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WalleyWorld:Where Inflation Dares to Tread

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More inflation in things we need and deflation in things we want.

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Sorry folks, park's closed. Moose out front shoulda told ya!
-Lasky, the guard at Walleyworld

Move along, nothing to see? Breakfast with Beeks sure seems that way, as muted inflation readings abound.

Yeah... pull this leg and it plays jingle bells!

Why, pray tell, is there such a massive chasm between what we see and how we feel? Allow me:

  • To appreciate where we are, we must understand how we got here.

  • There is a structural difference between legitimate economic growth and debt-induced largess.

  • That's why this cycle is indeed different than the historical norm.

  • There's huge Inflation in things we need (education, health care, energy).
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  • And coincident deflation in things we want (cell phones, plasmas, laptops).

  • That mutes overall readings but increasingly impacts our quality of life.

  • The middle class has been steadily squeezed out by a recession (yes, recession) that's been masked by lower dollar and skewed by the spending habits of the affluent.


How does one position given that climate? You mean, other than on a bicycle?

  • Peer around the corner at deflation, where all roads seemingly lead. The consumer non-durable sector, which Pepe recently highlighted in his "Best of Breed" with care--has the ability to pass through higher input costs and, more importantly, stand to gain when commodities (inputs) deflate and margins expand.

  • His faves (which he owns) are Darling In'l (DAR), General Mills (GIS) and Sadia S.A (SDA).

  • If you're in the "Inflation is here to stay camp," you can look towards the yellow metal as it nears our aforementioned "seven-handle" zone ($7-hundred something). As it stands, gold is off 16% from the March 17 high but still up 30% since last summer.

  • I am, so you know, leaning towards the stronger dollar camp (for a trade) so I'm practicing patience on rebuilding my energy and metal longs, which I pared in December after a multi-year bullish bent.

  • Through a broader trading brush, S&P 1405, NDX 2000, Russell 735, INDU 12,800 and expiration (volatility should manifest today) have set up for a perfect storm.

  • Which way will it fray? We've got chants of "Can't get 'em down" coming out of Matador City while, at the same time, Boo is pointing to an elevated put/call, teenage VXO and complacent sentiment (all bearish).

  • Trade, don't guess, define risk and remember that discipline must always trump conviction. Good luck Yo!


R.P.

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