Charts, and Thoughts, of the Day

This morning’s reaction to January’s hot CPI number speaks to the somewhat precarious spot markets find themselves in.

As I type:

SP500 (red X is yesterday’s close):

TLT (long-term treasury prices):

I.e., Stocks and yields are uber-sensitive to the prospects for go-forward inflation… Hence, the angst over the prospects for fiscal stimulus (boosting an economy that may have difficulty absorbing it without higher inflation) and over higher tariffs on imported goods.

The irony with regard to the latter is that, ultimately, by themselves and all things equal, they in the long-run would very likely create a drag on the economy, and markets, that could easily morph into a deflationary recession.

Here again are the four scenarios I articulated last week:

• If the dollar continues to rise on yields and geopolitical angst, stocks will crack… Gold, despite the higher dollar, will maintain a bid due to angst and central bank buying.

• If the dollar continues to rise on yields (spawned by accelerating economic growth), and geopolitical angst wanes, stocks, after a potentially brief stint in all time high territory, will succumb to record-high valuations and rising inflation.

• If data and inflation soften, and geopolitical angst wanes, the dollar will fall (with yields) and stocks will continue their ascent… Gold will hold up under those conditions, due to the weaker dollar (and lower yields).

• If the data roll over into recession, the dollar will rise initially, stocks will tank, gold may take an initial hit as investors redeem (the things they can) to meet leverage calls on equities, then rebound relatively quickly… As the recession plays out the dollar will ultimately fall as investors rotate to far better values abroad, and as global interest rates come closer to parity…  (Note: The yen will be the best performing currency in a global recession scenario).

Stay tuned…