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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Wednesday, July 24, 2013

The Pro Inflation Trades

The fairly standard block of trades to capitalize on an acceleration of inflation are: short
the US dollar and go long commodities, oil and a PM of your choice such as gold. This
type of trade was magic starting early in the past decade and running through mid - 2008,
and then again from early 2009  into 2011 on a hefty global re-inflation to bring the
world's principal economies out of the Great Recession.

I bring this up at this glum, slow time for the global economy because my inflation pressure
gauge may be set to rise and because there are preliminary signs of economic demand
improvement in big economies -- The US, Euroland, and Japan (China, the most voracious
user commodities and fuels, is still decelerating in growth). I also know there are lots of
players out there who favor this trade and would like to see it run strong again. For now,
this trade is working on a thin reed, awaiting more robust economic performance.

The chart I link to has panels for the US$, commodities, oil and gold. Inflation Trade Chart

US $
Graceful uptrend in place since latter 2011...Failure to take out 2012 - 13 resistance in 84 - 85
area and failure to take out 88 level resistance seen over 2008 -2010 keeps it suspect and the
hopes of inflationistas alive... The dollar's natural appeal in the wake of the deep global
recession of 2008 -09 has been undercut by the QE programs despite the very slow growth of
money + credit...Stronger US inflation pressure needed here to hurt $ in still risky global
economy.

Commodities
Strong downtrend from 2011 reflects unwinding of China's mercantilist engine, slower
global growth and larger spare capacity...Note downtrend is now being challenged...
I still see the CRB as undervalued on production cost basis and see 325 easily achievable
on stronger growth...CRB responding cautiously now.

Oil
Oil has been benefiting from spillover of QE into selected risk assets (see 7/19 post below)
...Took profits above $108 bl. on overbought...Note the $80 -110 approx. range of recent
years and that $110 should be broken to deliver the pro inflation trade.

Gold
The bounce here looks mostly like a response to stronger oil and commodities which have
put players of this oversold metal  in mind that there has been a small pick up of inflation
 pressure born by the fuels sector.

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