“I couldn’t believe how fast people changed.”
- Jeff Booth
That’s a simple quote from a book that attempts to simplify the complex about Inflation vs. Deflation. I’ve cited it before and hosted Jeff Booth for a Real Conversation about it on @HedgeyeTV.
Booth’s book is called The Price of Tomorrow – Why Deflation Is The Key To An Abundant Future. There’s no question that The People win when you have the healthy kind of disinflation. We call it #Quad1 or Goldilocks.
#Quad1 in America in the 1990s was awesome. Between 1 the Dollar was strong, Commodities were in a bear market, and Real GDP Growth averaged +4.5%.
Back to the Global Macro Grind…
Fortunately I’m not an inflationista or deflationista. If I was, I’d write books instead of daily Early Looks. I wouldn’t make actionable calls on The Cycle or have any #timestamps. I’d be bored out of my mind too.
Now that we got paid on another bull market ramp for US Equities, it’s time to reset your gross and net positioning wherever you already hadn’t. Your #Quad1 Asset Allocations should have you positioning for Disinflation.
What’s Disinflation?
Per Investopedia, “disinflation is a temporary slowing of the pace of price inflation.” Per Mucker Full Investing Cycle manual, it’s INFLATION #slowing from its Cycle Peak.
As you can see in today’s Chart of The Day:
A) The prior INFLATION Cycle Peak call I made was in Q3 of 2018 at +2.64%
B) The DEFLATION Cycle Low Call I made was in June, or Q2, of 2020 at +0.36%
C) And now, my math says, INFLATION is peaking > 6.09% in Q4 of 2021
Instead of sounding intellectual on the matter, try getting those Cycle Turns right – then we can have a Real Conversation about understanding inflation vs. deflation in practical terms (i.e. making money on it).
If you get the INFLATION Cycle right, you’ll get big things like The Quads and Interest Rates right.
I’m much more “confident” that we’ll see 150-200 basis points of disinflation from the Q4 2021 Cycle Peak by Q2 of 2022 than I am about the initial rollover in basis points.
Why? Because Cycle Peaks are processes, not SAT test points.
I definitely had one of the lower SAT scores at Yale. So, if you feel like some of this Quad & Stochastic Nowcasting stuff is over your head, empathize with me trying to compete with AP Calc kids in 1995 in New Haven.
27 years later, I’ll bet my firm on my team’s score being closer to the target than any of theirs on the Inflation Cycle.
Intra-quarter, we employ a stochastic nowcasting framework that anchors on non-linear interpolation to relay ROC (rate of change) signals from individual FEATURES of the dynamic FACTOR model to the base rate.
Yep, I know. I did it again. I confused the English Lit majors, dentists, and hockey players. So, let’s not read the mathematical words and go back to the color coded Nowcast Chart:
A) From 6.09% or wherever INFLATION peaks here in Q4 (OCT was +6.2% CPI)…
B) Our current GIP Model Nowcast is for INFLATION to slow towards 5.73% in Q1…
C) Then slow faster, towards +4.22% by Q2 of 2022
No. Stop. It. Right. There.
I am not getting into an intellectual property debate about why the “level” of +4.22% inflation is or isn’t higher than the prior made up Fed “target” for “optimal” American inflation.
I am going to do something far simpler than that. It’s called executing.
WHEN matters a lot more than “why” when it comes to Full Cycle Investing. If I am right on Inflation’s Peak, then I think my #VASP (Volatility Adjusted Signaling Process) is already signaling the right things:
A) Lower Cycle Highs for Commodities (CRB Index)
B) Lower Cycle Highs for the prices of Oil and Natural Gas
C) Lower Cycle Highs for the UST 10yr Yield
You see, the 10yr Yield peaked right when #Quad2 did, twice. Unlike #Quad1 (where inflation slows and real GROWTH #accelerates), in #Quad2 both GROWTH and INFLATION are #accelerating, at the same time into Cycle Peaks.
Now you know why I haven’t written a book about this. Instead it took me 47 minutes to write this today.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.32-1.64% (neutral)
UST 2yr Yield 0.47-0.72% (bullish)
SPX 4 (bullish)
NASDAQ 15,104-16,060 (bullish)
Tech (XLK) 166.01-173.15 (bullish)
Consumer Discretionary (XLY) 198-212 (bullish)
Housing (ITB) 75.19-82.43 (bullish)
VIX 16.29-30.19 (bearish)
USD 95.54-96.79 (bullish)
Oil (WTI) 61.40-76.95 (bearish)
Nat Gas 3.21-4.77 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
