Good question JonnyR and one I’ve thought about recently.
Current US inflation is running at 2.1% which is a smidge higher than the 2% Fed target rate. Not really runaway inflation is it, however, from the perspective of the post GFC environment it is a pleasing number for the Fed and all the QE they’ve thrown at the problem. Deflation finally appears to be behind the US and is probably a signal that the plus thirty year bond bubble is going to poop itself in spectacular fashion.
Back to the question, by markets I presume you are referring to the US stock market and how it can push higher with the current romp in the bond market (the 30yr UST has moved from 2.3% to 3% in under a month, I don’t know the sigma on that move, but it would be up there with anything from the last twenty years). Bond traders who have been long are getting a lesson in euthanasia. Yet, the US stock market rallies despite the yield on the S&P500 (2.06%) being lower than a 7yr UST (2.14%). How is this possible when the fundamentals for stocks are stretched to similar market tops of recent memory with risk blowing out across the investment universe? I have two thoughts, one being markets are forward looking and pricing in Trump's aggressive tax plan which will boost post tax profits and bring decent growth back to the US (probably looking at +4% GDP in the next year or two). Secondly, all the money that bonds are spewing requires a home and what other option is there other than the US stock market? Commodities are one, look at dr copper and other base metals which are sniffing out higher demand in the not too distant future - the rumblings of cost-push inflation. USD is strong and I doubt other currencies are catching too much of the emanating bond poop. Can you think of any other options? USD, US stocks and commodities (non precious type for now).
All that dusted, these moves have been very extreme and I don’t delude myself to the thought that they can continue. However, there is crowding in the trade and when everyone is long or short one side of a trade, it’s usually time to pair profits and start to move to the other side.
Where is inflation? It’s not here yet, although, the market is in the process of creating it in anticipation that the Trump administration will kick it off with their policies. I grapple with the idea that inflation is a phenomena that just magically appears. Alan Greenspan has been warning about inflation for the past year and his interview from six months ago (link below) on inflation makes him look like Gandalf waving his magical wand. Despite what one thinks about Greenspan and his previous policies, we should give him credit for a lifetime of knowledge - he see's inflation coming without being able to articulate the drivers or delivery mechanism - that’s experience. We still can’t say for certain that inflation is here and we won’t be able to for sometime. All the ancillary indicators of inflation are present, every box is being ticked from markets through to government policies (lacking previously), we are on the cusp of Greenspan’s inflation and the markets know it.
The next question is guided towards gold and NST. If the markets are sniffing out and/or in the process of creating inflation, why is gold not performing? First inflation needs to be created, money from the bond market will chase the inflation drivers first - equity markets, commodities, profits, wages, tariff policies etc. Only when inflation kicks off higher than cash rates will gold come back into the wider investment community. When inflation comes (and it will) then gold will be supported and possibly enter a new bull market (needs to clear $1,340-50 everyone’s watching the same thing so if broken then expect fireworks). Regardless, we either have this continuation of recent trend where everyone's on one side of the trade: long USD, US equities and base commodities which will lead to inflation or we’ll pull back and gold will rally. Either Way, NST is sitting with minimal fundamental risk. If the the current USD trade persists than the AUD will move lower in correlation. NST will probably go lower due to sentiment drivers and definitely not because of fundamentals which are being heavily discounted by the market. This is all short term however, if current trend persists than Greenspan’s inflation genie will appear and that will be positive for gold and NST. You either short term trade and lament over every cent or you take a longer term view and position yourself slowly when opportunity presents.
Anyhow, that’s probably about a tenth of my thoughts on the subject. Fairly easy to see why I’m interested in NST without diving into greater detail about the company itself and a more detailed bottom up approach.
On a completely different subject, a few COT charts I've been working on which I believe will come in handy one day for calling the direction on gold. The commercials (who rule the market) are currently following their standard formula and decreasing their shorts. If gold gets back to ~$1,050 the trend in commercial shorts is clear and will be at previous lows. The probability of gold going lower than the $1,050 on current trend is very slim and those that rule the market are telling us so.
Even expect a nice bounce in gold this week...check out the rate of change in commercial shorts, second chart - positive means they're covering.
NST Price at posting:
$3.60 Sentiment: Hold Disclosure: Held
(20min delay)
