Wednesday, July 1, 2020

This Week's Message: Flation is a virtual certainty...

The Dow future contract went from trading ~200 points lower to a hundred points higher by the open on news from ADP that private sector payrolls grew by north of 5 million (2 mill+ in June and a revised 3 mill+ in May) over the past two months, plus other headlines suggesting that two potential COVID vaccines are looking good in early-stage trials. 

The above news, particularly the latter, is of course unambiguously positive. However, while the day is still very young, the fact that the Dow didn't bolt to, say, a thousand-point gain speaks to the Everest-like climb the economy has ahead of it, and to the fact that the Fed has already helicoptered the stock market to essentially the mountain's peak, where it nervously (VIX ~30) waits for the economy to climb up to meet it there...

Hmm.... Well, it's our view that ultimately the two shall indeed meet up before this particular adventure is over. Whether that meeting occurs (initially) by way of the economy rising to the summit where the market presently sits, or by way of the market tumbling its way down to meet the economy thousands of feet below of course remains to be seen. Suffice to say that the economy's packing a tremendous amount of weight, and the mountain is incredibly windy these days...

Let's run with the "helicopter" metaphor, leveraging the title of Ben Bernanke's 2016 essay What tools does the Fed have left? Part 3: Helicopter money. 

I'll cut to the chase and simply state that in a world where monetary authorities commit to helicoptering a virtually infinite supply of newly-printed money onto an economy, it's safe in our view to say that whether it results in "healthy" inflation, or sickly stagflation, you ultimately (as in ultimately whipping recessionary deflation) end up with some form of rising-price-of-goods-and-services flation in the process. 

So what's an investor to do? Well, without question, you want to own things that are priced in dollars!

Now, of course U.S. stocks are priced in dollars, right? Right! And, sure, own some (we do), but be careful doing so when they're priced at 1999ish valuations (by several metrics) and the economy has the proverbial Mount Everest yet to climb. 

Here's your simple S&P 500 5-yr daily price chart:

And definitely own other things priced in dollars that aren't historically expensive.

Such as these recent additions to our client portfolios:

Ag commodities. DBA (5-yr chart)

Base metals. DBB

Silver. SLV

And gold (added last December)

Our commodities exposure (DBA and DBB being brand new positions) now makes up roughly 20% of our core portfolio; and I suspect we'll be incrementally adding as things progress. 

In addition, you clients, there's a good chance you'll see inflation-protected treasury securities show up in your portfolios very soon as well...

Bottom line, we aim to exploit the obvious going forward, but smartly (i.e. cheaply) and as safely as we know how...

Thanks for reading!