Upwards we go

Macro Perspectives: Mon 17 May 2021

For those who are concerned about stocks because of the hot inflation data that's rolling in, they must not be listening to the Fed. The Fed has told us that they see inflation as transitory, and they will let inflation run well above their target of 2%, until they believe it to be sustainable (key word).

If we believe this gameplan, we should be betting on an inflation storm scenario, because the Fed will be slow to respond to inflation. Only after the Fed panics and gaps interest rates higher to kill inflation, will they crush economic growth and asset prices (not anytime soon). Until then, the price of almost everything will continue higher.

With that, this quick dip in stocks was a gift to buy. The dip looked shallow in the S&P 500 cash market, but in the futures market, the peak to trough decline was a solid 5%.

And remember, it traded right into support that represents the Fed intervention that turned the stock market around last year. It's a significant trend, and it remains well intact (especially after the aggressive bounce from the lows over the last 24 hours of the week - a 3.5% bounce).

Another market with a significant trend, and bounce, is oil.

This trend from election day remains intact after a week where oil became the global focus. The next time we see crude oil dominate the global news might be $100 oil - could be this year.

Lastly, let's look at the dollar.

The dollar continues to chop around near the lows of the decline that was triggered by the Fed "bazooka" response in March of last year. When you increase the money supply by nearly 30% in one year, the value of your dollar against stuff becomes less.

For some assets, that adjustment has already happened, quickly.

However, to this point the decline in the value of the dollar against other currencies has been orderly. When will the dollar run off of the rails against other currencies? Probably when it becomes clear that the administration will ram through another $4 trillion in spending, in the face of clear economic strength and inflation pressures.

That could be the catalyst for the market to enforce a penalty on the excess.