By Larry McDonald, author of the Bear Traps Report
Imagine sitting in the seat of a central banker in June of 2021. You are looking down the barrel of millions of AMC nutjobs making up 9% of all U.S. equity market option volume on Friday and 8.2 million jobless Americans.
Since Jackson Hole (August 2020) you have been lecturing most of the planet ́s inhabitants that ridding the world of inequality is closest to your heart. Above all your message has been, “we did it all wrong in previous hiking cycles in pulling back accommodation too soon, this time we are going to let it run hot and lift all Americans up into the heavens.”
After the loud song and dance messaging, we have a moral hazard overdose and a job market that won't normalize at the current pace until October 2022 (837k jobs created the last TWO months vs. 8.2-million-person shortfall in the labor force vs. January 2020 levels).
U.S. central bankers have two choices:
- a) stay dovish and sow the seeds of a Lehman, LTCM event, while manufacturing more Bernie Madoffs and Al Dunlaps monthly or
- b) arrest accommodation and throw your social justice mantra out the window.
You want that job? NO thanks.
Over the last week it looks a lot like last month. Payrolls miss, bonds are bid with a HOT CPI waiting in the wings this coming Thursday. Clients we respect in the Bloomberg chat are talking up the U.S. Rates (lower) vs. Brent Oil (higher) divergence. This speaks to the power of the global re-opening catchup, fleeting American exceptionalism.
We continue to be oil bulls with India and Europe coming on strong with surprise demand upside. Since May 12, the copper – gold ratio has reversed favoring the precious metal. This is important to monitor, right on the 14-month trend line.
What is hyperinflation? From 1993 to 2020, the Fed ́s favorite inflation measure (PCE YoY) has ranged from 0.97% to 2.46%, with no exceptions.
After walking through this long valley, asset prices have been highly conditioned for “beyond tame” data. By this definition, anything near 3.00% is hyper. Today, PCE YoY is at 3.06% with $5T of U.S. GDP (California CA –NY New York), locked down for most of Q1 and Q2.
We see a meaningful inflation shock in the weeks/months ahead. Rents are rising fast across the U.S., and heretofore they have held back CPI and PCE inflation data. A mean-reversion is in the works and will drive inflation expectations higher – gold bullish.
We make the case; 1) wage pressures are vastly underestimated, 2) labor as a political power base is surging, and 3) a colossal secular shift is upon us.
The G7 “Global Minimum Tax” agreement still has some wood left to chop, BUT do NOT underestimate the importance of this trend. There are bills to pay and FAANGMT have a target on their back.
In the growth vs. value tug of war, the former has seen six months of failed rallies with lower highs. We will use pullbacks in commodity sector longs to add to positions and sell tech rallies.