This week's main message comes from my most recent entry to our internal market log:
News over the weekend has it that the Administration is very concerned about the great deal of heat it's catching over inflation. Therefore they’re changing their verbiage/narrative: No longer will “transitory” (although J. Powell may still use the word) be used to describe inflation, and while they have to stick with the notion that it is temporary, they’ll acknowledge and sympathize with the challenges it poses for the citizen.
From our perspective we have to remain cognizant of the fact that while the Administration is desperate to get a multi-trillion infrastructure plan passed, the heat their catching is targeted directly at the serious inflation risk it poses.
Should they even hint at cutting the size of the bill, or should its ultimate passing be called into question, the inflation trade (commodities, materials, industrials, commodity-centric regions, etc) will get hammered. Tech will hold up better under that scenario. Gold should do okay, as bonds will likely rally (rates will fall) on such news...
With regard to the Fed, they’re catching the same heat. Should J. Powell even hint (and, frankly, a "hint" is the most we should expect) at tightening policy to any meaningful degree, markets will get hammered across the board. As for which asset classes will do better or worse, it depends on whether or not the market believes that the first round of tightening will thrust the economy back into recession.
If indeed bonds rally (which will signal that the market rests on fragile underpinnings and that any tightening will stop the expansion in its tracks), and, thus, yields fall, gold (trading primarily on real yields of late) and tech should (maybe) hold up the best; the inflation trade will get hammered.
If, on the other hand, the market believes the expansion is resilient enough to withstand some (or the hint of some) monetary tightening, we’ll see bonds sell off (yields rise). In that scenario gold and tech (tech especially) get hammered. While the reflation trade should hold up okay...
The status quo scenario would be where the Fed points to the millions who remain unemployed, the threat of the Delta variant, and any other looming threat they can come up with, and, therefore, remains firmly on the present path; while the Administration pushes forward with its aggressive social and infrastructure agenda. In this case the inflation trade is a high probability -- and historically-substantial -- winner. Gold (longer-term) comes to life, as the Fed will diligently suppress interest rates… Tech underperforms, but doesn’t [have to, necessarily] get killed…
Stay tuned, stay diversified, and stay hedged!And thanks for reading!