Nothing is more difficult, and therefore more precious, than to be able to decide. ~ Napoleon
Good morning!
In this week’s Dirty Dozen [CHART PACK] we walk through competing arguments behind what’s driving inflation. We then look at rates and financial conditions, go through some Ag charts, talk US dollar positioning, and finish by pitching an Ag equipment stock as well as a renewables infrastructure play, plus more…
***click charts to enlarge***
- @MrBlonde_macro published a piece last week updating his thoughts on the current macro environment, valuations, near-term risks, etc… He also pitched an interesting SPX dividend futures trade. You can find the post here.
- Bridgewater recently published a report titled “It’s Mostly a Demand Shock, Not a Supply Shock, and It’s Everywhere” about, you guessed it, strong demand. They argue against the popular narrative that inflation pressures are primarily caused by COVID induced supply shocks. Rather, it’s the result of lots of stimulus cash, repaired balance sheets, and a tightening labor market + rising wage pressures that’s driving a historic wave of demand… demand that’s likely to be sustained.
Obviously, if true, this will have reverberating consequences for markets and policy makers alike. Here’s the link.
- One of my favorite econ writers Matthew Klein provides a balanced counterpoint to Bridgewater’s inflationary views. In this recent post (link here) he argues that the data suggests these inflationary pressures are temporary, writing:
The categories represented by the red columns constitute the overwhelming majority of consumer spending4 yet they collectively explain just 38% of the total increase in the CPI so far this year. The CPI is 5.5% higher in October than it was in January, but it would have been just 2.1% higher if the pandemic-disrupted categories—which normally contribute very little to changes in the total price index—hadn’t had such a massive impact.
- The inflation debate aside, the incredibly strong demand and growth we’re seeing in the US right now is real and unlikely to significantly slow anytime soon. Our US Growth Composite is just coming off record highs…
- Considering this backdrop, it’s quite unreal that real rates are at all-time record lows and financial conditions have never been looser…
- We’ve been Ag bulls all year and the charts in the space just keep setting up. Here’s a weekly of the Invesco DB Agriculture Fund (DBA).
- Variations of this chart have been floating around over the past week. It shows the correlation between fertilizer and agriculture spot prices, implying that the former is leading Ags to the upside.
- I’m keeping a close eye on the US dollar here. It’s been driven higher by an improving front-end yield-spread.
- But Spec positioning is getting quite crowded on the long side while DXY has only risen to the middle of its 7-year sideways range. We’re still longer-term USD bears (here’s our write-up explaining why) and this is obviously an important market to watch considering where inflation is at while the USD has yet to kick off its cyclical bear trend.
- Either the world is satiated with dollars which is why it’s not being pulled higher by positive relative performance or the dollar is gearing up for a big reversion higher. I think the former…
- I’m digging into a number of Ag and infrastructure/CAPEX boom plays this week. AGCO is one that caught my eye. The company manufactures and distributes agricultural equipment and related replacement parts worldwide and is based out of Georgia. It’s cheap. Growing top and bottom lines. And it’s a perpetual cannabalizer of shares. Plus, the long-term chart looks ready to rip.
- Another one I’m starting to look at is Infrastructure and Energy Alternatives, Inc (IEA). They’re a leader in the renewable energy construction space with strong growth, a large backlog, and solid balance sheet.
Thanks for reading.
Stay safe out there and keep your head on a swivel.
