The Next Inflation Shock Is Here
(Written by Bert Dohmen & Dion Dohmen, contains excerpts from our latest July Wellington Letters)
Our forecast over the past 12 months has called for a period of rising inflation, similar to what occurred in 1978-1980. The surge in oil prices and commodities this year are confirming our forecast thus far.
Oil and commodities are currently in new bull markets. In June we had expected that mid-July would see oil prices rising as global oil supplies dwindle. That was right on target.
The true oil prices are now being revealed. You see, the crude oil price quoted often is the futures price, i.e. paper. You can’t put that in your tank. The real (physical) oil price was never the ridiculous lie that it was below $70. Experts said that if a tanker were to buy the oil on the free market, they would be paying $110-115 per bbl.
But the return of paper prices to true physical prices seem to have started now. Here is the daily chart of the US Oil Fund (USO). It made a beautiful bottom in early July. We wrote around that time that well-connected traders had probably closed out their shorts and were buying.
Look at the great “buy” signal on the Short Term Dohmen Money Flow (bottom, black arrow) a few days later, which resulted in the recent 3-week buying surge.
We can also see that after the recent pullback, the USO is now approaching good technical support (green horizontal line), which it should hold.
We believe this longer-term rally in oil is still in the early phases. It is possible that the old high will be challenged, especially if our inflation outlook comes true. In fact, new highs are very possible.
Here is the chart of daily US oil supplies in the Strategic Petroleum Reserve (SPR) via BofA research. It recently plunged to its lowest level ever with just over 40 days left. And that was in June. Supplies have only been depleted further since then. That is called a “bear market” in inventories, the opposite of prices.
It will take a long time to refill the inventories even if Hormuz and the Red Sea reopen. And no one knows when that will be.
More recently, experts have estimated that the U.S. has now about 2 weeks of oil left (as of late July). That comes from the reported usage data from the EIA which calculates U.S. daily petroleum consumption (products supplied) are roughly 20.5 million barrels per day.
Therefore, with just 319M barrels in the SPR and 20.5 million barrels being used per day, that means around the SPR has just about 15 days of supply.
Other counties have similar shortages. The problems now appear to be surfacing. The little oil leaving Hormuz is a trickle compared to what is needed.
Chinese refiners came back online recently. That will increase the supply of the “end products.” But it will also cause a demand increase for crude oil.
Some experts say the first significant problem to arise will be a shortage of aviation fuel. Can you imagine the disastrous economic effect a lack of jet fuel would have?
Other commodity sectors are also doing well. Here is the 2 day chart of the DB Commodities Tracking ETF (DBC). It had a powerful rally in July but ran into strong resistance from its early June high (red horizontal line).
The short-term Dohmen Money Flow (bottom, black arrows) gave good signals at the May top and July bottom. Currently it is crossing to the downside, signaling a further decline in DBC. First support is around the 26.50-27.00 area (green horizontal line).
If it can rebound off support and eventually break out above the prior red resistance line in the coming weeks, DBC should rise to a new high if we are correct in our inflation forecast. That would open up some great opportunities for our valued members.
CONCLUSION: Shortages of many items will now be revealed, causing prices to rise. The new Fed chair won’t have a clue what to do, which was evident after his recent press conference.
So he will make the traditional error of hiking rates. That will just increase inflation, perhaps even lead to hyperinflation, because they will NOT tighten credit. Economists do what they learn in school, which is often very wrong. We have often said that only the Fed creates inflation.
The Fed chair did not say one word on HOW he would bring inflation down or prevent inflation from rising as it did in the late 1970’s or other similar periods. Anyone who has a solid plan would be eager to talk about it.
Therefore, the time has arrived for good opportunities in the specific areas of the market we’ve mentioned, without taking on the major risk of insanely overvalued tech and AI stocks.
Our members of the Smarter Stock Trader & Fearless ETF Trader (for shorter-term traders), and HedgeFolios (for longer-term investors) have been participating over the past several weeks and accruing some great gains lately.
And right now, you can save up 50% on our suite of research services as part of our limited-time August Flash Sale! If you’re interested in learning more about these services and claim our best deals of the year, visit DohmenCapital.com today.
Wishing you successful investing,
Bert Dohmen & Dion Dohmen