It is much easier to predict the past than the future, so you will have to forgive me if I am wrong about the following.
Oil is next year’s gold.
The world’s governments are energetically baking in lots of inflation for the future. Inflation versus deflation is the critical market call at the foundation of any investment strategy going forwards, so if you believe in deflation you are likely to load up on a very different set of instruments. If you are a deflationist then the only thing you really need to own is cash, because everything else is going to spiral down in price.
Deflation suggests to me that governments will look at the current catastrophe and suck their teeth and say, “Sorry folks, you’ve got to grind yourselves out of this mess, by the way we need more tax because we just can’t have these big deficits. Sorry about the cutbacks but we can’t go around doling money out, it doesn’t grow on trees you know.”
Nope that’s not going to happen. It is not happening. The opposite is happening.
That print-o-mania is not going to create deflation and let’s face it, it is better to eat a $100 loaf of bread and drink a $200 can of beer than be crucified on a cross of gold. But inflation is unlikely to be that bad. However, it will be higher than most people in Europe and the U.S. have experienced in their Generation X lives.
The market is currently quite convinced inflation is coming, which is why it is pushing gold to new highs and you don’t have to be a slavering gold bug to see $3,500 an ounce. Likewise, Bitcoin grinds through $10,000 to $12,000 without a murmur and it doesn’t take a massive belief in crypto to see it can head through $20,000 in the next 12 months.
All this is driven by more and more people seeing that inflation as inevitable.
Let’s keep it simple. Those government folks are now talking in trillions of dollars. Gone are the days talk of billions was the mighty max of dollar economics. Before the current crisis for the necessity of a financial unit in trillions to come up, you had to look to Turkey and Zimbabwe or countries where currencies had already been vigorously debased in the call of economic expediency.
So the market is flashing confirmation of the inflation call and I am in that camp. While deflation is possible, inflation is probable.
So if they take that as the base case, then commodities will go up in the coming years. First is gold and we are riding that right now. Next is oil. Then comes base metals and soft commodities.
The next key is timing. Timing is hard and if you crack the code of “what next,” it is harder still to get timing right because when the future seems obvious it feels likely to unwind in an accelerated Hollywood time scale, which it never does. These developments will take time and perhaps a few years.
If inflation is coming it will be oil that ramps next but that move will likely be in the middle of next year.
So the market play will…
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