In Search of Inflation

by JC Parets  -  April 22, 2019

“What inflation?”

That seems to be the talk of the town these days.

Interest rates all over the world made new lows last month and have since then tried to start a recovery. We’re seeing this across the developed world in the U.S., Germany, the U.K., and Japan, among others.

Meanwhile, journalists at Bloomberg Business Week decided to put a dead dinosaur on the cover of the latest issue asking, “Is Inflation Dead?”

This isn’t about some silly magazine cover indicator or anything like that. I think we can agree that we haven’t seen much evidence of inflation in markets.

In bonds, for example, TIPS (Treasury Inflation-Protected Securities) remain relatively flat compared to traditional Treasury bonds. Precious metals and other proxies in that space continue to grind sideways. I talked about this lack of inflationary price behavior during a recent podcast with Craig Johnson, the chief market technician at Piper Jaffray.

Last week, stocks closed at new highs relative to commodities. Here’s the S&P 500 Index versus the CRB Index:

One-year comparison of the ratio of the S&P 500 Index to the CRB Index.

[Click to Enlarge]

How much cheaper can commodities get relative to stocks?

Whenever in doubt, zoom out right… Here’s the current situation from a longer-term perspective:

Long-term comparison of the ratio of the S&P 500 Index to the CRB Index.

[Click to Enlarge]

For those of you who’ve been reading my work for many years, you know how often these Fibonacci levels come into play. This reminds me a lot of the S&P 500 in 2015, in fact. Prices stopped right at the 161.8% extension of the 2007-through-2009 decline.

Is this time different? Or will we get a similar outcome? Have stocks peaked relative to commodities? Is it time for commodities to have their moment? Is that why momentum is diverging negatively in this chart above? Was that low last month in rates around the world, THE low? At least for now? Is it time for rates to rally along with commodities?

With all the jokes about inflation and dead dinosaurs on magazine covers, is it too much?

Comparison of the movement of benchmark interest rates around the world in 2019.

[Click to Enlarge]

This is what I’ve been thinking about over the weekend. Will this key Fibonacci extension level come into play, as it has so many times in the past? Will the market not care about J.C.’s lines based off rabbit reproduction math?

I look through thousands of charts, and this long-term chart of the S&P 500 versus the CRB Index is one of the most interesting I see out there. Some people will brush this off and carry on with their narrative. Others will dig in a little bit more and see if there is actually some rotation starting here.

Also, commodities can start to outperform stocks – and both can still rise. We saw that from 2003 to 2006, for example.

What do you think? Am I on to something? Am I way off? Let me know what you think!

The Answer You Seek

I just posed a lot of pretty specific questions. Fortunately, I can easily answer, “I don’t know!”

Say it with me: “I don’t know.” See how easy that was?

How come we never hear that in the financial media? Because they don’t want you to say that.

How come we never hear that from the sell side analysts? Because the institutional customer will just call another desk at another firm with an analyst that has an opinion, and they’ll get the trade and earn the commission.

As humans, we’re just not built for this. It’s hard to admit you’re wrong and move on. But the truth is that none of us know what’s going to happen next, especially in the market. So, to admit that you don’t know is not only OK, it’s actually fact.

I sat down with David Keller to discuss this very topic…

To wise investing,

J.C. Parets
Editor, Big Market Trends