Lockdown, stock and two smoking ounces. Prepare for inflation!

By Marius-Cristian Frunza
Weekly Briefs

Before the pandemic outbreak, central banks were printing money like there was no tomorrow. During lockdown and most economies stopping for a few months, they are printing money like it was a “The New York Time” in its good days. Consequently, banks have even more access to liquidity and can continue to pump the stock market.

The necessary rhetoric was that this avalanche of cash could be controlled through governmental policies to avoid an explosion of the Consumer Price Index. The pandemic brought inflows of money not only on the stock market but also to private individuals through various governmental programs. It represents a huge inflation risk because the circulating monetary mass increases while the economic output decreases.

What-if an inflationary scenario becomes a reality? What is the best inflation hedge?

Powell and Lagarde are heating the money printers and increasing the debt levels of the United States and European countries, respectively. Most retail investors are cheering the NASDAQ rally and the avoidance of a massive crash on the Dow Jones.

They ignore one thing: "There is no free lunch". The European Commission envisaged even to underwrite Corona-bonds or perpetual bonds aimed to back the relaunching of the European Economy. Perpetual bonds are nothing else than a deferred tool for future taxation. Therefore, this initiative should be a cautionary tale. High inflation comes with a more restrictive fiscal policy, leading to higher taxes.

Commodities are often perceived as a good hedge against inflation. It will not be the case for all commodities. Oil and oil distillates price may go through a deflationary period, while gold could be the ultimate safe harbour.

In the 1970s after Nixon's era, gold price began its multi-decennial rally. During the 2000s, gold followed the commodities bubble that exploded during the Lehman crisis. Back in 2009, oil plunged in only a few weeks by over 100 USD, while the gold ounce went through another rally. During the COVID crisis, gold is flirting with a historical maximum, underlining the fact that investors see it as a sustainable investment.

What about the equities and bonds? The stock market will be good as long as the printer works. Bonds are right now in a swamp, but they may regain grounds if governments raise taxes. Higher taxes should remunerate bondholders, at least in theory.

Commodities such as gold and silver have a world market that transcends national borders, politics, religions, and race. A person may not like someone else’s religion, but he’ll accept his gold.
Robert Kiyosaki, American businessman and author

Market overview

The Dow Jones plunged in the middle of the week and bounced back above 26,000. We got used with this behaviour over the past several weeks. The market is like a huge boat waiting for its captain to find the right direction. Obviously, the main idea behind this trajectory is that central banks want to reinsure investors and to avoid disaster. Nevertheless, the reluctance towards these policies is growing, and investors are looking towards gold as an escape value.

In theory, investors should like the fact that markets are stable, but in the same time they fear irrationality more that instability. Therefore, there is a feeling amongst market players that a major event is imminent and everybody does nothing than waiting.

During the 1998 crisis, hedge funds were in trouble and banks jumped in to save them. In 2008, banks got in quicksand, and central banks jumped to rescue.  Currently, we have a scenario that central banks could face huge issues, and we wonder who will come to save them? The Salvation Army?


Heading towards 11,000

Since the early 1990s, NASDAQ gained over 4700% despite a turbulent episode in the early 2000s. It outperforms by far the SP500 and the other leading equity indexes. Needless to say, that we have a grasp of the Dotnet bubble in the air.

There is a small difference. Back in the 2000s, tech companies had no revenue and were valued by the number of clients, while now, most companies show some income. NASDAQ rally will continue until a global market correction comes, which is expected by the last quarter of current trading year.


Tesla is flying

Since the beginning of the pandemic, Tesla showed a strong performance, nothing similar to other automotive companies which go through massive cost-cutting processes. Musk's vision sent Tesla's stock soaring and made from the Californian manufacturer world's biggest car producer. Tesla share went through the roof over the past week, fuelling speculations about the sustainability of its price.

Is Tesla the vehicle of the future? Will Tesla replace the cheap Logan in Europe, the robust Niva in the Siberian tundra and the reliable Volvo in the frozen North? Will the New York wiseguys buy the Californian car instead of the classic Lincoln? Would Kim Kardashian have felt the same if she saw Kanye West driving a Tesla?

It is a risky bet that the market seems to price well. Nasdaq is in a mini-bubble amongst other stock markets, and Tesla is in a bigger bubble amongst other Nasdaq-listed companies.

Market outlook

As predicted, the Gold ounce had another good week and comes close to an historical high. The NASDAQ managed to find support at 10,500 and would not be a surprise to see it beyond 11,000 over the next week. The Dow Jones reached again the 26,000 level in the last market sessions and we could expect a technical correction early next week. The Brent crude has good perspective to remain above 42 USD and we foresee a slow evolution into positive territory.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial in- strument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.