Its Over

...disinflation, deflation, sharply rising inflation (stagflation),....in that sequence

...survive the deflation first, cash up for the ultimate commodity ride thereafter.

...until then, its 'get out of commodities' as we enter deflation.

...did I not tell you to stay out of resource stocks months ago?

MAC10

32 minutes ago

The Month Of Lehman

September has been the worst month of the year for two years in a row, we have no reason to believe the streak will be broken...

Over this past weekend Zerohedge highlighted a BofA note saying that the commodity bull market is just getting started and inflation is on deck due to Fed rate cuts. Perhaps. But we should not be too surprised if the exact opposite occurs. First off, when it comes to propagating specious investment themes, no one beats Zerohedge. BofA is a distant second. In this year to date Hartnett warned about a DotCom bubble in Tech stocks in the first half. Which came true and is now imploding. And more recently Hartnett predicted an incipient bond rally for the second half on benign inflation which totally contradicts what he is saying now. In addition, anyone who thinks that Tech stocks will continue to implode while commodities rally has no memory of the past twenty years. In this chart below commodity prices are overlaid on the Nasdaq and we see that every low in stocks was a low in commodities. There were no exceptions.

Barring imminent meltdown, a reacceleration of inflation now is not out of question but if we get a hot CPI between now and the Fed meeting in September you can assume that the stock and bond markets will be bidless. Markets have been cheering rate cuts this entire year so a return of inflation would kill the entire investment hypothesis for 2024. Commodities as we see above, will likely not benefit. A rate pause followed by reacceleration of inflation is exactly what happened in 1981 during the Volcker era and it led to much higher interest rates and 10% unemployment which was highly deflationary.

More recently, back in 2008 a late cycle commodity-driven spike in inflation occurred, but the Fed did not raise interest rates. In fact during that episode the Fed panic lowered interest rates. That's because the banking sector exploded when inflation spiked.

Here we see that scenario in this chart. I think that banks are about to implode regardless because this is the same level of interest rates and duration of tightening that took place in 2007:

Let's step back for longer term perspective. There is certainly reason to believe that over the longer term inflation could be ignited at some point down the road. However, first we have to cross the valley of deflation. I believe that unlike the pandemic this time the valley of deflation will be measured in years not months. Recall that the pandemic bear market and recession were the shortest in history and included zero deleveraging for the first time in history. It was the first time in U.S. history that debt levels rose in a recession. We were told that the longest bull market in history had been corrected by a one month bear market and no deleveraging. Everyone believed it. Now it's going on 15 years since the last true bear market combined with recession and household debt levels have climbed higher still since the pandemic. Now, we are being fed the same bull shit.

Anyone who believes today's reflation fantasy has to first ignore what's taking place in China right now:

"(Bloomberg) -- Inventories of key raw materials are piling up in China, evidence that economic activity remains too feeble to clear a surplus that’s crushing prices from steel to soybeans."

China’s steel industry is in crisis as the country’s moribund property sector drags on construction demand. Port inventories of its key raw material, iron ore, have ballooned to their highest ever for the time of year."

What is happening right now in the U.S. is that wealthy consumers are fat and happy. Middle class consumers are trading down from quality retail to Walmart. And working class consumers are dumpster diving, as the dollar store goes bidless.

This is causing all manner of stupid narratives to be propagated by Wall Street. As usual.

In summary, at least for the next couple of years, all signs lead to deflation. Which will entail a glut of everything.

So, if you are in the market for a Ferrari, just wait. Soon new ones will be half off or more.

Along with everything else.

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