Not to brag or anything, but I like to think I’m pretty decent at my job.
Just like I said on Monday regarding the Colonial Pipeline hack, “the near-term result is shaping up to be a small media-induced panic, and that could cause gasoline futures to rise far further than longer-term supply and demand would otherwise suggest.”
Well, sure as the sky is blue, the uninformed masses lined up in droves across southern states to fill up not just tanks and gas cans, but storage bins, garbage cans, iced tea containers and even plastic bags with gasoline.
I quote the U.S. Consumer Product Safety Commission when I say, “Do not fill plastic bags with gasoline.”
Needless to say, gasoline prices are falling fast off of the recent spike, down nearly 4% today.
And while I really wanted to short the United States Gasoline Fund (NYSEArca: UGA), our production schedule and a busy day prevented me from getting a short-term alert out to the V.S. audience yesterday.
If you shorted it anyway (I know at least one reader who did), then good on you. While I think there might be some more juice left to squeeze from that orange on this cycle, I’d prefer to do it from a higher level.
Unfortunately, we’ll have to wait and see if we get one, as it settled today toward the bottom of its recent price range on increasing volume and volatility.
That combination of factors tends to indicate that a new short-term trend is developing.
However, with yesterday’s headline inflation number for the Consumer Price Index (CPI) coming in much higher than expectations at 4.2%, it’s hard to say whether or not gasoline prices will just re-inflate in the near term.
Time will tell. But no action here just yet.
If you’re reading Venture Society instead of watching the news, then you’ve known inflation has been here with us for a good long while.
That’s because we look at leading indicators for inflation — consumer price trends, commodity price trends, inventories, etc. — rather than a backwards-looking metric like CPI.
But since the Federal Reserve worships at the altar of CPI, we are beholden to it to craft our future monetary policy.
And unfortunately — perhaps also unbeknownst — for the Fed, the leading indicator for the U.S. dollar’s health is our twin deficits, which exploded last year in response to the deflationary effect that COVID-19 had on our economy.
Source: Deutsche Bank
What this chart implies is that over the next two years, the U.S. dollar will lose at least 10% of its value — based strictly on monetary supply.
And worse, that deficit can’t be made up by taxes alone.
Instead, the only two choices available to the U.S. is to innovate our way out… Or inflate our way out.
The Fed has wanted inflation for a long time… And boy, are we going to get it now.
The commodity inflation we’ve been talking about (and in some cases, experiencing) for months is just the start.
As we discussed last week, we’re going to see massive increases in housing costs.
And it’s only going to get worse as input costs for housing increase.
Source: Bloomberg, BLS
And with the top-level PPI coming out this morning in support of the broader inflation story at the same time initial jobless claims are improving, the potential for blowout inflation numbers remains strong through the rest of the quarter.
Source: Bloomberg, BLS
The way to beat inflation is, of course, to be long the things that are inflating. And fortunately, we’re already long copper and energy (via pipeline) stocks.
So as those continue to go up, feel free to take gains.
But we’re starting to see a period — likely after these COVID-19 base effects wear off — in which we’re going to have to be defensively positioned.
That time is coming, but despite this week’s market selloff, I don’t think it’s now.
In fact, it seems like a whole lot of hedge funds are hedging their small cap stocks at the bottom.
Source: Bloomberg, Seawolf Research
And if my hunch is correct, that means the next thing to inflate could very well be the Russell 2000, which is sitting near the bottom of its recent range and put in a higher low today.
So let’s take one more speculative quarter tranche in the Direxion Daily Small Cap Bull 3X Shares (NYSEArca: TNA), and see if the space can get back its giddyap before next week’s options expiry.
All the best,