After spending several weeks in neutral in a market that lacked directional conviction, the Asset Inflation Deflation Timer Model has moved from a "neutral" to an "inflation" reading. This condition signals that the model portfolio should orient itself to the risk trade, namely inflation hedge vehicles, such as shares of commodity producers, emerging market equities and TIPs.
The Timer Model depends on commodity prices as a leading indicator of global growth and inflationary expectations. The chart below of commodities as measured by the CRB Index, shows that commodities have been rallying in the face a recent bout of equity weakness, which is constructive for the "buy risk" trade.
The chart below of commodity prices compared to equity prices shows the relative uptrend in a more dramatic fashion:
Buffett talking bullishly about the economy
As another bullish sign, Warren Buffett has been talking bullishly about US economy and employment and Bloomberg reported that Berkshire Hathaway recently bought $4b of stocks for its portfolio [emphasis added]:
We have gone through, I don’t know how many recessions, perhaps 15 in the history of this country.
But, our system over-shoots periodically. And in this particular case we had a huge bubble. So the fact that there’s a correction after that should not be unexpected. But our system always comes back and it will this time. And it already is...
We will come back big-time on employment when residential construction comes back. And we way over-produced in houses. I mean we were forming a million or 1.2 million households and we were building close to two million residential units.”
Big surprise, we ended up with too many houses. We’re not going to blow them up. We’re not going to have kids start getting married at 12 or something. There’s a natural correction. The only way a correction takes place is to have households formation exceed new construction by a significant amount for a significant period of time.
We’ve had it for quite a while. And when you see these figures of five or 600,000, that means we’re sopping up housing inventory and I don’t know exactly when that hits equilibrium, but it isn’t five years from now I know that. And I think it actually could be reasonably soon.
A commodity-equity disconnect?
On Monday, stocks tanked while gold rallied past $1,600, likely on concerns about systemic financial risk in the US and Europe. In my discussions I was asked if there is a possibility of a disconnect between gold (and commodity prices) and equities (and the "risk" trade).
I would answer that question in a number of ways. First of all, while gold and other precious metals can be regarded as an alternate currency to the fiat currencies, the move in commodity prices has been broadly based. Consider, for example, Dr. Copper:
...or the agricultural commodities, as measured by the ETF DBA: