A Summer Rally’s Approaching – And Now’s the Time to Make Your Move

Shah Gilani|July 1, 2021

Let me make it really simple for you…

You should be more afraid of missing the continuing bull market in stocks than of a little (or a lot) of inflation.

Inflation speculation is dominating the news. And it’s here. That’s not something I think, it’s something I know. You know it, too. And you know that more is coming.

But the U.S. Federal Reserve can’t say that. In fact, Fed Chairman Jerome Powell’s been saying the inflation we’re seeing is “transitory” and that after supply-chain issues are resolved – and plants and producers get back into gear – supply will catch up with demand and inflation will disappear.

Don’t buy that inflated pipedream.

Inflation will rise; but the Fed also, despite what everyone else is saying right now, won’t start using quick and steep rate brakes.

You know why?

Because they can’t.

And if you listen to the media here, you’ll miss out on a huge leg up in the markets this summer.

Here’s what’s really going on, why the central bank chairman is saying what he’s saying, why some Fed Regional Bank presidents are saying something else, exactly what the Fed’s going to do, and most importantly, why you should pay attention to that fear-of-missing-out (FOMO) feeling in your gut.

Inflation Is Here

There’s no question, inflation’s here. April’s shocking headline consumer-price index (CPI) marker was 4.2% higher than a year ago – prompting a multiple-trading-session market freak-out. The May CPI was higher, registering a 5% increase year over year, and markets blinked, kind of.

Why the surprisingly muted reaction? I’ll get to that. But first, here’s more proof of rising prices.

Oil, as measured by the U.S. benchmark West Texas Intermediate (WTI), is pushing up to $75 a barrel. It was around $39 as recently as last July. Also from last July: Wheat shot up more than 100%, soybeans are up 75%, lumber, the big winner in the skyrocketing “soft” commodities group, shot up an insane 289%.

Sure, these hot commodities have cooled off – and are all down from their highs. But they’re going back up – which I’ll get to.

Meanwhile, housing prices are through the roof. As of March, the FHFA home price index jumped 13.9% on a year-over-year basis. Not cooling down for a second, even as home sales have been falling moderately, the median existing-home price for May jumped a record 23.6%, according to the National Association of Realtors (NAR). They say every region saw an increase and that year-over-year prices have been increasing for 111 straight months.

If you want more proof that inflation is here and accelerating, take a good look at your grocery bills. Fill up your car, truck, boat, or lawnmower. And good luck trying to buy a used car for a used car price; As they say in Brooklyn…

Fuhgeddaboudit!

But that’s all “transitory” Fed Chairman Powell claims, though I don’t believe it. Nor do the congressional representatives who questioned Powell on the Hill last week. U.S. Rep. Steve Scalise (R-LA) didn’t mince words when he confronted Powell in a House hearing last Tuesday. The fastest-and-most-sustained rise in prices in a decade amounts to an “inflation crisis,” Scalise said, while pointing to a poster showing that milk prices are up 5%, bacon prices are up 13%, gas prices are up 56% percent, and used cars are up 30%.

Powell’s response was that prices are not rising rapidly because of the combination of loose monetary and loose fiscal policy – but instead because the economy is springing back faster than expected. He said, “A pretty substantial part or perhaps all of the overshoot in inflation comes from categories that are directly affected by the reopening of the economy, such as used cars and trucks in particular. There’s sort of a perfect storm of very strong demand and weak supply due to the reopening of the economy.”

The Fed chair also said of hotel prices and airline tickets, “Those are things that we expect to stop going up and ultimately to start to decline as these situations resolve themselves. They don’t speak to a tight economy or the sort of thing that has led to high inflation over time.”

Now you can either believe the Fed chairman or your own shrinking wallets and purses. I don’t see the inflation we’re seeing, he’s seeing, as “transitory.” I see most of it as structural, and it’s going to get worse.

But that’s no reason to get out of the stock market.

Investors think they must balance their expectations for faltering capital markets as inflation rises and the Fed is forced to taper and then raise rates, against their fear of missing out on the market maybe rising as the economy continues to power ahead.

Here’s the Deal

Forget what St. Louis Fed Bank President James Bullard and Dallas Fed Bank President Robert Kaplan are saying; essentially that the Fed’s going to have to raise rates sooner rather than later because they see inflation through a more “hawkish’ prism. Forget that the Fed’s infamous “dot plot” chart shows more of the 18 Fed members who place their dots on the short-term interest rate matrix have plotted their dots up higher and moved them more to the left, meaning they’re more inclined to see the fed funds rate rising sooner rather than later.

Some Fed Regional Bank presidents like to see themselves on TV and make waves, and the monthly dot plot game is nothing more than a sideways view of consensus views at the Fed, which are constantly changing anyway.

The truth is the Fed’s not going to taper too much or raise rates much – because they can’t. It doesn’t matter if inflation heats up so much that bond investors start selling some bonds and rates rise because of that. The Fed’s not going to cause rates to rise because they know if they do, if they raise them too much or too quickly, they’ll do one of two things, or both…

They’ll kill the economic recovery, or crash the capital markets, both the bond market and the stock market.

If they do either of those things, or worse, both, their fix is, guess what? – lowering rates.

So why would they risk that? They won’t. They can’t.

That’s why your FOMO gut instinct is right on!

Stocks are going higher because rates, even if they rise because bond vigilantes drive them higher, which they haven’t been able to do since February, in fact, rates have been coming back down hard and fast, aren’t going to get high enough to kill the stock market rally.

And a little inflation, even a lot of inflation, if companies have pricing power, which they do have, and can raise prices which improves their profit margins and profits, will lift their stock prices.

This Is Where Your Opportunity Lies

Commodities ran up spectacularly recently because they were cheap and caught a massive momentum push higher as ETF investors jumped into all the commodity funds they could find, which caused the buying of futures, which make up most of those ETF underlying assets, which steepened the “contango” curve of those futures, which caused more buying as inflation was expected to get more pronounced over time.

In other words, this is a typical commodities “turn” where early-stage investment is met with shorting as some big commodities investors don’t believe commodities are in-fact heading into a “super-cycle.”

But, as rates fell, so did those commodities.

That’s really just the weak “long” hands being shaken out, as the new-to-commodities, thanks to ETF exposure, wannabe futures traders got shaken out after buying in all the way at the top.

That was round one. Round two is coming, that’ll be a bounce off the recent selloff lows, commodities that ran too far too fast will enjoy.

That’s about to happen, so now’s the time to reposition yourself. The bell for round three will be heard when even a few of the commodities that ran up and came back down get back to their February and spring highs. That wake-up call will attract the chasers, again, and a new “base” will have formed, which hard and soft commodities can consolidate on and move higher on.

While both soft and hard commodities will rally, weather, in the form of rain, will take some of the heat off rising grains and ag commodities, which I like and expect to consolidate and go higher, ore and metals like iron and copper will just move higher unimpeded by “good” weather or changing table tastes, or synthetic meats, or laboratory grown grain alternatives.

That’ll be when rates start rising, when the 10-year gets back above 1.65%.

That’s when we’ll see the real outlook for inflation and whether a real super-cycle is underway. At that point, if you didn’t pay attention to your FOMO instincts, you’ll be cursing inflation.

But I know you’re paying attention, which means you won’t need to worry about it.

My favorite play here is my favorite mining and commodities-based stock, Rio Tinto Group (RIO). There’s no need for fear here, just buy RIO and enjoy the ride and inflation.

Don’t fear inflation, fear missing out on the market’s next leg up. Which, by the way, already started.

Until tomorrow,

Shah