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Weekly Memorandum 4/27/2020

Equities are up nicely again in the pre-market to start the week after posting small losses last week. Two weeks ago, we stated, "It looks like the equity rally could go on for a little while longer. Ideally, we see a secondary low form over the next few months that is higher than the lows formed in March." This continues to be our stance, as calls for a "retest of the lows" seems to be the position of a significant majority in the market. Coupled with the Fed's liquidity injections, these have been the main catalysts to drive the market higher. We definitely aren't out of the woods yet, but the longer we rally, the less likely a retest of the lows becomes.

In other markets, Crude Oil is down big again this morning, currently trading around $13/barrel. Last Monday, prices went negative, and fell as low as -$40. We finally managed to articulate what occurred in this market from an economic perspective-- hyperdeflation. This is a very rare economic phenomena, and it occurs when demand for a unit of currency totally, completely, and overwhelmingly outweighs any sort of demand for a particular commodity. Yes, the world wants dollars that badly. It is essentially the opposite of hyperinflation. Basically, oil producers had to pay for their orders to be fulfilled. Keep in mind there has been a supply glut for years, but with the economic shutdown due to the coronavirus, the supply glut compounded, which led to the current situation.

This is a big wake up call for many, because if interest rates can go negative, as seen in Europe, and commodity prices can go negative, as seen in Crude Oil, we must be open to the idea that we are in a hyperdeflationary economic environment. Our work still suggests that eventually this will lead to stagflation, but for now, we must play the hand the market deals us. If other commodity prices go negative, say for agricultural products, producers will lose incentive to bring their goods to market. This would eventually translate to a supply-shock, and lead to stagflation. Last week, we posited that perhaps the Federal Reserve should purchase commodities to mitigate this possibility.

T-Notes continue to consolidate near their all-time highs, which suggests we could see negative interest rates at some point in the near-future. If we do see rates go negative, we could see Crude Oil prices actually stay in negative territory for more than a day. Gold and silver are down slightly to start the week, but find themselves in a favorable economic environment. The only problem is, silver needs to catch up to gold. When it does, it should be spectacular.

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