by Sean Hyman
I know this is a hard one to believe, being that we are obviously in the middle of a deflationary period, but savvy institutional players are already starting to position themselves for inflationary times ahead.
Inflation! Have I lost my mind? Actually, no... Let me explain what I mean.
Former central banker Volcker (who is on Obama’s economic team) is prepping the world for deficits of $2 to $3 trillion dollars as the U.S. goes into one of the biggest spending sprees that (believe it or not) will make George Bush’s spending look like child’s play.
The financial world is listening. They’ve seen the leading indicators of the economy in the beginning stages of perking up. They’ve seen stocks stabilize and they’ve seen the down draft in commodities halt.
Commodities are pointing the way (ahead of time) to an inflationary environment that is coming!
In fact, some of the most convincing arguments for the coming inflation are what is transpiring in commodity prices lately.
For instance, the downtrend in gasoline futures has been broken and the cheapest gas prices are now behind us. This is largely due to the stabilization of oil prices of late. Oil appears to have found a floor around the $30 to $40 a barrel range. It may take some time to consolidate at these levels before oil and gas move materially higher, but money is made by being a bit preemptive about coming moves, rather than getting in them once things are obvious to everyone.
Another sign of inflation that has crept up on the radar screen has been the sharp move higher in gold prices. Yes, of course some of it has been brought about by the fears in the economy. However, much of the latest moves higher have been on the thought that the Obama administration will finally turn the tide for the economy and get us back to an “inflationary, growth” mode.
Gold recently broke a short term downtrend line or what technicians would call a “neck line” on a bullish inverse head and shoulders chart pattern. I think you will see gold easily run up to the $1,200 to $1.500 before the end of the year.
Another commodity that traders say has a PhD in economics has recently bolted higher in the short term too. That commodity? Copper. So why the PhD status among traders? Here’s why. Copper is a major commodity used in residential and commercial construction. It’s also used in electronics and automobiles among other things.
So since this commodity is so broadly used, investors watch this commodity as a barometer of strength and growth coming to the U.S. and even the world economy.
One thing you have to remember is that corporations ramp up their inventories just before they think they will need them. Therefore they buy just ahead of the demand increase by the retail and corporate market demands it.
Learn to think like the “forward looking” institutional investor and not like the retail investor… who is always “late to the ball game”!
So once copper starts the process of perking up, as it is now… it starts investors back in the offensive mode and away from the defensive posture in their portfolios. This change up in many institutional portfolios is beginning now before the retail investing public realizes that they should do the same.
You see, the retail public waits until they can see the economy turning around “in the here and now”. In fact, they even wait a bit after the economy turns up “just to be on the safe side”. However, this delay is what causes the huge differences between the forward thinking institutions that gain a better pricing and the sluggish retail investor who is historically always late to the ball game.
This “expectation” for inflation to resurface in the months ahead is also causing foreign currencies to begin to perk up and the U.S. dollar’s gain to slow down. This is yet another sign of a shifting that is beginning to take place across all markets even though it is still in the beginning stages.
So prepare yourself like the big institutional players are. Buy with cash, no margin. That way you don’t have to “time” the exact turnaround and incur a ton of margin interest while you wait. Buy broadly at first with ETFs or mutual funds. Don’t bottom fish in individual stocks because we are not at a place yet to where we know “who will survive” and “who will fall by the wayside”.