Trading Inflation, Infrastructure & Metals

It’s all over the news… what’s going on with inflation?  Is it transitory? Have we entered a new economic “regime”? Is it here to last?  Has the Fed, government stimulus and the new infrastructure bill lit the inflation fire? Is stagflation next?  Let’s talk about inflation and some trade ideas around infrastructure and metals.

What’s Going on with Inflation?

We don’t claim to be economists or run complicated econometric models.  We look at the data, form an opinion and then look for trades based on that view.  Our view:  inflation is not transitory – it is here to stay  – for quite a while.  All the stimulus has created a significant increase in demand, more so than the economy can handle.  A few observations that lead us to that conclusion:

• Consumer prices in the U.S. climbed at the fastest rate since 1990.
• Producer prices in China increased the most in 26 years.
• Supply chain disruptions are resulting in supply falling far short of demand and causing significant price increases for many products. It may take a while, but these problems will work their way through the system and, eventually, have less of an impact on prices.
• The Fed’s balance sheet has more than doubled since the COVID outbreak pumping an enormous amount of liquidity into the economy. The result is a huge increase in demand that will have a large, long-term impact on inflation.  Check out the chart, notice how much larger and more sustained the recent QE has been relative to Great Financial Crisis of 2008/2009:
  
• The stimulus provided by the Federal Government during Covid is 3 to 4 times that provided during the Great Financial Crisis. More gas on the long-term inflation fire!
• And finally…the new infrastructure bill – over $1.2 trillion in more stimulus, generating more demand, putting more long term pressure on prices.

How to Trade Metals and Infrastructure at the Same Time Given Our View of Inflation

Although infrastructure stocks have rallied with the passage of the infrastructure bill, there still may be some opportunities.  In addition to the infrastructure sector, we’re also looking at metals.  Masters in Trading research ideas are based on relative value: a stock, a commodity, a bond, etc. is not cheap or expensive on its own – it is cheap or expensive RELATIVE to something else.  Check out gold and silver relative to oil on the new Edge Charting Platform:

Notice anything?  Look how inexpensive gold (the blue line) and silver (the yellow line) are relative to oil (the green line)  Oil has rallied over the last year while Gold and Silver haven’t really moved…even Copper (the light green line) is off its highs…..so guess where we want to be long……yep….metals! 

Not only are metals relatively cheap (so we’re very bullish), but metals haven’t really participated in the inflation run so far.

TRADE IDEA:  Freeport-McMoran (FCX) is a way to get the best of both worlds.  First, FCX is an international mining company with significant copper and gold reserves.  Second, the company will significantly benefit from the infrastructure bill – copper is used in building construction, transportation equipment and green energy (electric vehicles, solar, wind, etc.).  A double whammy!

There are Plenty of Opportunities if You Know Where to Look

In just a few hundred words and a couple of charts, we were able to establish our view of inflation based on real data using Masters in Trading tools and used that opinion to come up with a number of opportunities.  Try your own research based on this approach (for example, what sector ETF is closely correlated with metals and is relatively inexpensive right now), but don’t trade your hard earned money without some paper trading practice!