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Weekly Memorandum 8/3/2020

The Nasdaq and gold both touched all-time highs today, which definitely isn't bearish. Uptrends are characterized by higher-highs and lower-lows, and as a rule, markets trend. Silver is at multi-year highs as well, and T-Notes recorded their highest monthly close in history this past Friday.

The dollar has caught a relief bid in the last couple sessions. The concern we have, however, surrounds commodity prices, inflation expectations, and quantitative easing. This is because a lower dollar should eventually translate to higher commodity prices. Higher commodity prices would lead to increased inflation expectations, which are traditionally a function of interest rates. That is, if the inflation rate is 3%, interest rates usually match that rate.

If the Fed is engaged in QE-Infinity, and inflation pressures rise too much, it would cause stress in credit markets. A similar scenario whereby commodity prices rose in the early stages of QE unfolded coming out of the Great Recession, which now seems so long ago. But not long after that commodity rally, deflationary forces crept back into the picture and turned them lower basically for the following decade.

This is 2020 though, and if this year has shown anything, it's shown that anything is possible. The outlook for US debt was downgraded to negative by Fitch just a couple days ago. While the fiscal situation is spiraling out of control, we note that a falling dollar provides an opportunity to repay said debt with dollars that are worth less. Perhaps the central bankers haven't received the memo in the last 10 years-- inflation doesn't rise when rates are kept artificially low. If they want inflation to inflate the national debt away, let rates rise. The problem with this scenario though is that it would bankrupt many governments across all levels, pension funds, and many other powerful market entities.

The world is drunk on debt, and the hangover from it won't be fun. Best to start re-hydrating now.

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