Below are Evergreen Gavekal's Likes/Dislikes for November 12th, 2021.
OUR CURRENT LIKES AND DISLIKES
Changes highlighted in bold.
Most financial commentators—and certainly the Fed—were caught off-guard by this week’s toasty inflation releases but EVA readers should not have been; this is a theme we’ve been on for at least a year. It’s interesting that the Fed has dropped its now widely maligned “transitory” characterization of inflation. Consequently, markets are preparing for the first Fed tightening cycle since 2018.
However, Wall Street is still largely buying the transitory notion but with a delayed reversal date. The assumption is widespread on “The Street” that the CPI will settle back to around 2% by the end of next year. In my mind, that’s a sucker’s bet. While certainly some supply bottleneck-caused price pressures are highly likely to recede, the long-term upward impetus caused by forces such as greenflation (the sharply rising cost of energy due to the Great Green Energy Transition); the Fed’s new main focus on employment vs inflation; its increasing politicization; rapidly rising wages, and surging rents, are likely to swamp easing supply chain constraints.
Moreover, on this topic, consider for a moment how far behind the inflation curve the Fed is presently. Its cumulative quantitative easings (QEs) that now amount to around $4 trillion since the virus crisis began are credibly estimated to be the equivalent of the fed funds rate being at -10% (note the minus sign). Accordingly, to catch up with the present inflation rate, the Fed would need to shrink its balance sheet and/or directly raise rates by an amount that represents 16% of de facto tightening. (The 6 percent current inflation rate plus erasing the prevailing 10% effective negative fed funds rate.) That is a level of monetary stimulus withdrawal that has never been done before, not even when Paul Volcker took interest rates from 10% to 20% forty years ago. The odds of this happening today are right up there with AOC switching to the GOP!
As a result, the Fed will be in a highly accommodative stance for as far as the eye can see; thus, fears of tapering/tightening negatively impacting assets like gold and copper are, in my view, greatly exaggerated. Perhaps others are waking up to this reality and that’s why the beaten-down gold miner ETF is up 6.4% this week while silver bullion is up 4.8%. Additionally, America’s biggest copper producer has been ripping higher of late.
My main point is to be sure your portfolio has plenty of inflation hedges. On that score, the correction in natural gas recently has created an opportunity to add producers of that critically important energy commodity as the Northern Hemisphere heads into a La Nina winter.
DISCLOSURE: This material has been prepared or is distributed solely for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Any opinions, recommendations, and assumptions included in this presentation are based upon current market conditions, reflect our judgment as of the date of this presentation, and are subject to change. Past performance is no guarantee of future results. All investments involve risk including the loss of principal. All material presented is compiled from sources believed to be reliable, but accuracy cannot be guaranteed and Evergreen makes no representation as to its accuracy or completeness. Securities highlighted or discussed in this communication are mentioned for illustrative purposes only and are not a recommendation for these securities. Evergreen actively manages client portfolios and securities discussed in this communication may or may not be held in such portfolios at any given time.