Editor's Note: Below is a complimentary edition of Keith McCullough's Early Look note to subscribers this morning. Keith lays out his expectations ahead of Powell's Jackson Hole speech and his outlook for the U.S. economic cycle (and his Long Inflation call).
"A hydra-headed monster, growing two new heads each time one was cut off…” - Nixon’s Council of Economic Advisors
THE BIG PICTURE
If my boy PE Powell describes US #InflationAccelerating that way today at the Jackson Hole thing, forget about two heads - I will shave my head bald by Monday morning.
While it’s nice to finally have some of the most lagging (i.e. late) Linear Econs at the Fed (Bullard) start to acknowledge what they should have since at least 2008 (i.e. that Fed policy to inflate asset prices inflates the cost of living of The People)…
The sad reality is that we may never hear a US President or “economic advisor” talk about inflation risks like they did in the 1970s… until we get the economic Stagflation of the 1970s…
Pre-PE-Powell speech (10am ET), both the FX and Bond market is seeing nothingness in the hole. If that changes, what I write on Monday will change. Unlike those who tell the market and the Fed what to do, I do what markets are doing.
Back to the 1970’s when guys like Nelson Bunker Hunt episodically became the richest man in the world by being long of inflation instead of calling it “transitory”…
“The first 6 months of 1973 witnessed the highest rate of inflation since the Korean War, an increase in consumer prices of +8% per annum, eclipsed late in the decade but a peace time record back then.” -The Story of Silver (pg 157)
In rate of change terms, that should make 2021’s first 6 months of US #InflationAccelerating sound somewhat familiar.
‘Oh, but KM, this is all about the pandemic and base effects and … pretty much everything you’ve called for on inflation since June of 2020 was right… but I don’t see that hydra-headed chart of Natural Gas this morning because I am looking at Lumber.”
Whatever you ask or tell me about inflation matters a heck of a lot less vs. what you do with your inflation/deflation view. Imagine you shorted Oil and the NASDAQ at last week’s higher-inflation-cycle lows? #ouchy
Contrary to popular Fed Fan Boy beliefs, the front-end of this debate isn’t on the tip of the tongue of a nothingness lawyer at the Fed who has bad nowcasts. Of course he can move markets in the short-term…
But it’s the term of The Cycle that really matters.
Never forget that. It’s the Inflation (or Deflation) Cycle that front-runs both the Fed and its late/lagging policy mistakes, not the Fed telling the bond and stock market what to do.
On front-running that “dual mandate” track of data (in the short-term):
- JOBS – weekly US Jobless Claims continued toward new Cycle Lows yesterday, but Powell is likely to wait on next week’s US Employment report to tell us what we already know… and on
- INFLATION – he’ll call it what it is (well past his “target”) but quell those concerns by calling out “uncertainties about the COVID Variant”… which should make his speech more dovish, on the margin, than recent Fed heads have been
If he does that, my big “call” (that I think I have made 51x this year) is that the US stock market will make new all-time highs.
What’s my “target” on that?
- SP500 = +1.4% from yesterday’s close to 4532
- NASDAQ = +1.6% form yesterday’s close to 15,184
I derived those price targets using a fractally optimized PE multiple of X divided by the spread between Powell’s dovishness and Bullard’s hawkishness.
And no, the 52nd all-time closing SPY high for 2021 doesn’t have to come today.
My Canadian crystal ball isn’t that good. But I do think whoever bought Deflation (i.e. Treasuries) and shorted the NASDAQ, Nat Gas, etc. is going to look dead wrong come another month-end markup on Tuesday.
Hydra or shaved-headed. Call it whatever you want. Being long of TRENDING inflation is where the Full Cycle Investing alpha’s been at since June of 2020.