The BIG Picture On Tuesday, legendary trader Paul Tudor Jones in a special interview with CNBC called out the Federal Reserve and challenged them to admit to the raging inflation that is so evident everywhere one looks. Tudor Jones stated: "If Fed treats [inflation numbers], which were material events, with nonchalance, then it's just a green light to bet heavily on every inflation trade. The idea that inflation is transitory, it doesn't work the way I see the world, I would be really concerned about arguing that inflation is transitory when we have inventories at a record low, we have demand screaming, and we have people who are really underinvested where they should be given the valuations of variety of financial assets." Tudor Jones also discussed the possibility of the Fed addressing the inflationary elephant in the room and actually taking action. "If they course-correct, if they say, 'We've got incoming data, we've accomplished our mission, or we're on the way very rapidly to accomplishing our mission on employment,' then you're going to get a taper tantrum," Jones said. "You're going to get a selloff in fixed income. You're going to get a correction in stocks." While Chair Powell did say he believes that inflation is transitory, and while the Fed took “no action,” leaving interest rates at 0% and continuing with their $120 billion per month in QE purchases, they did not completely ignore the obvious elephant in the room; inflation. The “dot plot” projections, each Fed governor’s prediction on when interest rate hikes will likely be necessary, saw several Fed governors moving up their projections for rate hikes to occur in 2023 rather than 2024. So, even though they technically didn’t do anything, the Fed for the first time acknowledged inflation. They also raised their inflation forecast for 2021 to 3.4% from a previous 2.4%. The result was that “doing nothing” actually did something. The mere mention of possible earlier rate hikes in their projections years out caused markets to crater and hammered commodities. Following the meeting, gold dropped 4.75% on the day ($87 per ounce) to $1,772, dipping a bit more to before coming to close at $1,764 per ounce today. Silver dropped 6.75% on the day, falling (and staying) below $26 per ounce. Bitcoin dropped $2,000, falling roughly 5% on the day to $38,200, before sliding down nearly another 8% to hover around $35,500. And the general commodity complex had a sell-off of roughly 3%. But Tudor Jones highlighted why he no doubt believes this commodity sell-off is one to embrace. Tudor Jones is paying particular attention to the levels of assets under management invested in commodity indices today versus where they stood in 2011 as a major reason for his long term bullish commodity call. "I look at $88 trillion of assets under management by asset managers. Of that, $670 billion are invested in commodity indices. That's about three-quarters of one percent. If I were to rewind to 2011 when inflation was peaking at 3%, those same investors had 1.2% of their assets (allocated to commodities)," he said. "If I just look where the asset managers are, the 60/40 types, the one thing they should be invested in, they are not invested in. So, you've got this massive short in the commodity complex." Tudor Jones' argument resonates. Asset managers today are 40% underweight commodities relative to where they were in 2011. This is occurring while inflation expectations are 15% HIGHER today than they were a decade ago. To top it all off, the Fed’s balance sheet is more than TRIPLE where it was a decade ago. Think about this. The Fed balance sheet now stands at $7.965 trillion. This equals roughly $1,000 for every person on Earth. This is more than double where the balance sheet stood two years ago and more than triple where it stood in 2011. So we have an environment where the underlying conditions have never been more perfect than they are today for a lift-off in commodities, and yet asset managers are 40% under-allocated relative to a decade ago with conditions that are three times worse. It’s indicative of the power of the money manipulators. The Federal Reserve has complete control over the mindset of the market. So much so that every fundamental is being ignored, all in an effort to front run the Fed.
It used to be that the smart money watched the Federal Reserve. Now my plumber understands the story, and is front-running the Fed along with everyone else. The boat is completely tilted to one side. This is why I believe it’s fair to argue that the Fed is currently experiencing their strongest moment in history. While some see this immediate strength as a positive, we see through the looking glass and believe it essentially means that from here their power is only likely to erode. The truth is that the Fed has never been more overvalued. I believe the best investors buy undervalued assets and sell overvalued assets. Gold is the anti-dollar and that the Fed sits on the opposite end of the pendulum to gold. So if the Fed is the most overvalued they’ve ever been in history, isn’t it fair to expect that gold is the most undervalued it’s ever been relative to the dollar? This is a reality we recently highlighted with our Gold Inflation Index indicator, which is pumping out its most extreme readings in history. Our highest GII reading, 14.70, was on March 8th, 2021 when the intraday price of gold dropped to $1,672. Just two months later, gold prices shot up above $1,900. Today’s GII number today is an astounding 14.63, indicating that gold is significantly undervalued. It should be at $2,661 per oz rather than the $1,775 we are seeing today. It’s something physical precious metals investors are seeing personally. While gold has been hammered over the last nine months, and is down nearly 20% from its August highs, demand for physical precious metals has never been stronger. Now let me share an ‘insider secret’ with you... As a partner in Advantage Gold I have access to certain insights and information not available to most investors. And because of that position, I can tell you with all certainty that the sagging price is not indicative of what I am seeing, which is very robust demand. Let me explain what I believe is really happening. Gold used to be a fear asset. It was held in most portfolios as insurance in case of a stock market collapse. But today we are seeing demand for physical bullion unlike anything we’ve seen in the history of Advantage Gold, and not because of fear, but because of upside and greed. On top of the obvious money printing, the socialist left agenda, and a national debt on pace to hit $50 trillion by the end of the decade, we have witnessed the paper precious metals markets exposed. The Wall Street Bets crowd has exposed the dramatic manipulation that happens within paper markets. It means that while gold and silver spot prices have dropped, demand for physical metals is through the roof. It’s a mismatch we believe creates a whopping opportunity. Investors are greedily gobbling up physical gold and silver for the tangibility and true long term upside they now offer. While metals will always serve as a portfolio diversifier, they are now an asset investors seem to believe will outperform the alternative of overvalued stocks and bonds. We believe we are in the midst of a mindset shift. And the cyclical pendulum of the supercycle is grinding in first gear. Signs are everywhere. And yet, we carry on in ignorant bliss.
It’s why I wanted to end this piece with a note from Michael Burry, of The Big Short fame as he explains the eerie similarity between the United States today and Germany in 1922, shortly before hyperinflation rocked the country to its core.
“The life of the inflation in its ripening stage was a paradox which had its own unmistakable characteristics. One was the great wealth, at least of those favored by the boom..Many great fortunes sprang up overnight...The cities, had an aimless and wanton youth. Prices in Germany were steady, and both business and the stock market were booming. The exchange rate of the mark against the dollar and other currencies actually rose for a time, and the mark was momentarily the strongest currency in the world" on inflation's eve. Side by side with the wealth were the pockets of poverty. Greater numbers of people remained on the outside of the easy money, looking in but not able to enter. The crime rate soared. Accounts of the time tell of a progressive demoralization which crept over the common people, compounded of their weariness with the breakneck pace, to no visible purpose, and their fears from watching their own precarious positions slip while others grew so conspicuously rich. Almost any kind of business could make money. Business failures and bankruptcies became few. The boom suspended the normal processes of natural selection by which the nonessential and ineffective otherwise would have been culled out. Speculation alone, while adding nothing to Germany's wealth, became one of its largest activities. The fever to join in turning a quick mark infected nearly all classes..Everyone from the elevator operator up was playing the market. The volumes of turnover in securities on the Berlin Bourse became so high that the financial industry could not keep up with the paperwork...and the Bourse was obliged to close several days a week to work off the backlog. All the marks that existed in the world in the summer of 1922 were not worth enough, by November of 1923, to buy a single newspaper or a tram ticket. That was the spectacular part of the collapse, but most of the real loss in money wealth had been suffered much earlier. Throughout these years the structure was quietly building itself up for the blow. Germany's #inflationcycle ran not for a year but for nine years, representing eight years of gestation and only one year of collapse. Best, Adam Baratta CEO Brentwood Research | 