It is my view that the inflation fear is about to peak. The bull market in inflation fear is now in full extrapolation mode by economists, investment strategists, financial news pundits, and other talking heads who typically just parrot what they hear. It is just time to fade this crowd because they have all convinced themselves that no price will ever come down again. What they are missing is how fast the economy is slowing right now. The lagged effects from the rapidly rising U.S. dollar that we have been witnessing the past six months is huge in terms of the impact on the cost of imported goods. That is not all though because inventories have now shifted from shortages to excesses and will need to be reduced with price discounts. You are seeing it already in retail. Switching from the constrained supply side story of inflation to the monetary side of inflation and you get a similar reversal. The growth in money supply has collapsed in the last few months and there is currently but a small pulse in money velocity. Supplies growing, check. Monetary stimulus fading. Check.
What about fiscal policy? How about in the span of a year it has shifted from radical stimulus to surprising restraint (for the Federal Govt.) in what is a seismic shift in direction. Take all this in and it feels like the cyclical aspect to the commodity bull market is probably now in the rear-view mirror (except energy and grains) and we are now in the blow-off speculative phase of price increases for things like industrial metals. Now as prices increase further through speculative demand, it will begin to thoroughly destroy real demand across all commodities except grains and natural gas which is being hoarded by Europe. With all these factors considered, I am personally beginning to think that inflation is going to really cool in the coming year, and few market participants are prepared for it.
While we want to play the bounce in the coming weeks, do not forget that it just may be a bounce in what is a coming large oscillating trading range. No one will ring a bell at peaks or troughs in the economy or the market, but there are well-established patterns at the fundamental lows. We are seeing that now with inflation and the recession viewpoint which has now become mainstream. This potential fall in inflation is another reason to look for a bounce in the coming weeks, even if it is just a retracement.
Best,
Matt
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