Welch: Weak inflation still a mystery | Opinion

The list of market discrepancies this year for the Big Four — stocks, bonds, currencies and commodities — is growing longer in length.

Each week that flies by, several more scenarios rapidly unfold, leaving investors and traders, including yours truly, at a loss for words to explain or rationalize what some markets are doing and why they are doing it. Certainly, there have been other years laden with market deviations, but 2017 seems unusual in that regard.

Anyway, and for instance, one of the most mind numbing market discrepancies is the relationship between the stock market and the CRB Index, which is comprised of 19 different commodities that are traded on various exchanges such as grains, livestock, petroleum, metals and so forth. This year, the spread difference between stocks and commodities is back out to where it was in 1970, nearly a half a century ago.

According to katusaresearch.com, commodities compared to the S&P 500 never have been cheaper. Martin Katusa predicts “by maintaining our discipline and waiting for great deals during a market environment where commodities are the cheapest they have ever been to the S&P 500 that we’ll be rewarded with attractive buy prices and huge returns in the future.”

From Market Watch regarding small cap stocks by Mark Hulbert in a piece entitled “Opinion: Here’s the shocking truth about the Russell 2000’s P/E ratio,” he states “small caps now more overvalued today than at top of internet bubble or 2007 bull market peak.”

Hulbert is hinting that small cap stocks are a bubble. If small cap stocks are a bubble, what does that suggest about large cap stocks such as the S&P? And why the discrepancy?

This week, copper futures rose to levels not seen since late 2014. Historically, copper is a leading indicator for commodity prices.

The old saw “as copper goes, so go other metals and other commodities” has proven to be a reliable indicator for what lies ahead. But the only metal doing as well or better than copper is palladium.

And this week, palladium futures rose to a new 16-year high. In fact, the last time palladium prices were as high as they were this week was in 2001.

But in 2001 gold was trading under $270 an ounce, compared to this week where the yellow metal is around $1,292 an ounce. Talk about an enormous discrepancy.

Here is another head scratcher. In the fall of 2016, the spread difference between cattle and hog futures was less than $21.

But when the U.S. struck a deal with China, allowing them to buy American beef, the spread difference between the two markets quickly expanded to more than $49.00 in April. Cattle prices rallied on hopes China would buy U.S. beef, while hog prices remained weak because the U.S. hog herd was the biggest in history.

But starting in May the spread difference between cattle and hog futures narrowed, and in August it was back to less than $21, despite all the hoopla about China buying beef. Such a scenario is difficult to swallow if you believe that sales of U.S. beef to China is the biggest, most bullish story for U.S. cattle ranchers in the past 10 years.

In this newspaper column and my twice-a-day newsletter, I have mentioned several times since May that the recent strength seen with copper prices always has been a precursor to inflation and rising commodity markets.

But since opening my big mouth about such a prediction, there have been no signs whatsoever that inflation is on the rise or that other commodity markets are poised to head north. Inflationary pressures are nonexistent.

However, the CEO and chief investment officer for DoubleLine Capital, Jeffrey Gundlach, managing more than $100 billion, predicted bond prices will rise, leading to increased market volatility. His reasoning was based on the ratio of copper prices to gold prices.

He said, “When the copper-gold ratio is rising, it’s incredibly suggestive that something is going on that might be a little inflationary … It suggests to me yields are going to break out to the upside. The leg up in yields will be a catalyst of volatility in the market.”

What Gundlach is forecasting is exactly what I was forecasting in May. The discrepancy or time lag between his forecast and mine does not bother me a whit. I am simply happy to hear that someone agrees with me.

But, of course, since May, I have been 100 percent wrong about inflation, and Gundlach also been totally wrong. Then again, there is plenty of time left this year for both of our forecasts to be proven right.

Or maybe we are just wrong.

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