Stalking a Bear or a Windmill? Commodity Prices Surge, Inflation Trade Gains Steam

Is it a bear or a windmill we’re stalking?

You may find yourself asking that question as the equity markets drift higher seemingly oblivious to a myriad of negative news.  Classic commentary such as “the market climbs a wall of worry” or “the trend is your friend” are being bandied about with increased regularity.  Of course, these sayings are useless when the bottom falls out of the market but for now they appear reassuring as they add to the overwhelming feeling of complacency pervading the equity markets.

In the interest of  remaining open-minded and having a strong desire to avoid Don Quixote’s fate, I will offer the following analysis that could buttress a case for continued equity price support. 

Instead of relying on hackneyed phases and static commentary let’s focus on the building strength of the inflation trade.  Yesterday, the FOMC minutes were released with the following headlines… 

FOMC Minutes Released: Fed says economic activity expanded at a moderate pace in early 2010, inflation is likely to be subdued for some time

Fed Minutes say if economic outlook worsened or trend inflation declined further, “extended period” of low rates could last “quite some time” – Reuters

Read complete FOMC Minutes  

 The Fed clearly feels inflation is of no concern. Apparently, all FOMC members with the exception of Hoenig are unwilling or unable to read commodity price charts.  Several key raw materials are experiencing impressive price appreciation as seen in the following charts…



Crude Oil:






If this commodity price surge continues then conceivably equity prices could continue to grind higher as often happens at the beginning of an inflationary period.  You may notice, I did not include a Gold or Silver price chart in the above group.  As you will see below, Gold and Silver prices have yet to hit a new high and will need to do so for the inflation trade theory to be legitimate.  






About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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