Weekly Hard Assets Insights
By David McAlvany

A Confluence of Factors

The Federal Reserve’s FOMC meeting this past Wednesday made one thing abundantly clear. In the face of a rapidly reflating economy and increasing inflation, for now, the Fed’s heels are firmly dug into their ultra-accommodative policy stance. The Fed’s position is based on the view that a hot economy and rising inflation are “transitory,” and therefore, in this instance, these two factors should not be met with the typical policy response of tightening via higher interest rates and a reduction of stimulus. The Fed has been extremely consistent in choosing to look beyond what they see as temporary reflationary impacts in the wake of an unprecedented pandemic.

Given their stance, the next few months may be poised to significantly test the Fed’s conviction. We already have the five-year breakeven inflation rate hovering around a ten-year high in the 2.5% range, and an array of rapidly rising prices everywhere from industrial metals, agricultural commodities, energy, lumber, and housing prices. Just this week, Dr. Copper tested all-time highs and Goldman Sachs came out with a note arguing for the continuation of the higher commodity price trend.

Goldman strategists believe we are in a new commodity super cycle, and now anticipate a broad 13.5% increase in commodity prices for the next six-months “with risks to the upside.” In that six-month time frame, they specifically expect $80/barrel oil and new all-time highs for copper. In the case of oil, Goldman goes so far as to predict that over the next six months we will see “the biggest jump in oil demand ever,” a demand increase of 5.2 mb/d.

If prices and CPI prints continue to rise, along with a hot economy, they will likely impact higher future inflation expectations that will feed into and fuel higher actual inflation. March CPI was already higher than expected at a 2.6% year/year increase, and according to ING Chief International Economist James Knightley, consumer prices will continue to rise and could gain about 4% year/year by May. With all this in mind, the next several months should be extremely interesting, and could put the Fed squarely in the hot seat for a real test of resolve.

Meanwhile, earnings season continues to go well. With 60% of companies having reported, 86% of reporting companies have beaten earnings estimates. According to FactSet.com, if that 86% beat rate holds, it will mark the best quarterly result since the company began tracking the data in 2008.

The rate of companies beating estimates is a big story for this earnings season, but according to a Bank of America report out this week, inflation is “arguably the biggest topic during this earnings season, with a broad array of sectors (Consumer/Industrials/Materials) citing inflation pressures.” BofA reports that the number of “inflation” mentions on company earnings calls has increased more 300% year/year. This over 300% increase is by far the biggest spike in the recorded series dating back to 2004. The second biggest increase in year/year mentions was just over 100% in the period preceding the Great Financial Crisis.

The most intriguing aspect of the BofA report is that, historically, the number of mentions leads CPI inflation by about one quarter. The companies reporting inflation pressure this earnings season have cited everything from all forms of commodity and raw material costs to energy and transportation costs. In addition, companies have mentioned anticipated wage inflation pressure. Companies are reporting that their efforts to hire and retain workers are losing out to boosted unemployment benefits and government stimulus checks. An increase in wages is seen as the only way to entice needed employees back to work.

The next several months promise to be fascinating as a number of key issues play out under the close scrutiny of all. Surging stock prices and all time highs, a strong economic recovery theme, a top-notch earnings season, and a Fed that insists that all concerns are “transitory” all set the stage at present. These factors are inspiring an unparalleled degree of across-the-board blue-sky market sentiment measures, and stoking even greater future sky-high expectation in perpetuity.

The next several months may turn tumultuous: all this bullishness in one corner will be facing the challenger in the other. That market challenge looks to come in the form of record-high valuations, the typical market seasonality rolling over into the “sell in May” summer down months, all while we may have an eruption of cautionary inflation signs flashing throughout the economy. If significant inflationary evidence mounts while the Fed’s ultra-accommodative position is dug-in, expect tension and a market wrestling for resolution. Any way you slice it, it should be an interesting summer.

As for weekly performance, in the precious metals space, the yellow metal was down 0.57%, silver was down 0.81%, platinum was off by 2.26%, while palladium was the standout again in the space, up 3.44%. The HUI gold miners index took it on the chin, down 5.29%. IFRA, the I Shares US Infrastructure ETF, was up 0.20%. Energy commodities were higher on the week. Oil rallied 2.32%, while natural gas prices were up 3.90%. Oil services stocks (OIH), improved by 3.70% on the week. The CRB Commodity Index was up 1.89%. The Dow Jones US Real Estate Index ended the week up 1.06%, while the Dow Jones Utilities Index was nearly flat at 0.11% higher. The dollar staged a strong late-week rally and finished up 0.47% on the week. The yield on the 10-year Treasury was up 7 bps.

Enjoy the weekend!

Best Regards,

David McAlvany
Chief Executive Officer
MWM LLC