Everybody's dancin' down the local armory
With a basement full of dynamite and live artillery (Grateful Dead)
It was one of those serendipitous moments. I was filming a CNBC segment live from Minyans in the Mountains
when Dylan Ratigan shot some unexpected questions from the hip. When asked what it would take to get the tape higher, I said that "to understand where we're going, we must realize how we got here" and touched on "the difference between legitimate economic growth and debt induced demand."
In an attempt to clarify my perspective, he asked if "caution" was the message I was trying to convey. As a firm believer that the market is a complex machination of non-linear influences, I offered that "there are opportunities both ways" and highlighted the secular benefits of energy
, two sectors we've embraced in Minyanville for the past few years. "In a normalized, trending market," I said from my perch 11,000 feet above sea level, "those groups should continue to outperform on a relative basis" It's a theme I've repeated often--and one that has worked quite well--although I'm quite conscious that it's no longer a novel concept.
I arrived back at my turret and, true to the path of maximum frustration that the market tends to tread, the commodity complex immediately shouldered some serious supply. I pulled up a chart of the CRB
, the commodity proxy, and noticed two significant technical inflection points in our midst. The 200-day moving average was being challenged and, perhaps more importantly, the trendline that's been in place since the early innings of 2002 was also under attack. Normalized, trending market? All of a sudden, those words assumed an incredibly important context for the entire financial realm.
Why does this matter, you ask? It's quite simple, actually, although few folks in the mainstream media or popular press have wrapped their heads around the implications. In the post-bubble reflation effort by the FOMC, the rising tide of liquidity has lifted all boats at the expense of the U.S dollar. Viewed through this lens, equities, metals, crude, agricultural products and basic materials are all part of the very same trade. Asset class deflation or dollar devaluation. We can't have the best of both worlds and the day of reckoning is seemingly upon us.
There's been intense debate in financial circles regarding the next steps by the Federal Reserve. Inherent in that discussion is the basic question of whether inflation
or an economic slowdown
poses a greater risk to our economy. Assuming that our central bank is still calling the shots--which is far from certain given that foreigners hold the majority of our debt (denominated in dollars)--we're left to wonder whether the devil we know (inflation) is better than the devil we don't (deflation).
Deflation? Am I sniffing glue? Before clicking through to the next, best article, hear me out. The difference between "less inflation," as evidenced by last week's CPI and PPI, and "deflation," in the conventional sense, is a matter of semantics for the forward looking discounting mechanism that is the stock market. Further, as perception is reality on Wall Street, a subtle shift in psychology could have far-reaching ramifications for the financial assets and the people who trade them. I'll continue to offer that the June swoon was a quick whiff of deflation and we all know how much fun that was.
While lower asset-class prices are an effect
rather than a cause
of deflation, my sense is that the CRB is providing us with a graphic illustration of the tightrope we together walk. The rub, for lack of a better word, is that the long-held and universally accepted notion that lower energy prices would bode well for the consumer and, as an extension, the stock market is entirely misplaced. If the commodity complex begins to spin lower, the odds on bet is that equities will follow their lead.
It's an unconventional perspective, I know, but that may be exactly what we need as we edge through these unconventional times.
Good luck today.
Position in metals
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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