Scratch & Sniff test...
For months upon months, we've listened to the inflation
vs. deflation debate.
Of late, "the trade" has obviously been on inflation, as gold,
oil, and commodities in general have soared to new highs.
But, why were they soaring?
Post the bust of the 1998-2000 tech & internet bubble, the
Fed starting reflating. It accelerated that reflation post
911, and inflation lifted all boats as noted in this chart
below.
Something that few traders would realize, is that the DOW
actually outperformed the CRB commodity index over that four
year period, with the DOW being up +54% to the CRB's +39%.
Last August the Fed started it's interest rate cut campaign,
and gold, oil, and the CRB soared to new highs fueled by
a lower US Dollar, ramping money supply, and rising inflation.
But, what's happening now?
The DOW has collapsed 3,000 points off it's highs, and
housing has continued to implode, while gold, oil, and
the CRB continued on to new highs.
So why the disconnect, and what caused the DOW to fall?
The US economy has rolled over, real income is down,
unemployment is rising, both consumer sentiment,
and spending have collapsed. And we've seen asset
deflation in housing, financial instruments, and
stocks continue.
Smells like deflation doesn't it?
So why the continued rise in oil, gold, and the CRB?
The Fed began it's rate cuts last August and did not stop
until this April. The US Dollar sank. CPI, and PPI rose, and
whether due to speculation, changes in supply:demand, or
geopolitical supply disruption risk - oil went to new highs.
We all know that the Fed rate cuts, and monetary stimulus
have a lag effect. Inflation numbers have continued to
soar... largely from the impact of higher commodity costs
and explosions in food, and energy prices.
But, the Fed has actually slowed the expansion of the money
supply, and asset deflation has continued unabated in
housing, and in the equity markets.
And in the last 48 hours we've seen unprecedented
intervention to save Fannie Mae, and Freddie Mac,
and perhaps the US financial system from collapse,
and... we've seen oil, nat gas, energy stocks, gold,
metals, and mining stocks, along with commodities
selling off?
Are commodities finally getting a whiff of a slowing
global economy, a Fed that's throttled back on the
rate of money supply expansion, and intervention
on speculators?
I wrote about this two weeks ago here:
Message 24720459
--------------------------------------------------------------------------------
PPS: Relative the ongoing inflation/deflation debate,
there can be no question that so far...
this has been an "inflation" trade.
But, that doesn't mean it will continue to be so.
Is anyone thinking (ahead) about how gold, and
gold stocks perform in the various stages of deflation?
Are you keeping an open mind -- as far as the
inflation/deflation debate is concerned?
Or, are you a "one way" trader?
Gold bugs may soon reach a crossroads.
One, in which choosing the right road,
may lead to massive windfall profits.
And the other, which may result in becoming
road-kill and giving it all back.
Markets move in both directions.
Markets, and economies are dynamic, not static.
Gold wears many hats, as should traders.
How many hats do you wear?
Are you a dynamic trader, or a static one?
ALWAYS be thinking...
ALWAYS be asking questions...
ALWAYS be anticipating...
ALWAYS keep an open mind...
AND never, ever, fail to take what the market gives you.
You have two choices in this environment...
Pro, or Joe.
Which one do you want to be?
Tune out the cheerleaders, and put away the pom poms.
You'd better be 110% focused, and on your "A-game"
going forward...
Because the "throw a dart"... easy $h!t is over.
---------------------------------------------------------------------------------------
This collapse in the DOW and financials was pricing in the
realities of a rapidly slowing economy, if not outright
deflation.
Sooner, or later, it's inevitable that commodities do
the same thing...and they may be doing that right now.
-- The Fed has slowed the expansion of money supply.
-- The Fed has ended it's rate cut campaign.
-- The Dollar has held it's bottom.
-- The US and global economies are still slowing.
-- And the US is still experiencing a deflationary
collapse in housing, and financial assets.
Yes, the inflation numbers are rising, but those
are lagging indicators, and ex food and energy
which are correcting... those numbers may come
down hard in fast, if the economy continues to slow.
You can anticipate these changes, or you can react to them,
and equally as important - you can get pre-positioned to buy
back the collapse in commodities, because if deflation does
gain traction... Bernanke will deliver on his promise to
do what central bankers do best... inflate.
But, right now... he's praying for a little food,
energy, and commodity deflation.
And actually, with this degree of intervention in
the markets... they're doing more than praying.
So stay on your toes, don't drink the Kool-Aid,
and stop every once in a while to take a sniff test
of the market winds... because they be a changing.
S.O.T.B. |
