One thing I love about being a in the markets is you develop and idea, and then apply and you are almost immediately told if you are right or wrong (or too early or too late). GLD/TLT has been such a good trade, I am surprised its managed to be as weak as it has this year. Down 26% from the highs, and down 8% this year.
This has indeed focused my mind. What could have changed in markets to drive such a move? I like GLD/TLT because it fits in with the political world that I see, and which continues to be nationalist, populist and inflationary. If anything the politics is getting more populist, not less so. But markets have not reacted to this. I look at 30 year Gilt yields, and with the elevation of Andy Burnham to Prime Minister in waiting, I would expect yields to spike higher. But actually they have fallen.
My guess is that the markets have looked at Kevin Warsh, and decided that the US is going to run tight monetary policy, and this is going to be deflationary. So sell gold, buy TLT, and strong dollar. So here is EXACTLY where I differ from the markets. I don’t think central banks have any control over inflation, and never have. Central Bank independence coincided with an acceleration in globalisation - so they looked really good. Now central banks are trying to control inflation in an era of political populism. They are doomed to fail in my view - but it does excite me that Kevin Warsh is going to try and control inflation. This should drive the next leg higher in interest rates and yields in my view. While I worry about gold, I should mention I am happy with my bearish view on Private Equity. The Invesco Private Equity ETF is at new lows.
So the real mispricing in markets is now the 30 year bond market, which has rallied because they think central banks will bring inflation under control. I just don’t see it, although I understand their logic. Where we are now is the reverse of the bull market in bonds from 1980 to 2020. Then, after every rally, bonds would sell off, and everyone would be waiting for them to keep selling off - but instead yields went lower. Now, I think people are worried that with a new Fed, long bonds may rally again, but politics tells me they go higher. GLD is acting as it should, but I think TLT is going to trap some bulls. The next big move in 30 Year Yields should be higher.
Finally, in my last note, I used the CRB Food Index to say food inflation was not an issue. A very sharp subscriber pointed out this was discontinued in March. My bad, but when I had looked at other food indicators, they said the same. Urea prices are back at lows.
And wheat prices are subdued.
I still come back to the same conclusion. Either politics pushes up inflation despite the efforts of the Fed, or the inflation will undershoot in the short term, and Fed will seem more dovish sooner rather than later. That is, no need to chase recent move in markets. If you still like gold - you can hedge that position with a good short book potentially - but there are not many good short sellers left out there.
