June 05, 2018

The 3,000+ Meltup We Called at 2,600 is Now Underway

The inflation driven meltup has begun.

Back at the end of March we predicted that stocks would make a run to new all-time highs this summer. At that time, we predicted the S&P 500 would rise to 3,000. Bear in mind, stocks were trading at 2,600 at the time and everyone was predicting a total collapse to the low 2,000s.

Fast forward to today and we’ve broken up as expected. Not only that, but we’ve broken above critical resistance (red line).

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Are we going straight up from here? Of course not. But the big move has begun. By this time in August, the S&P 500 will be at 3,000.

This is not the “Black Swan” I’ve been forecasting since 2 of February 2018. It is "White Swan". It will mark THE blow-off top for the markets. Yes, I mean THE top will be in for years to come.

We all know what's coming afterwards.

Let’s talk about inflation.

Inflation enters the economy in stages. It's not as though the Fed begins to print money and POOF! inflation appears. It takes time.

The first stage occurs in the manufacturing/ production segment of the economy when you see producers suddenly paying more for the raw goods and commodities they use to manufacture/ produce finished goods.

One or two months or higher Producer Prices for commodities or raw goods is no big deal, but once you're talking 6-8 months of steadily rising Producer Prices it's significant. At that point manufacturers/ producers have to start raising the prices of finished goods or face shrinking profit margins.

At that point you move into the second stage of inflation. That didn’t happen in 2008 (the deflationary crisis removed the inflationary stresses). But it did happen in 2011. And it’s happening again now.

When the price of finished goods begins to rise, you're in stage 2 for inflation. Again, this can be temporary, but if you have multiple months of this, you're talking about a significant development.

Bear in mind, that phase 2 can happen in different ways. Management at companies don't just say "raise the price now!" Instead they can do different things such as charge the same amount for less of a finished product/ shrink the size of the container. This is called shrinkflation.

Another strategy is to start using cheaper/ lower quality raw goods (to reduce costs/ quality) while charging the SAME amount for the finished good. This too is inflation as the cost of the SAME item is MORE expensive, though it’s being masked because the QUALITY is LOWER and the price is the same.

You get the general idea.

It’s HERE that inflation begins to appear in the economy. However, it doesn’t become a SERIOUS problem until you reach the point at which the price of finished goods remain elevated long enough that people start to demand raises/ higher wages to maintain their living standards.

THAT is Stage 3 for inflation… the inflaiton that most people think about when they use the word. And it marks when it's fully seeped into the economy.

We are now hitting this stage.

We hit phase 1 back in mid 2016. We hit phase 2 in early/mid 2017. We are now hitting phase 3.

Average hourly earnings rose eight cents, or 0.3 percent last month after edging up 0.1 percent in April. That pushed the annual increase in average hourly earnings to 2.7 percent from 2.6 percent in April.

Source: Reuters.

You read that correctly… while the CPI and other inflationary measures show inflation only slightly above 2%, WAGES have been rising by over 2.5% year over year for months (since at least January 2018).

Put another way, “INFLATION” as most refer to it, is finally seeping into the economy. By multiple measures it’s already north of 2.5%... and the Fed is hopelessly behind the curve with rates at a mere 1.75%.

This is THE trend going forward for financial markets. And those who are well prepared for it will do extremely well. Remember, stocks LOVE inflation at first...

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This is not the “Black Swan” I’ve been forecasting since 2 of February 2018. It is "White Swan". It will mark THE blow-off top for the markets.

Best Regards.

Deo Talaverano.

Chief Market Strategist DHF.

George Town. Cayman Islands.