I have been reading a lot over the weekend. Most of the writers are calling for a market top but the burning question is: What is happening on inflation?
If the government and the Fed are not in agreement, there could be a different outcome to all these fears. This is such an important thing that most market participants underestimate the impact this can have on your portfolio. The fears are already translating into action as FIIs are withdrawing from emerging markets for fear of interest rates moving up and the dollar moving up. In India’s case, this selling is very fully being absorbed by the DIIs.
Inflation figures in the US are coming hot. If we extrapolate the October numbers, we can get an annual rate close to 11 pct. This is the most dangerous inflation figure we have seen since the Volcker period.
Take into account this as well: as of mid-September, there was about $550 bio remaining of the $1.9 trillion stimulus that was passed earlier this year that has yet to be deployed. There is another additional $1.2 trillion dollars that is already been approved. With all of this, the Fed is still buying $105 billion a month - meaning they are pumping that much more into the economy.
The Fed is still running policies as if we are in an emergency situation. There are already many schemes at work and new schemes are being introduced - meaning more fiscal spending that can compound to the rate at which prices are rising. The market is already reacting to these fears.
Gold finally looks like is breaking out of a downward sloping trend line. Gold has been always an inflation hedge. But despite the most feared inflation that we have seen in decades, gold overall is down for the year. This may have a lot to do with Bitcoin becoming more acceptable and is being perceived as a better inflation hedge than gold in an increasingly digital world. Having said that, this recent breakup in gold may have more legs and you can make more sense of it if you have a look at the longer-term chart.
Another commodity that has been really hot is copper. Unlike gold, copper is up on the year and that too by 25%. Copper plays a big and key role in renewable energy like solar wind and EVs. The upside case for copper is still very strong.
The producers of copper who know the supply/demand dynamics more than anyone, think prices have still got a long way to move up. The outlook for copper has never been better as the transition to clean energy will take centre-stage all over the world. Copper will command meaningfully higher prices to support more mine investment. The combination of rising demand and scarcity of new supplies will dictate large impending structural deficits, supporting much higher copper prices than previously expected.
I will be writing a more fun report tomorrow with a few anecdotes to highlight the Fed vs government position on inflation.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is setting up a hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.