The correction we have been expecting for some time is now underway.
Inflation Breakout: Demand Pull Moving To Cost Push
Inflation has broken out and gold has broken out to a two- or three-month high. We suggest that investors use dips to buy gold, silver, copper, and other industrial metals in demand for battery applications, such as lithium.
Demand-pull inflation will dominate for the next few months, and will be a minor long-term problem, especially in the areas of housing prices and globally, food prices. However, the type of inflation that is best for commodities, and worst for the high P/E stocks, is cost-push inflation.
This will be driven by higher commodity prices on a global basis, as more countries demand a greater share of the profits generated by their commodities, for example Chile, Indonesia, Peru, Mexico, and many African nations. Higher labor costs, higher expectations of future inflation, higher taxes in the developed world, higher fees for mining in developing countries, higher transfer payments, and a turn towards socialism and redistributionist policy will also contribute.
Inflation, Gold, and Bitcoin
All of these are coming to the United States and to the developed world, and they will push long-term inflation higher throughout 2022 and into 2023. Cost-push inflation makes profit margins, and therefore stocks, vulnerable — especially industrial stocks, but not as much software. Adding to this will be a renewed demand for commodities as bitcoin and other cryptocurrencies are attacked by central governments around the world — as a threat to their sovereignty, a threat to world pollution, an aid to laundering money, and an aid to illegal activities such as drug dealing, and so on. The knives have come out for cryptocurrencies this year, and we caution investors not to underestimate the power and determination of authorities to deal with what they see as a threat to their monetary sovereignty and the reach of their tax collectors. We have seen the messaging from high and low, in the U.S., India, Turkey, and now China.
Canada
Canada is a logical beneficiary of these trends. Canada is a major producer of lumber, copper, silver, gold, natural gas, oil, nickel, and zinc; other base metals, rare earths, and food grains and oils are also produced in Canada in lesser quantities.
Canada’s government is quasi-socialist, and has done plenty to hinder the natural resources sector in Canada, but worldwide demand is such that Canada will do well and the central government will have to acquiesce to this reality. We believe that Canadian natural resource and grain companies will do well; so will the Canadian dollar and perhaps Canadian banks.
Canada has been a standout performer for the past several months. When we look at the largest Canada ETF, we notice that its constituents may be a mixed bag (see below), but the overall fundamentals for the nation’s currency and equity market are the best they’ve been in over a decade. Furthermore, these fundamental drivers look to have legs, so we are looking for an appropriate entry on a pullback.
Thanks for listening; we welcome your calls and questions.
