Back in 1979 through 1981, commodity traders on the New York Exchanges were having a party. Literally. Not only were buckets of champagne on ice delivered daily to the floor like bottled water, but the boards were lit up with rising prices in gold, sugar, coffee, and silver, among others.
Triggered by inflation, Interest rates had a deliberate rise to 20%. The oil crisis of that era, delinking to the gold standard, government overspending, and the self-fulfilling prophecy of higher prices leading to higher wages leading to higher prices, made The Fed(Paul Volcker) resolved to stop inflation.
Between 1970 and 1980, the US dollar was generally depreciating while the rate of inflation was generally rising. Between 1980 and 1985, the dollar was appreciating while the rate of inflation was falling.
Fast forward. Inflation rates dropped to below -2.0% in 2007 (deflation). By 2009 after the meltdown, the inflation rates crept back up to -1.0%. The Fed was in the throes ofQuantitative Easing and the stock market began to recover.
Presently, the inflation rate is back below 0% and the stock market is on new highs. TheFederal Reserve, although done with easing, is keeping rates at current levels. If we look at 1979 as one end of the rubber band with peak inflation and extremely high interest rates and 2015 with minus inflation and super low interest rates as the other end of the rubber band, we could make a case for a rubber band stretched to the maximum.
What does that mean? The Federal Reserve does not want to raise rates while the inflation rate stays teetering on deflationary numbers. I woke up on Friday thinking, “Be careful what you wish for”, Janet Yellen and the gang.
I realize that the idea of rising inflationary numbers with the soft commodities, some of which are near or on multiyear lows, (exception cotton which has retraced around 50% from the peak low in 2009 to peak high in 2011), seems farfetched. Especially, since low demand has a lot to do with the falling commodity prices.
Gold’s nadir was in 2005, zenith in 2011 and now sits at 5 year lows. Oil has taken the hardest hit, making new 15-year lows last week. The dollar’s recent appreciation of course, relates to low inflation, but mainly because of the US decoupling from the current global policy of “easy money” to one of a tighter and stricter monetary policy.
Going back to the rubber band, its elasticity can hold up for quite some time, so in no way am I suggesting it’s about to snap, (mainly because of the low demand in the current global environment). However, as one who has lived to see and trade through both ends of the rubber band, my point is, good to be aware of how the unexpected can create a domino effect, blindsiding the unprepared.
Here’s what seems like the worst case scenario. The Fed holds on a rate increase, commodity prices rise, for whatever unfathomable reason, the inflation rate heads back towards 2%; only then, the market begins to drop. The Fed therefore, has to raise rates, in essence putting a silver bullet into the already declining market and wham, back to a 1980 scenario just like that.
In the meantime, do like my old pals on the Exchange would do; go have some champagne and enjoy the ride while it lasts.
S&P 500 (SPY) Not too much to say really. Great week last week but still not near highs and no reason to worry about a huge fall in prices either. Subscribers: Positive Pivots in all
Russell 2000 (IWM) New all-time highs and high close with a runaway gap.
Dow (DIA) In good shape with room either way
Nasdaq (QQQ) 108 support and 109 point to clear
XLF (Financials) we need to see this clear 24.90 to really be in gear!
KRE (Regional Banks) Looks better after Friday’s pop and still in gear as long as it holds around 40.50
SMH (Semiconductors) 56.45 support and 58.00 nearby resistance
IYT (Transportation) 165.17 the high to clear and 162 area to hold
IBB (Biotechnology) Could have been a blow off top with huge volume on Friday. Let’s see if it confirms
XRT (Retail) New highs again so still looking potentially parabolic
IYR (Real Estate) Big move on the rate drop-not surprising
ITB (US Home Construction) Has to close above 27.83
GLD (Gold Trust) Could see a move to 116 provided 112 holds up
USO (US Oil Fund) 17.00 next hurdle with 16.00 the new support
XLE (Energy) Stuck under the 50 DMA and over the 10 DMA
XOP (Oil and Gas Exploration) Confirmed phase change back to bearish
TAN (Guggenheim Solar Energy) If this ever gets a decent dip-buy it
TBT (Ultrashort Lehman 20+ Year Treasuries) TLTs enjoying sitting over the 50 DMA-but they are close enough for us to pay attention to should it fail the 50 DMA
UUP (Dollar Bull) The 50 DMA comes in at 25.19
EWW (Mexico) Subscribers: Now, until it takes out the base its been trying to forming since December, will wait
EWG (Germany) Looks good over 30.00, only with an inverted hammer doji after the gap higher
EWY (South Korea) Over 58 should continue
RSX (Russia) 16.75 should be pivotal
CORN (Corn) Impressive pop Friday. However, have seen these before. Has to have some follow through
BAL (Cotton) Subscribers: Think this is bottoming so looking for an entry somewhere around 41.70-41.90