This past December one of the Investment Themes that I outlined for the 2nd half of 2009 was “The Queen Mary Turning”…

My macro “call” for 2009 has had 2 parts – with two different durations:

1.       Re-flation = 1H09’ (vs. Q408 prices)
2.       Increasing Cost Capital = 2H09’ (on an absolute basis)

The first part of this call has to play out in order for the second part to – that’s why I made it a two part call. With the price of oil up for the last 6 weeks, consecutively, taking it +42% over that time period and +15% for 2009 YTD, we are already getting what we were looking for.

Obviously copper prices being +25% for 2009 to-date supports the same. As does the SP500 trading +8% so far for March to-date, reflating +5% from the November 20th low, and +18% from the March 9th low.

A lot of market pundits confuse the terms reflation and inflation – they are not the same thing. Reflation can occur on a day-over-day and/or a month-over-month basis. All reflation means is a sequential acceleration in the price of whatever you are measuring. I measure inflation on a year-over-year price change basis.

Issuing massive liquidity like the US Government has, in the end, will be inflationary. In between now and whenever we see inflation pick up on year-over-year basis (I think we could see that more obviously in Q1 of 2010), we’ll see 2-year yields on US Treasuries rise. They should effectively start discounting what it is that we are going to see on the inflation front, no matter how many Treasury bonds Bernanke says he’s going to buy.

At ZERO percent, rates in the USA are as low as they can go. The only place they can go from here (provided that we don’t turn this place into a Japan) is UP. Rates on 2-year Treasuries are already moving to higher intermediate term highs. An important line in the sand for 2-year yields is the intermediate TREND line at 0.88%. Trading above that line is where I’ll start to concede that reflation is running higher/faster. Trading below that line is where we should all be worried about deflation.

Queen Mary better turn higher, or deflation will have us all resorting to the unenviable investment position of having to pray. Reflation is the only way out of this mess.

Keith R. McCullough
CEO / Chief Investment Officer

Chart Of The Week: Queen Mary, Pray For Us! - queenmary