Inflation fear pummels market while gold plummets

Abraham George Macro Views

Feb 27, 2021

With all that was happening last year, the economy was never completely shut down. At the depths of the health and economic crisis, the economy was still running at 64 % (pre-crisis capacity was 77%).

Now the economy is nearly back to the pre-pandemic levels. With that backdrop, the latest Atlanta Fed GDP model is now projecting an 8.8% annual rate of growth for the first quarter. That’s 3 times faster than the pre-pandemic Q4 2019 growth. Personal income was up 10% in January, (compared to Dec) thanks to the $900 bio aid package in late Dec and the extended federal unemployment subsidy.

The personal savings rate was 20.5% in January. That’s more than double pre-pandemic levels, and more than double the average US savings rate of the past 60 years. And real disposable income is 13% higher in January, than it was in before the pandemic. On top of all this we are getting almost another $2 trillion spending package. It should soon be passed by the senate with the help of the Vice President.

Now can we see why the treasury rates are rising? This is What Jeffrey Gundlach, the bond king had to say, “The ratio of the price of copper to the price of Gold is a great inflation indicator. Copper has rallied d a great deal while gold is slightly down. This tells us the US 10 year treasury should be at 2.25% right now.”

There is no doubt interest rates are moving much higher than most of us originally anticipated. The new amount of stimulus by the Biden administration will never be paid back. This is not bullish for the dollar. Further a declining dollar is inflationary. With the US dependence on global manufacturing, the cost of goods to US will have to rise.

Inflation and a falling dollar are bearish for the extremely over valued bond and equity markets. However a declining dollar is bullish for emerging markets and commodities. A situation of similar circumstances existed in early 1970’s when OPEC blocked oil exports to the US , sending oil prices up four fold in 1973. Inflation may not rise to the levels of 1973 as productivity gains and China could be a big dampener but there is no way of avoiding the coming inflationary pressures.

Equities

The sharp fall in the three major indexes is in line with the topping patterns that we have been pointing out. The patterns are more clearer in the Dow and Nasdaq now. With the break below 31,653 in the Dow any rally is a more safe sell for a move down to at least 29,850. The counter trend rally in S&P could have ended on Friday at 3859. We should see more weakness next week.

Bonds

The bond yields continued to rise and prices continued to decline. The active daily futures contract which is now for June declined to 156^08 a little higher than the 155 level we have been discussing since a long time.

The daily sentiment index has declined to 9 % bulls indicating the market may be too short. Any contrary move in prices and a decline yields should be viewed as counter trend. If prices really bounce 162^22 , it should provide strong resistance and an opportunity to sell again.

Euro

Euro should be supported at 1.2023 the low of Feb 17 before the next leg of the up move.

Gold

We have continuously kept a bearish outlook on gold contrary to the bullish view the market has maintained.

We recently even had a headline tilted “Don’t trust the gold rally”. Actually on Friday it broke through a nine month support at 1765. Any bounce in gold is still a sell and our downside targets are around the 1660 level.

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