Going to track weekly deflation indicators to gauge when the "reflation" trade becomes the best trade
Indicators will include:
10 yr bond-10yr TIPS bond
M2 10 week moving average
So far this week, several have continued down and made new lows or in the case of the DXY (strong $) moving higher-which is deflationary. For the near future, oil is one of the only important commodities that hasn't broke down yet-even though the US is swimming in near record oil and gasoline inventories. Because oil has not broke down yet, I think "deflationary concerns" will still dominate market psychology. After oil breaks and bottoms, if it does, how the other deflationary indicators respond will mark how long before the "reflation" trade becomes the correct trend. A trend that I think can last 1-2.5 years.
10yr bond -10 yr Tips--low 1.91%--close 2.03%
gold--low 1179 close 1224
Silver--low 18.17 close 19.45
copper-- low 2.99 close 3.06
oil--low $92.67 close $96.56
CRB index low 275.54 close 275.62
M2 10 week moving average 4.4% last week 2.76%
DXY high 83.34, close 83.20
SLX low 36.45 close 38.00
Bottom line a number of deflation indicators hit 52-week or multi-year lows this week: TIP, 10 br bond, gold, silver, copper, CRB index, SLX (7 of 10) and the DXY was up everyday this week. Only Oil and the M2 10 week moving average did not contribute to the "deflationary scare"-although M2 was only up 2.76% last week vs average gains all year of 4-6.85%.
What does all this data tell us? The world economy is getting weaker and relatively slower growth of M2, suggests the $ (DXY) will continue to strengthen putting further downward pressure on commodity prices.
Hence, other than opportunistically picking up positions in gold/silver, NG and indirect big data/cloud plays (BRCD, QLGC, ELX), I'm a net seller into strength expecting to be able to buy later a lower prices. Ideally I would like several things to occur;
1)oil to break below $85=back door tax cut
2)M2 growth to get above 6% annualized
3)Major problem in Europe to surface to force ECB into active QE
4)S&P500 to fall to under 1500
Of my 10 indicators, at the end of this week vs last week-two were up and four were down, the others unchanged or little change. That suggests to me that deflationary forces increased in the latest week. Oil, one of the two that were up, will cause measures of inflation (CPI and PPI) to rise, but could be considered deflationary because consumers will have less money to spend on other good and services after incurring higher energy costs.
Also, M2 and the DXY were two of the 4 indicators that suggested deflationary forces are increasing-the DXY hitting a 3 year high and M2 growth, over the last 10 weeks, is up only 1.035% at an annual rate.
Bottom line, with the $'s relative scarcity, commodities should face continuing downward pressure-any good news out of Egypt will get oil down as well. $ strength and commodity weakness suggests to me a bond market rally is close.
On a larger political front, we have seen the current administration has politicized the IRS, EPA and FBI. It won't surprise me if we learn, as time passes, that BLS and other government sources of macro-econ information have been compromised as well. What it is setting up is a de-legitimizing of the federal government. A continuation of same, for the balance of the BO term, may just have taxpayers refusing to send in checks come 4/15 or some other forms of protest. It could get bad enough to start a $ crisis. Ultimately the value of the $ is based on faith. Destroy faith and $ holders will bail. It may take a couple years, but at that time the accumulated deficit will be close to $20 trillion and unfunded liabilities will be close to $100 trillion. With that ugly balance sheet, once the downward tape starts, it will snowball.
After the 1st Q final revision, per capita income, after inflation, fell at an annual rate of 9.21%-extremely weak. That suggests future consumer spending is going to be soft and also implies that after a period of macro-economic softness, a new FED chairman will institute QE4. Soft GDP, implies that the budget deficit will come in much higher than recent estimates of $650 billion-further justifying QE4. Also, France continues to get worse and just may be the catalyst for QE by the ECB in 2014.
In the interim, S&P 500 sales and earnings growth is going to be feeble-however the "market" is paying alot for that marginal growth. I don't think that will hold up as the "world" is getting more vulnerable to financial shocks with the combination of slower growth and higher interest rates.
After this period of weakness, I'm looking for more QE from the FED and active QE from the ECB to come to the rescue, sometime in the 2ndQ of 2014.