Inflation is Still the Biggest Theme in the New Year

Turning the Calendar Does Not Change the Trends

Yesterday we did the resolutions, got those out of the way. Now we can move back to the markets in real time. By this I mean right now. I recoded a video yesterday for our clients, which you can see here, laying out my thoughts for the new year. The biggest take-away is that the turning of the calendar does not mean all that much. Sure there are some quirks in the first few days of trading:

• Fund manager records start over from zero. This is a brutal business and there is very much a “what have you done for me lately” vibe to it. The manager who was up 50% last year now has to live up to that mark this year. Last year was last year, what else do you have up your sleeve?

• Taxes become a bit of a consideration. If you are sitting on a big gain, selling in January pushes the tax bill to next year. Me personally, I don’t take the taxes into consideration. No, I don’t want to pay a dime more than I have to but paying taxes means you are making money.

Aside from these two items, not much changes with the turn of the calendar. The trends that were in place on December 31, 2020 are still in place on January 4, 2021. There is no need to make more of it than that. It would have been nice if the year got off to a better start, but one day is really only important to day traders. But, it is good to get thoughts out there. It is going to be a big week for economic data. The data is backward looking so not all that helpful, but the media will report and the public will think it is important so let’s pay attention to it and how the market reacts. So far the global data is mixed. In the US, the Manufacturing PMI came in ahead of expectations and higher than last month but Construction Spending missed estimates which called for a month over month decline. Truthfully, at this point, investors probably want to see the economic data come in worse than expected which would increase the odds of the $600 stimulus payments being bumped up to $2,000.

Speaking of stimulus payments. The initial checks are hitting the accounts of the people who are eligible and my anecdotal report is that they are being spent in two places:

• retail - the small mall near my house was crowded all weekend.

• bitcoin - the cryptocurrency traded over $34,000 this past weekend. Perhaps with equity markets being closed for three days, some people took their “free” money and bought bitcoin?

I am still firmly in the camp of “if you give people money, they are going to spend it.” This is likely to lead to higher inflation. So far, investors seem to agree, with inflation expectations spiking from the March lows.

It may not show up in the official government measures of inflation such as CPI, but it is showing up in the numbers that matter to consumers. Here is the price of wheat over the past year.

How about corn? We use a lot of high-fructose corn syrup in this country. This chart looks nearly as good as the one of bitcoin.

I could go on and on but the point is, all of these are themes that I have been writing about and talking about for months, they are not new for 2021 and they are not likely to change in the near-term.

What does this mean? To me, it means that investors are going to have to stay with equities in order to protect their purchasing power as the prices that we pay just to live our lives continue to move higher. Aside from equities, bitcoin will probably continue to work in an inflationary environment and gold will become more interesting again. In fact, commodities as an asset class are beginning to outperform the S&P 500. This does happen from time time to time. The last time was in the period from 2002 to 2011.

By the way, the best debates on social media are between the bitcoin fanatics and the gold bugs. They are both dogmatic in their views (a terrible trait for investors) and they generally think the other person is flat out dumb. Highly entertaining. I try to keep an open mind. I just want to own what is performing the best. Here is bitcoin relative to gold over the last two years…you can decide who is winning the debate (hint: bitcoin is the numerator and gold is the denominator and the line is what you get when you divide the two prices), I have already made my bet and I continue to make it ever two weeks.

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