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January 2021 Commentary

Source: Wikipedia

Number of Covid-19 cases in the US

Source: The New York Times

The Federal Reserve has been “printing money” to keep markets functioning, making credit easily available and bigger money supply and lower interest rates. But given current debt levels the Fed might really be running out of ammunition.

M2 Money Supply

Source: Fred St. Louis

M2 Money supply shooting up during the COVID-19 period due to “money printing”.

Causing their balance sheet to have a sharp increase as well. With such a massive debt load, interest rates cannot rise and the Dollar bear market must continue or equities will be at risk.

Federal Reserve Total Assets

Source: Fred St. Louis

With Fed stimulus and current economic conditions, a reflation trade has been the obvious trade for traders around the world.

Now let’s look at performances of markets since the pandemic began.

US Equity Market Performance since COVID-19

Source: Koyfin

Showing a successful V-shape recovery? Well clearly the stock markets are continuing to hit all-time highs on stimulus hopes.

US Equity Sector Performance since COVID-19

Source: Koyfin

Top 3 – Technology, Consumer Discretionary, Materials

Bottom 3 – Energy, Real estate, Utilities

These are sectors that tend to perform in the first phase of the business cycle which fits the recession recovery narrative.

US GDP recovery also confirming where we are in the economic cycle…

Source: Fred

The ISM PMI index which is a great leading indicator of the US economy is also above trend growth and accelerating like the GDP.

Source: Fred

A 60.7% reading of the PMI corresponds to a 5.2-percent increase in real gross domestic product (GDP) on an annualized basis according to the ISM.

Source: MercurialResearch

US Equity Industry Performance since COVID-19

Source: Koyfin

Top 5 – Clean Energy, Semiconductors, Retail, Internet, Tech Software

XLE as the worst sector performer while PBW doing well is interesting to note. COVID-19 led energy consumers to cut back on fossil fuels. Due to the use fossil fuels in the travel industry, cut back of travel has impacted traditional energy sources way more than cleaner sources. Not to mention the rising popularity of ESG as a whole.

Joe Biden still seems interested in increasing the stimulus checks and his American Rescue Plan is estimated to be around $1.9 trillion dollars.

Therefore, the play should be around a weakening USD theme which has been playing out well as it is being driven by massive money printing and supportive fiscal policy. With the stimulus and the post-Covid-19 economic recovery and increased consumer demand, we will be at the inflationary point where the purchasing power of the US dollar will drop.

With M2 skyrocketing, inflation expectations are sure to increase, a good macro driver for precious metals

Now let us look at how the dollar has been performing since we are looking at a dollar weakening theme.

DXY recently broke down from 9-year support levels and currently at a multi-year range support.

Source: TradingView

Although the fundamentals all point towards continued dollar devaluation, the technical and sentiment seems to be giving clues to a short-term correction. Taking a look at the CFTC COT report, the DXY is looking a bit too oversold which is in line with the horizontal support in yellow as shown in the chart. Short-term reversals due to short squeezes can be expected.

COT flip (Net Commercial Longs minus Net Commercial Shorts) data is at bottom 2% of all times.

Source: CFTC

Given the current macro backdrop, commodities are looking attractive right now, because it is a sector highly impacted by dollar strength. As commodities tend to respond to changes in the dollar's relative strength in international markets rather than domestic inflation pressures.

Looking at the S&P GSCI, it is looking to break up after 12 years. Looks like a commodity super cycle could be inbound. Price has already broken through both the 13 and 50 monthly EMA and attempting to break up of the 200 EMA.

Source: TradingView

Not to mention when looking at the GSCI to S&P ratio, commodities are looking cheaper than it was back in the tech bubble when compared to equities.

Commodity performance since COVID-19

Source: Koyfin

Top 5 – Soybeans, Silver, Corn, Natural gas, Copper

We like the commodities sector as our view is that incessant money printing will continue causing finite assets like precious metals and stocks to go up.

The commodity that caught our eye was Silver.

Silver is a way to bet on growing global industrial demand for metals which fit the narrative of an economy coming out from a recession.

Silver’s performance till date…

Source: TradingView

Silver to M2 ratio shows how silver is undervalued relative to money supply.

Looking at its log chart, such a beautiful buy signal can be seen from a technical perspective. Props to @badcharts1 for this chart.

Source: TradingView


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