Continuing Bet Against Inflation

My longer term inflation pressure gauge strongly suggests some acceleration of inflation
pressure over 2018 - 19. However, the shorter term inflation pressure measure, although
hitting a low this year, has advanced only meekly despite a nearly global advance in economic
momentum. The broad CRB commodities index is up but slightly over levels seen in mid-2016.
Even the industrial commodities composites have leveled off after advancing earlier this year.
I think it is true that despite faster economic growth, there is still significant excess plant capacity
in the world, but there are a couple of other factors worth remembering. One major one has been
the very substantial over-investment in inventories in evidence for at least the past five years. I
believe excess stocks are being worked off and that as near term supply comes into better
balance with demand, commodity prices should rise a bit faster. The other big change we have
seen since the early part of this new century has been the 'financialization' of materials markets
through rapid growth of futures trading and the development of products that both traders and
investors can access without having to deal with the actual physical volumes themselves.After
the major global economic downturn of 2007- 09, materials markets have have lost favor to
the financials reflecting the continuing imbalance between materials supply / demand.

However as the slack comes out of the materials markets and inventory overhangs are cleared,
there may well be a shift in trader preferences from financials back toward materials, one which
could be much stronger than the actual improvement of materials demand vs. supply.

With prospects for faster inflation still rather humble short term, the financial markets still
hold sway. Consider the exceptional tightening of the yield curve: 30y Treas% - 2y%

The Stock Market -- Long Term

I am projecting the SPX to reach the 3550 level by 2025. This projection is for doggy growth of
about 4.2% per annum and includes a substantial price retreat and subsequent recovery around
2019 - 2020. What's worse is that I have ginned up the SPX ' earnings growth rate slightly to
account for faster foreign sales and profits growth and also for improved inventory management
by US companies.Despite the availability of highly sophisticated supply management  tools, the management of inventories by business has been too speculative over the last seven odd years.
I am also looking for modest appreciation of business pricing power as the world slowly works
off still sizable production capacity. The growth of monetary liquidity will continue to taper
down as central banks work to regain reasonable balance between the still excessive supply  of
liquidity and genuine economic demand. This will mean somewhat higher interest rates over the long run and considerably more market volatility as the days of spoon feeding the global economy with
dollops of liquidity wane. In sum, I envision a more subdued continuation of the bull market but
one with an expanded 'normal' price range.

If I was a younger guy with a couple of extra bucks, I would be looking at investment in reasonably
valued smaller capitalization companies in both the US and foreign markets. I would only trade
the US market overall after periods of substantial price weakness and, most of all, I would be
looking to invest money privately here at home.

The following chart shows the current very elevated SPX with a horizontal line at 2200 which
is the level that would provide closer to a 10% annual total return out to the projected level of
3550 in 2025. SPX Weekly