In the latest writing that Marc Faber of the Gloom Boom and Doom Report published of mine, I argued that following the Summer Crash and Fall Melt-Up of last year, market internals seem to be suggesting the strong possibility that inflation expectations are returning to risk-assets.
As followers of my thinking are aware, I deeply believe that identifying conditions is far more important than making predictions. The most important condition that drives the asset-allocation decision is the direction of inflation expectations. If rising, risk-on into stocks. If falling, risk-off into bonds.
Following the first week of January, I noted in my company’s free weekly e-newsletter that the ATAC (Accelerated Time And Capital) models we use to manage client accounts were screaming “reflation,” allowing us to position aggressively into equities and out of bonds, just in time.
So far so good, but I know there are many who remain skeptical of the rally and are waiting for a pullback. For the skeptics still looking at Europe and the U.S. economy, consider the possibility that the stock market advance is now more stimulative to global growth than anything SuperBen and the League of Extraordinary Bankers can possibly do through low interest rates. Worldwide equity market cap has risen by over $3 trillion in four weeks. Yes, the markets have risen by as much as the entire balance sheet of the Fed and may soon now create more money than the European Central Bank in terms of global liquidity.
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