Inflation is the only antidote

Abraham George Macro View

Feb 17, 2021

Lately, we have been talking a lot on interest rates and rates are on the move. Actually rates are now back to pre-pandemic levels. But there’s a big difference between now and February of last year.

The economy currently is producing about the same level of output, utilizing almost the same level of capacity during the pre-pandemic levels. Household net worth is at record highs though unemployment levels have not eased. That should ease up as the economy opens up more and unemployment is expected to fall to 5.3% almost at the average unemployment rate of the past 50 years. The US economy is expected to grown at 3.8% annualized rate - a level hotter than the pre- pandemic growth.

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However corporate net worth is down, about $1.2 trillion from last Feb. US government net worth is down $2.2 trillion as if the end of Q3. This number will only continue to rise. So, what is the solution? Inflation.

Politicians and the Fed are trying to fix this gap by inflating the nominal value of assets and output. They want to inflate the cost of debt. It is happening right now, and there’s more of it to come.

One asset that should have done extremely well in this situation is Gold. Unfortunately, that is not happening. Will it happen? Eventually it might but currently the digital gold (Bitcoin) has caught the attention and imagination of the mainstream media and Bitcoin is indeed soaring.

Equities

The Dow has made three new closing highs in the past three trading sessions. The most recent two has occurred on negative breadth. The rally of Dow was not confirmed by the S&P. NYSE up/down volume figures were also negative.All these behaviors are compatible with an advance that is at or near the end of the up move.

Bonds

As expected the bonds continued to decline and it went down as far as 163^17. Our long advertised levels are down to 155.

While there is every possibility of prices dropping down to these levels, the daily sentiment index has dropped down to 15% from 45% . The last time the sentiment index was this low was in May 2018 and it coincided with an 8 day rally.

Major resistances hover around 167^25 but our bias is still for more downside pressure.

Euro

The rally in Euro from 1.1952 the Feb 05 low topped out at 1.2170. Yesterday’s sell off must have completed the downside pressure and the next move to challenge 1.2350 the Jan 06 high should start soon.

Gold

As expected gold continued to weaken . The disparity between gold and silver is at their lowest level in 11 weeks. So silver could show some weakness in the coming days.

The 1765 level is a significant and watershed level for gold. This is the third time the market is testing the area. 1765 was the high of May 19,2020 and the low of Nov 30, 2020. Yesterday’s low was 1770. I believe that there could be more weakness in gold before it could become a buy. There can be a snap-back rally from current levels.

The other factor is that according to the COT data large speculators are net- long to the tune of 46% of total open interest while commercial hedgers who take the opposite side of that trade are net-short 54% of open interest. I like to be on the side of commercial hedgers as they are more right than the speculators. So, a clear break of 1765 should position oneself for further weakness. A move to 1650 could be on the cards.

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