that would break my trading rules, CAD: I’m watching for a set up to sell OTM calls to rebalance my long term savings currency hedge, Crude: I’m lightly short (the rally off the June lows stalled at .618 of the Mar/Jun decline, Ross Clark has a Sequential Sell Setup, COT analysis.) My trading instincts tell me that this rush higher in risk assets has been a “sugar rush” and I am strongly tempted to sell it short across the board…I haven’t because that would be top picking…and picking tops and bottoms has a low probability of success! (Very tempted, though!)
Big Picture Thoughts: These days the Authorities would rather see inflation than deflation and they will act accordingly…but do they have the power to counter the forces of deflation in today’s world…is inflation or deflation in our future? For me this is not an academic question…getting this right could be the biggest and best trade I ever made!
The Authorities didn’t always prefer inflation. Volker took bold steps 30 years ago to “break the back” of inflation and inflationary expectations…he obviously had the power to succeed.
At the root of my skepticism about the Authorities having the power to counter the forces of deflation is the notion that the deflationary forces they hope to overcome have been precipitated by something far larger than a typical post WW2 recession…that these deflationary forces have been created by the confluence of a number of contributing factors…starting with the credit bubble collapse after the biggest credit boom in human history…but certainly also including deflationary demographic trends…the deflationary impact of globalization…the Internet…and good old over-supply in the face of falling demand!
I’m not an economist, and I’m not trying to win hearts and minds here, I’m just a trader posing a question…but as noted above, I think getting the answer to this question right could lead to the biggest and best “trade” of my life. Bill Gross HERE and Frank Giustra HERE have both recently made a strong case that expecting inflation is the way to bet. They are both very thoughtful men with impressive track records. Who am I to disagree?
Well, we could all be right…it’s a matter of timing and definition. As a trader I’m always trying to sync my trading with the time frame of my analysis…to do otherwise usually causes confusion and losses. But how do I define inflation and deflation? Yes, I’m aware of the classic monetarist view of, “Too much money chasing too few goods,” but for the purposes of “finding the trade” I’m going to take the view that inflation means rising prices…and that is not monolithic…therefore the Authorities could cause inflation (or price increases) in some things while the prices of other things are pulled lower by deflation…and some things will be “on the bubble”…maintaining a shaky price equilibrium while being buffeted by both inflationary and deflationary forces. (The Authorities may also be more interested in rekindling inflationary expectations than actual inflation…but that will be an uphill battle given the weakness in the labor and housing markets.)
Financial assets and commodities (not including iron ore and coal) have been bid higher as the market perceives another period of stimulus. Will these markets continue higher or is this “Financial Heroin,” to use Donald Coxe’s term, going to wear off quickly leaving financial assets and commodities to fall? Do the Authorities have the power to make inflation happen…or not?
It seems that consumer spending is the biggest force in the economy…and I wonder if consumers aren’t getting tapped out…financially and demographically. I wonder if they have used too much credit to buy “stuff” and are now at risk of setting off a vicious circle of deflationary trends if either the economy slows or interest rates rise…or both of those things happen. I wonder if manufactures made a boo-boo and figured that consumers would keep buying “stuff” and now those same manufacturers are sitting on warehouses full of inventory…financed by banks…and if that inventory doesn’t move the manufactures will have to lay off workers…making their contribution to the vicious circle of deflationary trends.
Inventory is not just in warehouses…for instance, I see a “shadow inventory” of nearly new Harley Davidson motorcycles sitting in consumer’s garages all over North America…if the economy goes soft these used Harleys will be on offer…deeply discounted to the new ones in the showrooms. My mechanic friend tells me that the bottom has fallen out of the used car market as new car lease terms have been extended past 8 years…lower prices on used cars may become a “shadow inventory” that haunts car makers…an over-supply of “stuff,” in other words, may strengthen deflationary trends.
My deflation bet: I rent a lovely condo on Vancouver’s waterfront…I have no interest whatsoever in buying real estate here. My long term savings are mostly in cash (I note that BOC Governor Carney has been hectoring Corporate Canada to start spending some of the record large mountain of cash they are sitting on…I therefore take some comfort in sitting on my own record large pile of cash!)
Article provided by:
Drew Zimmerman
Investment Advisor
Union Securities Ltd. | Vancouver, BC
Tel: 604-646-2031 | Fax: 604-646-2067
Email: dzimmerman@union-securities.com
Web: www.union-securities.com
Victor Adair
Victor Adair is a Senior Vice President and Derivatives Portfolio Manager at Union Securities Ltd. Victor began trading financial markets over 40 years ago and has held a number of senior positions during his long career as a commodity and stockbroker. He provides daily market commentary on CKNW AM 980 radio Vancouver and is nationally syndicated on Mike Campbell’s weekly Moneytalks radio show. Victor’s trading focus is primarily on the currency, precious metal, interest rate and stock index markets and his clients are high net worth individuals and corporations.
You can reach Victor Adair at:
