The Inflation Trade Back On?

B

BlueStreek

WELL, all those conviced oil was hitting 73, and the world was coming to an end I bet were sure surprised by this move in OIL & COPPER on a Friday no less, when equities were flat.

Notice the dollar Index 85ish, not 88ish.

Same fears exist, but new interpretation being established -- will see how much traction the trade gets.

But the Inflation trade may be back on: Short the dollar, go long commodities.

Why?

Europe instituting austerity measures, US spending like there is no tomorrow. This comparison will be highlighted at G-20.

Sunday, we could gap up, move over 80 on a breakout, and hit 83.50 next week---will see, but I imagine there are a bunch of shorts covering at 80, and then the buyers will be technically buying a breakout.

But the longer term implications of the inflation trade are what is interesting, (copper 3.08--hasn`t been there in a while).

Gold is a crowded trade, but copper and oil - much cheaper by comparison, could get some extended play if fund flows start going into these 2 commodities.

Pay attention to the dollar index, if we make our way back to 81, crude will be over 90.

Its not all about the Euro, its the dollar index that is the key, but I think the Euro benefits as well from this trade, and it goes farther than the experts think, back up to the 128-132 range.

It took a couple of days for the big players to interpret the Fed statement`s implications: but just maybe, the interpretation is that we need to put back on our old favorite trade: Short the US Dollar, and go long commodities like Oil & Copper.

The inflation trade has been put on on several occasions during the last 5 years, and fund managers have made a lot of money by initiating this trade.

If it goes back on, this is just the beginning, as this trade is not crowded currently, but fund managers are sheep, they exhibit a whole lot of group think, they attend the same conferences, discuss the same un-original ideas, and then pile into the same trades.

That`s one of the reasons trend trading can work so beautifully once the right instrument has been identified.

So watch for this trend over the next couple of months to see if it in fact exists, and then trade accordingly.
 

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The 30 year is yielding 4%. If the inflation trade was back on, wouldn't it be yielding a lot more, like 5%+?

Also, the dollar is in a confirmed bull market. What evidence is there that the long-term bull market is over?

To me this just looks like a short-term pullback in a long-term bull market. The Euro did this multiple times during its 7 year bull run, so did oil from 25 to 146, so did gold etc.

If you are right, you gain little because it will become clear if the breakout is for real within the next few weeks. Whereas if you are wrong, you will be short just before a major further leg up in the dollar. So overall I don't like this trade - fading an entrenched trend during a pullback in the trend is a bad odds play IMO.
 
mind you, if the trade is starting you literally are getting in on the ground floor.

The yuan revaluation, now opens the door for the other asian countries to let their currencies appreciate against the dollar, thus exporting the Asian inflation to the US.

I will play it long CL, it should zigzag its way to 100 by 2011, say March 2011.

Your thinking much more long-term cutten, the inflation trade often goes on for 6-8 months at a time.

But yes, we are in a treasuries bubble, and it is just a matter of time til investors start expecting a higher yield to take on the risk of susidizing the US debt.

So longer-term I think this play just gathers steam into 2011, 2012 through to 2015, but I am thinking much more short-term.

So right now you cannot really call it the "inflation trade", call it the "market adjustment risk back on trade" but longer-term yes, this is the inflation trade.

You want to own real assets, and short all paper based assets. The fed monitary policy along with the US Government`s propensity to deficit spend devalues the US Dollar.

And just like Greece, the market will demand accountability in terms of higher rates to finance our debt, which ultimately weighs on the US Dollar further.
 
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