• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

Fat Tail Daily

Investment Ideas From the Edge of the Bell Curve

  • Menu
    • Commodities
      • Resources and Mining
      • Copper
      • Gold
      • Iron Ore
      • Lithium
      • Silver
      • Graphite
      • Rare Earths
    • Technology
      • AI
      • Bitcoin
      • Cryptocurrency
      • Energy
      • Financial Technology
      • Bio Technology
    • Market Analysis
      • Latest ASX News
      • Dividend Shares
      • ETFs
      • Stocks and Bonds
    • Macro
      • Australian Economy
      • Central Banks
      • World Markets
    • Small Caps
    • More
      • Investment Guides
      • Premium Research
      • Editors
      • About
      • Contact Us
  • Latest
  • Fat Tail Series
  • About Us
Macro Central Banks

The Inflation Trade Is Unwinding — The Inflation Surge is Over For Now

Like 0

By Greg Canavan, Wednesday, 23 June 2021

A common argument for low bond yields has been ‘But the Fed is buying so many and holding them lower. That’s clearly not the case…There are two other charts I want to show you that indicate the inflation surge is over for now…

US markets fell sharply on Friday. The Dow lost 1.6% while the S&P 500 declined 1.3%. The NASDAQ fared better, falling 0.9%.

The Wall Street Journal explains the reason for the selling:

‘Policy makers had signaled Wednesday that they expect to raise interest rates by late 2023, sooner than they had previously anticipated. Sentiment waned again on Friday after Federal Reserve Bank of St. Louis leader James Bullard said on CNBC that he expects the first rate increase even sooner, in late 2022.

‘The Fed has faced more inflation than it expected, and policy makers need to be nimble, he added. But it will take several Fed meetings to organize the debate over tapering its bond-purchase program, he said.’

What’s going on?

I’ve been warning my subscribers that a correction is likely. Not that we’ve even got one yet. Global markets, including the Aussie market, are at or very close to all-time highs.

The reason for my concern is that ‘everyone’ thinks inflation is back. Rising inflation means prices of everything, including shares, go up, right? That seems to be the thinking.

The problem is, we are not in a period of rising secular (long-term) inflation. Rather, my view is that we have been experiencing a period of ‘reflation’ driven by massive fiscal and monetary policy in response to COVID. Add to that significant supply chain disruptions, and the short-term effect on prices has been extreme.

But it’s a reflationary effect, not a shift to a structural inflationary environment.

But prices are rising, you say. So, what’s the bloody difference!

Well, put simply, reflation is transitory inflation. Without ongoing government support, the global economy will shift back to a disinflationary/deflationary stance.

And we might be at the early stages of such a shift now.

Although having said that, there is no need to get too carried away with any particular viewpoint. When faced with uncertainty, humans create narratives to try and make sense of things. More than likely, these narratives are wrong. But they make a good story, so we stick with them anyway.

So keep in mind this whole inflation/reflation/deflation argument is just an attempt to tell a story about an unknowable future.

If I’m right about the reflation story, you’ll see the global economy start to slow, and stock markets move lower into the second half as shares price in this weaker economic environment.

Of course, much of this viewpoint depends on the actions of policymakers, especially the Fed. Right now, the Fed is responding to the inflationary narrative and making murmurs about raising rates in the distant future. That’s enough to spook the market.

But, it’s only very early days. Markets haven’t even put in a decent correction yet.

So, to see where things are at as we approach the halfway point of the year (yes, 2021 is nearly half done already!), let’s look at a few charts.

One of the most important is the US Dollar Index. After looking like it could break down to new lows just a few weeks ago, it has surged higher in the past few sessions.

It’s obviously in response to the Fed’s recent language on the removal of support. The question is whether a new upward trend is underway.

As you can see, after peaking in March last year, the dollar declined sharply. It made a low in January this year and has been bottoming for the past six months.

A rising dollar means one of two things: An outperforming US economy (and relatively higher interest rates) that sucks in global capital, or a financial market deleveraging as speculative capital exits the market.

One is bullish, the other bearish for asset prices. My guess is that as the Fed makes noises about tightening, the market sees this as bearish for the economy and asset prices and are unwinding speculative positions.


Optuma

Source: Optuma

[Click to open in a new window]

As I’ve mentioned a few times previously, the bond market never bought the secular inflation argument. US 10-year bond yields peaked at the end of March at around 1.75%. On Friday, they finished the session at 1.43%.

Falling bond yields indicate a slowing economy and/or falling (not rising) inflationary pressures.

A common argument for low bond yields has been ‘But the Fed is buying so many and holding them lower’. But if that were the case, and the Fed was supporting the market, their recent announcements should see yields heading higher.

That’s clearly not the case…

There are two other charts I want to show you that indicate the inflation surge is over for now…

First, copper. It’s down around 15% from its highs. Granted, it’s had a massive run since the March 2020 low, and a correction shouldn’t be a surprise. But it will be worth keeping a close eye on in the next few months. A break below support around the $4 area would suggest a deflationary environment is unfolding.


Optuma - Copper Down 15%

Source: Optuma

[Click to open in a new window]

And then there is the Aussie dollar. It fell to its lowest point in Friday’s US trading session since December last year (see chart below). The Aussie is a great barometer for global economic activity. Like US bond yields, the Aussie peaked in March at around 80 US cents. It’s now below 75.

A little bounce here wouldn’t surprise, but it looks like a shift in trend to the downside.


Optuma

Source: Optuma

[Click to open in a new window]

Finally, let’s look at gold.

Gold sold off with all the other ‘inflation-sensitive’ assets. It went from nearly US$1,920 an ounce a few weeks ago, back down to support at around US$1,770.


Optuma

Source: Optuma

[Click to open in a new window]

Interestingly, real long-term yields in the US have declined while the gold price has corrected. This is an unusual occurrence. Gold normally rises when real yields (nominal yields minus inflation) fall.

This suggests a buying opportunity for gold.

Best,

Greg Canavan Signature

Greg Canavan,
For The Daily Reckoning Australia

PS: One thing I didn’t mention is Bitcoin [BTC]. It dropped to US$29,000 at one point in recent trade before rising back over US$30,000. I suspect a buying opportunity is brewing here too.

All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

Greg Canavan

Greg is the Investment and Editorial Director of Fat Tail Investment Research and Editor of our flagship investment letter, Fat Tail Investment Advisory. Over the last 20 years, Greg has developed a unique investment philosophy that combines value fundamentals with technical analysis. The result is a portfolio solution that’s consistently beaten the market and embraces one key idea: that you don’t have to take big risks to make big returns.

Greg also runs the Fat Tail Capital Solution model portfolio, which is currently only available as part of the Fat Tail Alliance.

Greg’s Premium Subscriptions

Publication logo
Fat Tail Investment Advisory
Publication logo
Alliance

Latest Articles

  • OpenAI and Microsoft Divorce?: Why this could be good for you
    By Charlie Ormond

    While breakups are rarely pretty, this one might actually benefit investors willing to look beyond the drama.

  • Three Lithium Stocks in the Buy Zone
    By Murray Dawes

    Lithium stocks jumped this week, so Murray and Callum discuss whether this could be the beginning of the second boom in lithium stocks. They also discuss a fund manager that is recovering and looking cheap

  • Every Australian Investor Has a Stake in Mining
    By James Cooper

    With its deep pool of retirement capital, Australia is on track to become the world’s primary destination for resource markets.

Primary Sidebar

Latest Articles

  • OpenAI and Microsoft Divorce?: Why this could be good for you
  • Three Lithium Stocks in the Buy Zone
  • Every Australian Investor Has a Stake in Mining
  • The next wave of AI winners
  • Could the US People Repudiate the National Debt?

Footer

Fat Tail Daily Logo
YouTube
Facebook
x (formally twitter)
LinkedIn

About

Investment ideas from the edge of the bell curve.

Go beyond conventional investing strategies with unique ideas and actionable opportunities. Our expert editors deliver conviction-led insights to guide your financial journey.

Quick Links

Subscribe

About

FAQ

Terms and Conditions

Financial Services Guide

Privacy Policy

Get in Touch

Contact Us

Email: support@fattail.com.au

Phone: 1300 667 481

All advice is general in nature and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

The value of any investment and the income derived from it can go down as well as up. Never invest more than you can afford to lose and keep in mind the ultimate risk is that you can lose whatever you’ve invested. While useful for detecting patterns, the past is not a guide to future performance. Some figures contained in our reports are forecasts and may not be a reliable indicator of future results. Any actual or potential gains in these reports may not include taxes, brokerage commissions, or associated fees.

Fat Tail Logo

Fat Tail Daily is brought to you by the team at Fat Tail Investment Research

Copyright © 2025 Fat Tail Daily | ACN: 117 765 009 / ABN: 33 117 765 009 / ASFL: 323 988