The Bloomberg Commodity Index tumbled once again today, hitting its lowest level since 2002. Stocks did not. We have seen this kind of 'deflationary' boom before... and it did not end well...
Who needs raw materials when you have eyeballs.
As BofAML somewhat mockingly reflected...
It's a deflationary boom: Nasdaq hits all-time high today; CRB breaking down to 2002 lows;
Wall St narrative flips from crash to boom/bubble as rally leadership = tech, biotech, banks, i.e. a heavy dose of deflationary "growth" stocks with a dash of domestic cyclical "value".
As Cornerstone Macro detailed in November 2014, the concept of a deflationary boom is a controversial one in economics. Truth be told it will not work in every economy. Indeed, a pre-requisite for this to unfold is an economy driven by consumers. In that sense, it does not get more consumer-centric than the US. The second, and necessary, condition calls for a major decline in commodity prices ideally compounded by a strong currency to provide the fuel for growth. In essence, a decline in commodity and import prices creates disposable income the same way the Fed Funds rate cuts used to a decade ago.
Positioning for a deflationary boom is a binary event. After all, “deflationary” implies that stocks levered to lower inflation will have a powerful tailwind, these are what we like to call early cyclicals such as consumer, transports and other similar segments. Meanwhile, the “boom” part of the story implies that segments levered to growth, US growth in this case, also find a tailwinds.
This should help the beleaguered financials to a better year in 2015 and also provides support for sectors like technology and some of the industrials. As we see it, “deflation” is going to become the operative word on the street... that and PE expansion since they typically go hand in hand.
As always, we shall see.
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