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Inflation pressures are building again

Despite the big rally in equity markets, my preferred trade of long gold (GLD), short bonds (TLT) has continued to trade well.

I have been arguing that politically the idea of government austerity is no longer a winning policy (Rishi Sunak is likely to discover this the hard way). And increased government spending is inflationary, and negative for financial assets in my view. One counter argument was that US spending was beginning to dip after Covid. This is no longer the case.

While food prices have stabilised a bit, they remain at high levels, which for me keeps political pressure on to keep rates high.

There is no particular sign that unemployment is rising. ADP data out today is very strong.

Despite all this, and in contrast to 2010 as the US government began austerity and food prices were falling, investors are selling the GLD positions and buying TLT.

Weakening oil prices over the last year has eased inflationary pressures, but we are beginning to see US shale producers cut the number of wells drilled.

Reducing the number of wells drilled is not in of itself a sign of falling supply. But what is unusual is that this in happening without any build up in well inventory.

Buyers of TLT are living in the past. The world has changed, and TLT looks a good short.

Capital Flows and Asset Markets
Russell Clark