Global Macro Commentary

Cyclical recovery and commodities have dominated the news since Q1, but prices have experienced a near collapse during the past month; this is a very drastic change in market sentiment. My take on the chain of events impacting market sentiment this year is as follows: (i) Fed/government props up market via historic stimulus/bailout, (ii) inflation fear prematurely turns into hyperinflation fear, fueling risk-taking, (iii) stocks recover and green shoots sprout everywhere, (iv) an optimistic and inflation-fearing Fed/government prematurely indicates plans to roll back historic stimulus/bailout, (v) hyperinflation fear turns into deflation fear, curbing risk-taking, (vi) stocks sell off and green shoots are put into doubt, (vii) ???. As for subsequent chain of events, I expect the Fed/government to realize its premature mistakes and eliminate any doubt of economic recovery (while at the same time implementing much needed additional fiscal/monetary stimulus). Consequently deflation fears will dampen and risk-taking will resume. As for timing, I expect the Fed/government to act before the current stock sell-off gains serious momentum (so pretty soon). It is interesting to note that despite the drastic sell-off in commodities during the past month, the dollar index has not moved all that much; the current currency devaluation trend is still very much in play.

Dollar index: 9-month (this chart gives me comfort that commodities prices are currently oversold)

Silver: 6-month (back to 12.80! BUY!)

Crude: 6-month (down $14 since last week’s scandal; could hit 55 but 60 seems to provide strong support)

Treasuries: 6-month (breaking out; rates have room to go lower while commodity prices (and inflation expectations) recover)