Dear investors, friends and clients!
We would like to inform you that the Incrementum Inflation Signal has recently turned to falling inflation momentum!
This is a very interesting development, as inflation expectations have surged higher recently, particularly since Donald Trump’s acceptance speech. Market developments since the triumph of Trump are quite remarkable and it seems that the election clearly was a game changer. Bond yields surged higher and the US-dollar just made a 14-year high. US equity indices are rising to new highs despite the strong US dollar. On the back side of these developments, precious metals have been losing ground.
How can the reversal of our inflation signal be squared with these market developments?
Our inflation signal is forward-looking! When the signal switched to rising inflation in March, inflation was not yet a big issue in the markets. Meanwhile, the election of Trump and the GOP winning both houses potentially clears the way for major stimulus which likely will foster inflationary developments down the road.
The current situation is often compared to the 1980s, when economic growth was revived under the Reagan administration. Reagan’s expansion from 1982 to 1989 was the greatest, consistent burst of economic activity ever seen in the US. However, there is a fundamental flaw in this comparison between the situations of Reagan and that of Trump. The Reagan boom took place AFTER the peak of inflation and yields! Falling inflation and falling interest rates provided a great framework for an upswing. This time around the opposite holds true!
The current upward momentum in yields has the potential to choke off the recovery or – perhaps even more likely – provoke havoc in other regions of the world (particularly in emerging markets or in the euro area). Especially countries or corporations which are relying either on low interest rates or on a low US dollar are vulnerable. Historically sharply rising interest rates and/or a rising US dollar often triggered financial calamities overseas. Repercussions for financial markets and the US economy would be highly likely.
Moreover, higher inflation rates might be very bad news for the US-economy, as rising inflation often preceded recessions.
We interpret the new Inflation Signal as a cautionionary sign and see an increased probability for a “risk-off” move, i.e. asset price deflation. As long as there is no obvious warning sign sent rom financial markets (especially US stock markets), the Federal Reserve will have to follow the direction of bond yields and increase their hawkish bias! We could imagine a sharp reversal of this move after an eclipse of US dollar strength and a spike in equity volatility in the coming months.
As long as this momentum – higher US yields accompanied by a stronger US dollar – continues, we are concentrating on positions for EUR-Inflation! We have reduced our positions in mining equities and implemented stop loss limits on all other inflation sensitive asset classes as well as increased short EUR positions.
If this scenario plays out, watch out for great entry points in precious metals and gold and silver mining stocks in the coming months!
Mark J. Valek & Ronald-Peter Stoeferle
Partner & Fund Manager
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Veröffentlicht am 28. November 2016