Why Dismiss this Reality?


DON'T KNOCK IT - So we all know inflation has been subdued forever and because of this, the stock market has been able to really take advantage. But nothing lasts forever and you can bet inflation is coming again. I get irritated when I hear a Fed member dismiss the link between wage growth and inflation. It seems to me to be a silly thing to consider, especially when you consider there is good evidence to show they are linked, when you consider both have been subdued for a very long period of time and that both NEED to already start picking up again. When I hear a Fed official dismiss the link, all I hear is someone who may not be doing a good job and reading between the lines. And in between those lines, it's clear to me that this is where we are headed and that this will invite a lot more downside pressure on risk correlated assets. Of course, as this is confirmed, we should also see yield differentials move back in favor of the US Dollar, as the Fed is forced to get ahead of rising inflation and raise rates faster than what they had been projecting.

cartoon feb 14

HIGH IMPACT - With all that said, I don't think we are going to see this latest dip in stocks supported for another run to fresh record highs. I think there is a greater risk that any rallies are now well capped below the record high on a weekly close basis, ahead of the next major drop (I will leave it conservative and say weekly close basis because I don't want to rule out the market shooting back up). It's amazing to me that there is now this mentality out there where no one actually thinks the market will ever fall hard again. And as tough as it's been to take on the bearish view, the fundamentals do not disagree as far as I'm concerned. If you are going to use super accommodation to bolster the market artificially, the removal of this accommodation will have the opposite effect. Simple as that. Now I don't know how all of this translates into our next trade, but I am hoping we get to play something that will allow us to benefit from what I anticipate. If not, it may just be buying AUDNZD again into a dip, which is still there and still looking like it could give us an even better opportunity. Let's see.

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