January 12, 2018

Obvious Negative Factors Hiding in Plain Sight

This Friday ahead of the three-day holiday weekend, all three markets are ignoring the ominous warning signs that are building by the day. They're registering new highs, the Dow up better than 200 points, 228, closing over 25,800; S&P, NASDAQ both hitting record highs today.  To me, this is very reminiscent of 1987, in that the stock market is rising despite the fact that there are very obvious negative factors that are building and are hiding in plain sight.

CPI Number is About to Go Up

The CPI came out today and the headline number was in line, +.1%.  Year over year, though that's still a 2.1% increase in headline CPI. But, unless you're asleep, you have to realize that the number is about to go up. Look at what is happening in commodity prices.  Oil prices are up big today, over $64/barrel.  This is the highest oil prices have closed since November of 2014.  And, if you go 4 months earlier than that, we were over $100. So, if we re-trace that move, we could actually hit $80-$100 this year.  This is an ominous sign for inflation and it's also going to be a big problem for the U.S. economy. That means that headline number is going up.

Poor Trade: Dump Gold on Higher Inflation Numbers

Now the Core CPI, which everybody seems to look at, year over year, that one's only up .8%.  That's not going to last either. We're going to be over 2% on the Core, I think, in a couple of months. The number was up .3 for the most recent month - they were looking for +.2.  In fact - this is funny - right before the number came out, gold was up about $10 and the dollar index was down about .50.  Then the CPI number comes out, and the traders immediately see this inflation number that is higher than expected on the Core. What is their initial reaction? They dump gold, gold lost half its gains, and they bought the dollar.  The dollar gained about 2/5 of its losses.

Why Aren't Higher Rates Bad for the Stock Market?

Why is that? Why would people think higher inflation is bad for gold and good for the dollar?  The reason is, they think, "Oh, higher inflation?  The Fed is going to raise rates." So what?  The Fed has been raising rates - we all know the Fed is going to raise rates. But if higher rates are bad for gold, why aren't they bad for the stock market? The stock market should be affected by higher interest rates - but the market somehow thinks higher interest rates will be bad for gold.

Gift from the Traders

The reality is, higher inflation is great for gold.  That's why people buy gold.  It's a hedge against inflation.  So the more inflation, the more demand there is for gold.  The opposite of the dollar:  by definition high inflation means the dollar is losing purchasing power. So, if the dollar is losing purchasing power, that is bad for the dollar. And by the end of the day, that's exactly what happened.  Gold finished the day up about $16.  So if you bought that ridiculous move, a gift from the traders, you had a nice profit.

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