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S&P 500 kept plunging into the close, with yields rising across the board – confirming the slide as much as tech weakness. With the White House playing the extraordinarily elevated inflation card with some finger-pointing for today‘s CPI, the drummed-up expectations are for a really hot number. Whether it outperforms market expectations or not, the inflation expectations of yesterday show the boat short-term tilting a bit too much one way – so, we may get a fake S&P 500 rally, a temporary reprieve that would be sold into.

Likewise, precious metals and commodities are positioning themselves for the price surge ahead. The long consolidation following the late Feb run-up is drawing to an end, and a steady upswing with the Fed talking a good hawkish game headwind is ahead. Not just talking, they would deliver on the next FOMC and would keep delivering until something in the real economy breaks. The yields trajectory including the yield curve would signal that, and I‘ll keep you updated in real-time as to the implications of the many open plays.

Let‘s quote from yesterday‘s seminal analysis laying out the medium-term prospects, including macroeconomically. Sure, the Fed will:

(…) deliver quite a few hikes, even the 50bp one at the next FOMC that‘s in the air, but how about intentions to shrink the balance sheet monthly by $95bn as well? Sounds like a bridge too – while the real economy is decelerating, it hasn‘t yet tipped into a recession – but looking at the 10-year to 2-year spread, we‘re past the inversion point (and I‘m not even bringing up select other spread which have inverted earlier already).

So, it‘s pretty safe to say we‘re in the countdown to the recession, and that‘s not a function of yields only but of oil prices too – practically doubling, and the real economy just keeps humming along? Gimme a break. Usually, it takes 12-18 months since the inversion for recession to arrive, but this time around, I think that 6, max 9 months is more appropriate an expectation.

For stocks, this means we‘re still going down until yields turn, which would be a replay of the safety trade. But the 60-40 model is dead, and in the inflation paradigm I‘ve been hammering since early Jun 2020, the themes would be rotations out of growth into value, and of course also out of cyclicals into defensives, those not cyclically dependent areas. I keep pounding the table for energy, precious metals, base metals, uranium, water, agrifoods, fertilizer, timber etc. Retail and consumer discretionaries would be hurt – but real estate not so much. I would though wait for yields to come down (which would mark a nice stock bear market bottom as well) before looking at housing twice.

Expect wild stock market swings – bull and bear markets lasting 1+ years that take you nowhere if you aren‘t picky about stocks allocation favoring real asset overtones. This is the era of inflation – make no mistake, the Fed won‘t break it, and the geopolitical consequences would soon drive inflation into double digits. Not even Strategic Petroleum Reserve (in place of that vaunted OPEC spare capacity?) record releases all the way to midterms would cushion it.

A few more thoughts on yields – let‘s take 10-year Treasury one now at 2.72%. As we approach, and cross that psychological 3% threshold, that would be a nice catalyst of more stock market selling (brace yourself, tech – I had been transparently a bear on you for a long time, but played S&P 500 as that‘s more of an interest to the audience). The short profits can keep growing, we aren‘t yet at the end of the ride. Precious metals, crude oil and copper are to extend gains, and break higher out of their current consolidations – the local bottoms have been made.

Enjoy and profit!