You Have to Be Ruthless

This morning's GDP report arguably hinted at some early signs of dreaded "stagflation" in the U.S. economy, which of course conjures up images of the wage-price spiral from the 1970s. Each cycle is a bit different, however, and wages spiking is not yet a concern here.  

Instead, this time around the issue is whether the price action in some commodities this year may be an early clue about looming stagflation, given the pedestrian growth figures we continue to see in the economy.

Moreover, and perhaps of even more significance, part of the stagflation argument in this cycle would almost assuredly revolve around a decrease (or outright loss) in confidence in global (developed economy) Central Bankers, as they have routinely been exposed as being at the behest of markets in lieu of economic date and/or their mission statements. 

If that is the case, then commodities should do rather well and may very well be in the very early stages of that rotation into "real goods/real assets" as a way for investors to express their displeasure for most things fiat and paper. 

Commodities have a well-deserved reputation for being ruthless when they finally decide to move, which is part of the reason why those who have tried to fade the precious miners this year, for example, have repeatedly been left aghast by a seemingly unlikely gap higher even though the metals and miners were already "stretched."

To state the obvious, crude oil and its recent glaring weakness since July 4th is a missing link in the stagflation argument, and is a continued talking point for the pure deflationistas. 

In light of the XOM CVX earnings sell-offs this morning, however, crude, the XLE OIH (energy sector ETFs), and even Russia and emerging markets in general are green here. This type of action is giving crude bulls every chance to hold serve here and defined this recent move lower as the last good shakeout before a new rally. 

And then there are the commodities/miners flying under-the-radar: To see materials miners SWC TCK at or near 52-week highs tells me the stagflation thesis has a puncher's chance of prevailing in due time. 

One thing is for sure: If most commodities and mining stocks now get the memo of the early stages of stagflation and participation broadens out, we will likely need to match wits with the ruthless nature in which they trade in order to play along.