New Fed Inflation Tact: May not Upset the Hellbound Cart
The New Fed Show does not help my working premise: That the world is a better place than the US and the stock market is prohibitively overpriced and ready for a correction. It does help another part of my working premise which holds that the dollar will weaken and bonds will underperform.
The possibility of more inflation gives bonds yet another reason (YAR) to falter.
The dollar index, a measure of the currency against six developed market peers, fell 0.8% on Friday as investors weighed in. The euro rose to $ 1.1914. MSCI’s measure of emerging market currencies hit its highest level since early March, a sign of the dollar’s decline. The decline is not general, as it remains strong versus emerging market economies.
This dollar decline can be attributed to Treasury borrowing.
Longer-term Treasuries continued to sell in the aftermath of Fed Chair Powell's speech, pushing the yields on these assets higher, while shorter-dated debt securities rose in price, lowering those yields.
What may be the effect of the dollar's decline, and some wisps of inflation appearing on the investor's mental horizon?
Writes one Bob Kirtley, stock and options trader:
From March the US Dollar started to head south and gold started to head north suggesting that their inverse relationship remains intact....Interest rates are now expected to stay low for the foreseeable future and coupled with more Quantitative Easing we expect the US Dollar to decline even further in value. This decline in value along with the misery amount of interest on offer for our investment funds will cause investors to rotate out of currencies and into the field of hard assets, one of which is the precious metals sector.
Kirtley shows a chart that has the dollar trending down after a burst-up in the immediate path of the Pandemic Panic.
This activity could effect gold prices, although the following note emerges separate of this consideration: Pimpco says "Our base case is that rates remain relatively range-bound; this outlook, combined with our view that momentum and interest in gold causes the real-yield-adjusted gold price to move higher, points to gold still having more upside from here."
He is not always right - but he is not a bad model. And Warren Buffet may be seeing what others are seeing - US stocks out. His Berkshire Hathaway late Sunday acquired 5% stakes in five of Japan’s storied trading houses — Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co. and Sumitomo Corp. — in a wager valued at more than $6 billion, according to Bloomberg. Buffet had caught the gold bug a while ago and bought a position in gold-mining giant Barrick Gold Corp. It may not be about a marcro trend, and may instead be that these entities are cheap relative to the cash flow they generate and screen well using Buffett’s familiar investment criteria, David Fickling writes.
Barrons was pretty boring this weekend. A general sense is that August will play out boring as well. - B.B.
Materials Referenced
From https://seekingalpha.com/article/4371560-federal-reserve-action-to-propel-gold-and-silver-prices
Comments