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All Price Changes Signal Deflation? Really?

09-16-2019

As I'm sure everyone expected, the attack on Saudi oil facilities over the weekend had an impact on many markets. Of course, oil (i.e., WTI) opened "only" about 10% higher because Trump said he would release oil from the SPR. Not that he cares what I think, but that was a huge mistake. He wants to try to limit any outcomes that would dent the stock market because he has attached his reelection (and ego) to it, but he would have been much better off seeing where the market wanted to price in the recent events before dipping into the SPR. Which perhaps means he has plans for retaliation, and thus couldn't contain himself about announcing his response.

Unrefined Thinking In any case, I think the significance of the weekend's events was not what they did to the price of oil, but rather the fact that it shows how geopolitical concerns have perhaps been underpriced in most markets. Turning to the stock market first, about an hour into the day the S&P was down about 0.2%, i.e., next to nothing, because it seems the people who buy stocks think that any news, regardless of how negative, is somehow bullish.

It's a little like how all the people who believe in deflation think that a 10% jump in oil prices is somehow net-net deflationary, as they regard price hikes in general as deflationary. The logic, if you can call it that, is that higher prices take money out of people's pockets. Therefore, that leads to less demand and potentially less GDP activity. They equate a weakening economy with deflation, with a depression being the most severe example. They forget that depressions can cause deflation, but rising prices by definition are not deflationary, they're inflationary.

Doubling Down on Downwards It just shows you how entrenched the mindset is as far as inflation versus deflation. It also illuminates how absurd the activity in the stock market is, but the lunacy will continue until it stops, whenever that turns out to be.

Turning back to the action, there was a small dip about midday, then in the afternoon the market just drifted sideways to higher and was off fractionally, as you can see from the box scores.

Away from stocks, green paper was higher, fixed income took advantage of the geopolitical angst and rallied, despite the move in oil. Bonds were probably looking toward the FOMC meeting, where the Fed will rationalize higher oil prices as tending to create economic weakness and therefore a great reason to ease. In the current environment, almost every news item is a reason to cut rates and bad news is essentially rationalized away, at least when it comes to stocks and bonds.

Looking for FOMO MOMO Turning to the metals, they enjoyed a bounce after the recent drubbing, led by silver, which gained 2.5% to a 0.75% move for gold. I assume a lot of wounded gold bulls won't trust this oil-induced rally, which in a perverse sense is exactly what might make it move higher, because it means folks who think that way will be waiting for a dip to buy. Usually, when enough participants are waiting for a dip, it doesn't happen. But as the talking heads like to say, the situation is very fluid.

Lastly, the miners had an OK day, but nothing special. Kirkland Lake in particular did well, thanks to updated drilling results at Macassa, but given the beating they've taken, today's action just shows that folks are still afraid of their own shadow when it comes to the mining sector.

Positions in stocks mentioned: long KL, long KL calls.