This morning’s open looks like a virtual replay of yesterday’s; US equities (save for commodity-related) up, commodities down. Which (commodities down) is/was, in our view, a high probability occurrence, per the messaging in recent videos. The question of course would be, are we talking trend going forward?

Well, alas, markets ain’t easy, which leaves us forever digging through data, geopolitics, fundamental and technical setups, etc.

With assessing possibilities/probabilities in mind, here’s from my latest entry to our internal market log:

3/9/2022

Inflation forces:

• Tight labor market (ECI multi-year high)

• Green push (fiscal policy)

• Lack of resources (mining) capex

• Politics of oil

• De-globalization (on-shoring, etc.)

• Populism (fiscal policy)

• Geopolitics

• Fed’s “wealth-effect” obsession (inflationary aspect of Fed put)… I.e., the Fed’s reluctance to hike rates, to an inflation-killing degree, due to the impact it would have on financial markets — and the economy

• Debt-to-GDP, etc., portends potential yield curve control 

• Foreign dollar-denominated debt demands long-term weaker dollar

Near-term counter — to the inflation-trend — case:

• Base effects

• There’s been a huge pull forward in commodity prices (aggressive mean reversion potentially in the offing)

• Possible Geopolitical resolution (immediate relief for resources inflation — commodities traders will dump)

• Fed tightening

• Slowing macro

• Weak consumer sentiment

• Flattening curve

• Supply chains freeing up

There’s potential for the inflation trade to cool going forward, setting the stage for:

• Tech outperformance

• Defensives outperformance

• Treasuries outperformance

• China, India, Europe, Japan outperformance

• Commodities and related equities underperformance

• Financials underperformance

• Australia, Latin America, Canada underperformance

Long-term convictions:

• Weaker dollar

• Foreign (dev and em [Latin America]) equities outperformance vs US

• Metals (copper!)

• Miners

• Oil

• Renewables

• Precious metals

Per the above, our long-term thesis remains very much intact, however, we do believe near-term notable headwinds exist. At the margin, therefore, clients, you’ll likely be seeing a bit of tweaking over the coming days and weeks.

Asian equities got hammered overnight, with 12 of the 16 bourses we follow closing notably in the red.

Among our 38 core positions (excluding cash and short-term bond ETF), 21 — led by AMD, SOXX (chip makers), Disney, tech stocks and water stocks — are in the green so far this morning. The losers are being led lower by energy stocks, uranium miners, gold, base metals miners and Latin American equities.

Wisdom:

“If you live in a world where everyone assumes that everything goes up forever, then it is inconceivable that prices might go down.

Big price changes occur when market participants are forced to reevaluate their prejudices, not necessarily because the world changes that much. The world really didn’t change that much in 2008. It was just that people finally noticed there was a problem.

Consider the current U.S. debt problem. A lot of people say there is apparently no inflationary threat from the growing U.S. debt because bond yields are low. But that’s not true. Bond yields will only signal that there is a problem when it is too late to fix it.”

–Colm O’shea

Have a great day!
Marty