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Weekly Memorandum 11/23/2020

Equity futures are up nicely to start off the holiday week, as most markets will be closed on Thursday for Thanksgiving in the U.S. This comes after equities have spent the last two weeks or so digesting their gains following a run up to all-time highs. Sideways price action following a bull run like what was witnessed is perfectly normal and actually preferable to a market pullback. In any case, stocks are entering their most-bullish part of the year from a seasonal perspective.

Interest rates on Treasuries are higher a bit too, and this remains a key market we are monitoring very closely. Prices have held up thanks to QE-Infinity, but we are witnessing a battle between the free market forces of long-term cycles maturing in this market and the monetary tools of the Federal Reserve. It will be interesting to see how this unfolds as we enter the final stretch of 2020.

Rising rates are typically bullish for stocks, at least initially. A good rule of thumb is that rising rates are bullish for equities until the interest rates on bonds exceeds the dividend yields of the major market indexes. Nonetheless, the dollar continues to struggle, and we saw multiple agricultural commodities close out at multi-year highs this past week. All of these point to higher inflation in the months ahead. The nuance here is that this inflation is coming from currency depreciation, versus an actual increase in consumer demand. This means that stagflation is likely for the actual economy.

Precious metals were down last week, and their correlation with bond prices continues. Don't be surprised to see them come down if bond prices come down further too, as much of their rise over the past 2 years was in a deflationary environment. That is, precious metals rose with falling rates. So much for the "inflationary hedge" narrative that the gold bugs love to push.

Then we have the cryptocurrencies, which surged higher last week too. Bitcoin closed out at its 2nd highest weekly level in history, which is hardly a bearish development, while Ethereum and Litecoin both closed out at multi-year highs too. A new Mercator Letter was published yesterday, which included the analysis of a particular cryptocurrency mining stock that we like. A Mercator Crypto report will be published next Monday, November 30 as well.

Lastly, we want to wish a Happy Thanksgiving to our readers! We are thankful for your support and patronage.

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