I have been a long-time subscriber and attended the Chart Seminar around ten years ago. Back then you were a young kid and David led the show. Showing no disrespect for David who admire greatly, you have become at least an equal when it comes to your daily audios. I found this weekend's long-term picture very interesting and well done. I think you have properly described where we are at presently and the likely outcomes in the medium and longer terms. I do get the sense over here in the US that we may be facing an environment of Stagflation. With rising inflation and what now looks like slower growth in the near term, combined with a shrinking Fed balance sheet and rising rates, we could be facing some real headwinds for equities. Can you share your insights on an environment of stagflation and what asset classes would generally over-perform and underperform if the past is a guide? Thank you and keep up the great work!

Eoin Treacy's view

Thank you for your kind words. David is a visionary I can only hope to emulate. Luckily, the reason we have always gotten along so well is because we share a very similar world view.

Tax cuts funded with debt, a potential infrastructure bill funded with debt and the prospect of tariffs on steel and other basic commodities all represent inflationary pressures.

The basis for the stagflation fears, I have heard more than one commentator expound upon, is a series of reports that have come out over the last couple of weeks downgrading the initially rosy expectations for growth. Here is a section from a New York post article: 

The Federal Reserve Bank of Atlanta has one of the most closely followed indicators of the economy’s health. Its so-called GDPNow gauge on Feb. 4 had the economy growing at a 5.4 percent annual rate during the first quarter of 2018.

Now that gauge is down to just a 3.2 percent annual gain. And the quarter still has another month and a half to go. So it’s possible that the GDP could be much lower when the first official number is released in late April.

The Atlanta Fed is now more in line with the Nowcast GDP that is produced by the New York Fed, which has the economy growing at 3.11 percent during the first quarter. The two Feds guesstimates, as I’ve written before, had conflicted badly in the past.

Both of those estimates, however, are higher than those of some economists on Wall Street. JPMorgan Chase, for instance, reduced its prediction to an annualized rate of 2.5 percent. It had been at 3 percent until a worse-than-expected inflation rate recently pushed the guess down.

Growth in the region of 3% will likely be regarded as a success for the tax cuts but if it comes in below that level, while supply of debt is also rising, then the argument for stagflation will become more pressing.

Treasury yields were muted today despite a record $150 billion in short-term paper being issued. $28 billion in 2-year bonds were also issued which contributed to that yield hitting a new high. 5 and 7-year bonds will be issued later in the week to a total of $79 billion. The auctions passed off without a hitch which weighed on inflation hedges but this is but a taste of the issuance we can expect over the balance of the year. Here is a link to a related Bloomberg article. 

Gold should do well in a stagflationary scenario, so should high growth stocks and those that can raise their dividends well in excess of the rate of inflation. However, for the latter group we now have evidence that yield expansion is underway which will eventually make them more competitive to bond yields on an absolute basis.

Right now, gold has clear base formation characteristics and has a history of breaking out in an emphatic manner. However, a surge above $1380 will be required to confirm a return to demand dominance.