Inflationary Angst is Here

Before I set out on my usual magna parabolum, I want to set the record straight in light of the magnitude and frequency of market commentary that would have us all believe that we are soon approaching a market bottom, all based on set after set of “Rules Based Investment Principles” that “have stood the test of time”. To that, I would say “Hogwash”.

Firstly, in countering the adage that says that “History may not repeat but it does rhyme”, in order for it to rhyme, there must be a reference point that allows one to seek out the rhyming partner. As it would pertain to today’s market backdrop, there is no single point in history that even vaguely compares to 2022. Literally nothing rhymes with gargantuan sovereign debt levels, egregious supply chain shortages, and rising social unrest leading to disorder. In other words, there is simply no reference point from which to draw comparisons.

As much as I am a stock market historian and gold market enthusiast, I do not see myself as a soothsayer. However, many of the popular bloggers and podcasters would have us believe that that they have the “secret sauce” paving the way for outsized investment success but what is so important to remember is that there are few investors alive that were in the trenches in the 1970’s or the 1940’s or even the Roaring ‘20’s. I entered the investment industry in 1977 but was spared the horror of the 1973-1974 bear market. The closest I got to that wealth-destroying period of high inflation and contracting economic activity was by listening to stories from veteran brokers that survived it and from the looks in their eyes and tremolo in their voices, it was a very nasty time for all of them.

So, when I read the pomposity with which this New Generation of “influencers” offer breathless, table-pounding “analysis” on the outlook for stocks, when one pulls back the curtain and peers into the control room, the objective of the narrative is to increase market share (“followers”) rather than delivering accuracy. My point is this: Do not follow any given narrative in managing your investments; all investors, no matter how good, experience drawdowns but the experts that will take YOU down are the ones that are never wrong.

I sent subscribers an email alert this week that pointed out the danger in getting “too bearish” but after the Thursday-Friday rout in everything except gold, it sets up the potential for a particularly interesting triple-witching event next week and underscores the title of last weeks missive “Career Suicide: Never try to Second-Guess the Fed”. Everybody is trying to leap-frog their competition in identifying another March 2009 or March 2020 bottom but why that is a flawed strategy is that both of those bottoms were engineered by a “friendly” Fed. There is no “friendly Fed” here in 2022 and until “official” inflation rates as reported by the U.S. government hit their target of 2%, there is no impetus for anything resembling a Fed “pivot”. The current “wink-wink-nudge-nudge” narrative that says the Fed will continue tightening until “something breaks” fails to include the possibility that the member banks (‘the club”) like JPM and GS that OWN the Fed may decide to cover their shorts far earlier than the “something breaks” event. As the late George Carlin would tells us “It is one big club and you and I ain’t in it!”. The “club” covers shorts early then goes long into the “something breaks” event. If you doubt this, remember Election Night 2016 when the market was down massively into the Trump victory? Carl Icahn came on CNBC the next day chortling smugly how he and his “boys” bought the S&P futures in staggering size during the wee hours of the morning and summarily launched the next major upleg of the 2009-2022 bull market. That was “the club” at its privileged best exercising their Divine Right of Market Manipulation” with absolute dexterity and unabashed aplomb.

I started the June 10th missive on Thursday evening before the dreaded CPI number hit the tape and was almost forced to scrap what I had written over the past two days. What I found absolutely staggering was the action in the Crimex gold pit. The very second the number hit the tape at 8:30 a.m., the algobots sprang into action and trashed the price down to $1,826.50 because the highest consumer price index reading since 1981 is obviously bearish for an inflation hedge metal, right? Then, to add insult to injury (for everyone that got stopped out of their long positions), over the next two hours, gold put on a USD $50 reversal closing out the week at USD $1,875.

I was speaking to a fellow newsletter writer on Friday afternoon that absolutely hates gold and silver right now. He was lecturing me as to the myriad of reasons why Millennials (he is one) and GenExers (he is soon to be one) are avoiding the precious metals. After we exchanged barbs a few times, his “knockout punch” was that gold cannot do well when the Fed is battling inflation to which I replied: “Then why is it up 2.56%year-to-date?”

Had the new wave of youthful investors been able to allocate as much as 10% in gold, the major benefit would be anything but financial but rather educational as they pounce upon the learning curve of bear market navigation in the manner of a drowning man lunging for a life preserver. Instead, they are mired in recency bias, continually begging for a Fed “pivot” such as they received in March 2009 and March 2020, both of which fostered the now-famous “BTFD” trading mantra that worked beautifully as long as the Fed had their back. The golden life preserver fulfilling its role as a financial rescue asset floats alone and unused by generations of investors that only know about bear market idiosyncrasies from old books and retired brokers and that, as they say, is a damn shame.

Gold bullion appears to be forging an important low here in the month of June with July being one of the top three months of the year for seasonality which sets up a reasonable chance of a tradable rally in both Senior and Junior Gold Miner ETF’s (GDX/GDXJ). I suspect that we are entering the phase of the cycle where the blue chips that dominate the Dow Jones Industrials and the S&P 500, currently in “correction mode” will join the NASDAQ and the crypto names in full-on “bear market mode”. When this current outperformance by the blue chips crumbles (as we saw last week), we suspect the pre-programmed alogbots will begin gravitating to “that which is working” and because the oil trade has become a crowded theatre, they are going to accelerate their portfolio weightings to gold and other risk assets that should elude the clutches of the Fed’s anti-inflation claws which includes the mightily-asymmetric uranium trade at the forefront.

The difference between a truly tradable bottom and a bear trap lies not in the lip service of the CNBC Talking Heads but in the undisputable actions of a few million traders. Irrespective of the level of percentage decline, the 2008 and 2020 lows were “deep correction” lows, not the nature of the lows of 1969, 1974, or 1982, which were actual “bear market” lows, characterized not by CNBC trotting out shopping lists of “bargain buys” but rather Daily List Parades of “stocks to avoid”. Since the 2009 lows, contrarian strategists have flaunted their avant-garde investing process such that every pullback was populated with the gaggle of highly vocal and colourfully visible cheerleaders using dour retail sentiment numbers as buy signals. That strategy only works in bull markets that are insulated by a friendly Fed. In bear markets – and I mean real bear markets – buying the dip does not work because it is a defacto violation of a primary trading rule which is to “Never average down by adding to a losing position.”.

There is a final reason why the current softness in stocks has more legs and since a picture is worth a million keystrokes…

This discussion of “angst” carries different meanings for different people. The vast majority of investors are experiencing the feeling of abandonment now that the invisible hand of Fed intervention and interference supporting stock prices has gone invisible. Gold investors like me are concerned that the most bullish set-up for any inflation-sensitive commodity in history failed to launch it into the collective embrace of a new generation of investors. However, there is not enough angst out there to create the pervasive sense of impending doom which typifies market bottoms. We may be there in gold; we are nowhere close in stocks; we are light years away in achieving Fed’s 2% inflation target.

I close the weekend missive with a comment on volatility. At the start of the year, I concluded that the most predictable event would be a sharp rise in volatility and used the UVXY:US as my proxy for volatility and as my portfolio hedge for 2022. I exited the position with a 30% gain in April but given the magnitude of the decline, I was surprised that it failed take out the 52-week highs near USD $39. The reason, as it would turn out, is that declines that are disorderly tend to cause a sharp spike in volatility but an orderly one such as the one in which we currently sit do not trigger spikes. I am watching closely for an opportunity to replace the position and will advise subscribers in due course.

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