The market has risen sharply off of its June lows through July and August. This was largely driven by the lower inflation reading (now down to 8.5% from 9%+). Is the market’s reaction justified?
“It’s not about whether you are right or wrong, but about how much you make when you are right, and how much you lose when you are wrong.”– Stanley Druckenmiller
Based on the inflation headline reading, a case can be made that inflation is easing and the Fed will slow its tightening pace. That potential has buoyed the market in hopes that less aggressive monetary policy will push stocks higher. Remember, don’t fight the Fed! If the Fed goes easy, the market typically rises. The notes coming out of Wednesday’s meeting implied a 0.5% rate raise in September–as I suggested would happen in this blog– rather than the market’s anticipated 0.75% rise back in June and July.
However, a closer look at the underlying data indicates the market’s reaction may be wishful thinking. Is the Fed going to hang a “Mission Accomplished” banner at Jackson Hole or the September FOMC meeting? Highly doubtful.
The cooling inflation pressures were driven by Apparel, Appliances, Used Vehicles, Hotels, Car & Truck Rentals, and Airfares.
In contrast, Furniture, Housekeeping Supplies, New Vehicles, Beverages, Primary Residence Rent, Vehicle Repairs & Insurance, and Food all increased. These categories are the ones the Fed is most concerned about. They are still rising (!) and there is no clear evidence inflation is receding.
And lets not forget that wages are up, while production has now begun to fall….stagflation, anyone?
Our take – the Fed will not view the latest inflation report as clear and convincing evidence that inflation is receding, and the market’s hopes for a tightening reversal may be dashed by September. The tightening pace may slow, but that is different from cutting rates. Don’t fight the Fed.
1965-1982 sideways market
In our research paper – recently sent to VT Update newsletter subscribers – we noted that the current era may bear some similarity to the 1965-1982 period. Back then, the Dow stayed below 1000 for 17 years, and inflation meandered and spiked.
Here’s a quote from the very man who orchestrated the Fed’s very incorrect activities, causing the same problem we may be facing here:
“There were so many feeble efforts to deal with inflation in the 1970s, they said ´don’t tighten monetary policy too aggressively, you will get some unemployment,´- so we went a decade that way, and we ended up with more inflation and more unemployment.” – Paul Volcker with Ray Dalio in 2017
“Fed Chair Jerome Powell needs to “shock the market” as part of the central bank’s fight against inflation. If you want to change someone’s view… you have to hit them in the face,” Henry Kaufman (renowned economist)
If the Canadian BOC and US Fed think that inflation is falling, the average Joe and Jane do not necessarily see the same outcome when it comes to “the big 3” costs. Note how we are looking at the same consumer stress level as seen during the 1965-1980 period:
Risk appetite may fade into the Jackson Hole meeting (end of this month)
Risk assets remain vulnerable to a selloff, market volatility is misleadingly low, and the market is playing a dangerous game of ‘call the Fed’s bluff’.
Below is the VIX chart. Note how my orange horizontal line of 20 represents some sort of support/resistance point over time. Markets can trend up so long as the VIX trends lower – seen by my green arrows on the chart. If markets continue to illustrate low volatility, the 15-20 zone will likely be hit. Note how that zone inspired the current bear market. One needs to keep an eye open for an upwards reversal in the VIX as it breaches the 20 line.
So–where do we hide?
In a nutshell: Value, low beta, gold, commodities (including food- see comments below) and cash.
Below are the comparative value vs. growth ETF’s from Vanguard. VTV (value) vs VUG (growth).
The chart for growth is encouraging, but there is a lot of damage to repair.
The safer bet is value- a sideways trend.
Perhaps its not a bad idea to explore some agricultural plays. There has been a definitive move towards pressuring the independence of our food choices and farming practices in the world today. This obviously leaves long termed concerns of authoritarianism politics – but to focus on the investment side, there may be opportunities for investors in the near-term.
Some quotes by 3 Portfolio Managers – taken from BearTraps & their Portfolio Management firms contacts on the subject:
“Bill Gates is buying farmland. They is clearly going to be food issues and a clear plan to make beef prohibitively expensive – you won’t miss it is in tow – very clear.” – PM NY
“It isn’t just Bill Gates. It is Blackrock, Blackstone etc. They’re buying up all the land as part of the great reset.” – PM London
“They have been hoping for continued asset inflation and globalization with falling wages as an output in the west, as the basis for a sustainable government funding model.” – CIO NY
The iShares “COW” ETF is the only Canadian ETF in the agriculture sector. It holds a number of food, farming products (potash etc.) and agriculture machinery stocks. It doesn’t hold the underlying commodities. For that, you would likely need to examine agriculture commodity futures orientated ETF’s, such as the Investco ETF (DBA) or others. They have similar appearances so I just posted the COW chart below. Looks like a triangle setup to me. A definitive breakout might be bullish, with a possible target near its old highs.
As an aside – Craig mentioned to me today that the “reset” plan towards plants and bugs for food still requires energy. Energy, that cannot come from windmills and solar alone. We continue to like that space in the longer run.