Weekly Market Pulse: Where’s That Confounded Boom?

The US economy is still stuck in the stall its been in since early spring. Sometime in mid-March everything just seems to have gone into suspended animation. Interest rates and the copper/gold ratio stopped rising. Real interest rates (TIPS) stopped rising. The US dollar started falling. But nothing has fallen so far as to warrant concern about a double-dip recession. And nothing has risen far enough to warrant any enthusiasm about future growth. Inflation expectations did continue to rise a while longer but have recently started to fall back too even as the inflation data itself continues to at least look hot. The economic data has recently been disappointing but not incredibly so. In short, we’re stuck in the middle, not good enough to be on the verge and not bad enough to be on the precipice:

Clowns Bears to the left of me!
Jokers Bulls to the right!
Here I am stuck in the middle with you.
Yes, I’m stuck in the middle with you,
And I’m wondering what it is I should do.
It’s so hard to keep this smile from my face.
Losing control and running all over the place.

Just because I chose to quote a 1970s song doesn’t mean I’m in the camp that believes we’re on the verge of a rerun of that decade that was so bad in so many ways. No, inflation does not yet seem to be much of an issue despite it getting so much attention lately. Inflation expectations, as measured by the TIPS market are still within the range they’ve been in since 2003. Closer to the top of the range than the bottom but in the range nonetheless. And the dollar, which really deserves most of the blame for that inflationary period, is still in the range it’s been in since 2015. Closer to the bottom of the range than the top but in the range nonetheless.

Will the dollar finally break down from here? There does seem to be a sizable contingent that believes so – that is at least part of the rationale for holding Bitcoin – but there aren’t many betting on it yet. Positioning in the futures markets remains wildly neutral with no big one-way bets against the dollar. If it does finally break down, I would expect to see the trend followers jump in quickly though so a little more down may mean a lot more down. That has implications for investors obviously, most prominently in the real asset side of your portfolio – commodities, gold, and real estate. It also has implications for the US economy and the rest of the world too, especially emerging markets. EM economies have always been boom and bust, the boom part coming when the dollar is falling and capital is looking for a new home, the bust coming when the dollar is strong and capital is heading for safer climes. As for markets, a falling dollar is generally associated with foreign stock outperformance and rising real asset prices.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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