What Deflation Feels Like
After some back and forth overnight, we wake up to an S&P that is indicated to open some 11 handles higher than Friday’s close. One can question the reasons behind this incredible six year run since the 667.00 low in March of 2009, but what you can’t question is the resilience of the broader market. Clearly, there have been some great stories over these last six years, but despite negative and unprecedented headlines too numerous to mention, we find ourselves within shouting distance of an all time high. I grow more and more impressed with each passing day; I also become more frightened. Impressed for obvious reasons, but frightened because the level of complacency the BTFD culture has spawned is at record levels.
For quite some time, I have believed that our true enemy is deflation. For much of 2014, the loudest voices in the room were calling for rates to rise. Many called it the no-brainer trade of a generation. It was my contention that quite the opposite was in store. Today we have 10 year yields either side of 2.00%. To support my deflation thesis, we have crude oil trading at the lowest levels we have seen since April 2009, copper at 4 year lows, and The Baltic Dry Index rivaling only the New York Knicks on the futility scale. The BDI is on a 30 day losing streak and is also trading at multi year lows.
So what does all this mean for the broader market? Well, up until now, it has meant nothing at all. The Federal Reserve can fly their own “Mission Accomplished” banner, at least when discussing the U.S. equity market. But in my opinion, at some point something has got to give.
Since the October 16th low, the S&P has made a series of higher highs and higher lows – most impressive indeed.
This morning on CNBC’s Squawk Box, Ron Baron made the case for the market to double over the next 10 years. Time will tell. However, earning’s season opens with Alcoa after the bell today, I think things are about to get very interesting.