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We are officially in an inflation trade melt-up.

Everything that is an inflation hedge has exploded since late August. Gold is up 15%. Silver is up 48% (courtesy of the manipulators finally getting taken to court). Agricultural commodities are up 25%. Oil is up 20%.

Against this backdrop, stocks’ 17% rally becomes slightly less insane. That’s right, stocks are up 17% since late August. What happened in late August?

The Fed announced QE lite and promised QE 2 was coming. Almost to the day of this announcement, the US Dollar rolled over and dropped some 8% (it’s down nearly 15% since June).

gpc 11-8-1

In plain terms, we are entering an environment in which a US Dollar collapse has fueled inflation trade mania. By launching additional QE measures at a time other central banks have renounced additional easing measures (the ECB and Bank of England) or are actively raising interest rates (China and Australia), Fed Chairman Ben Bernanke has made it clear he is willing to trash the US currency.

Consequently, money is pulling out of Dollars and flowing into hard assets and other inflation hedges. The below chart plots the US Dollar (green) against Gold (yellow), stocks (black), and commodities in general (blue). This picture, details in stark terms the overall trend for markets today.

gpc 11-8-2

The most concerning thing is that there doesn’t appear to be any sign of this stopping. Emerging markets, which have lead the S&P 500 ever since the Financial Crisis began (during this recent rally, they bottomed in May while the S&P 500 didn’t bottom until July) are not only back to pre-Crisis levels but are a mere 8% off from their 2007 highs. It’s almost as though 2008 never happened.

gpc 11-8-3

Part of this is better fundamentals, but a lot of it is money flowing out of US equities and piling abroad. This is causing many emerging markets like China and Brazil to impose capital controls and other efforts meant to slow the inflows of funds.

Will this infaltion trade trend continue? It’s very hard to tell. I cannot believe China is going to let Bernanke get away with QE2. However, until China issues a response in the form of policy, we’ll have to go by the US Dollar for signs of what’s to come.

The below chart shows the greenback’s multi-year uptrend line (black) and support lines (green).

gpc 11-8-4

As you can see, the US Dollar is literally sitting on its multi-year trend-line. If we break below this, then we have support at 74. If we break below that, we have FINAL support at 72. Below that… well, we’ve NEVER been below that before. So PRAY we don’t go there now.

Indeed, if QE 2 succeeds in devaluing the Dollar below 72, then this triggers a MASSIVE Head and Shoulders pattern that forecasts a 50% devaluation in the greenback over the coming years.

gpc 11-8-5

If this neckline is violated, we’re in uncharted waters for the greenback and the US is in for a very, VERY rough time (think Argentina or even Weimar Germany). As I wrote this, the US Dollar was at 76. Going from 76 to 71 won’t take much, so keep your eyes here for signs of what’s to come.

In the meantime, the inflation trades dominate everything. So the best place for money is in commodities, especially precious metals (make sure it’s bullion, NOT ETFs) and agricultural commodities, as well as emerging markets.

On that note, if you have not already taken steps to prepare yourself for the inflationary storm that is coming, PLEASE DO SO NOW. It doesn't take much to turn a potential disaster into serious profits. And believe me, we are going to see an absolute DISASTER in the coming months. Those who do not prepare themselves in advance will lost a LOT... possibly EVERYTHING.

Don't be one of them.