A read through for inflation, commodities and tech stocks.

One year ago, I wrote that I expected the 10 year bond yield to rise.

My view that interest rates would rise was derived from a combination of a some type of reversion to a ‘norm’ along with a belief that inflation would become evident due to an eventual increase in prices driven by ‘output gaps’.

This led to my ‘correlated’ comment suggesting being long various commodities would position investors well for such a move.

The commodities listed in that post rose between 25% and 80% in a short period of time.

The inflation trade has already occurred and the continued media hubbub is only reporting what has already played out.

Recently bond yields have overshot and probability lends itself to them falling. More on that in an upcoming note, where I’ll reference the recent peak in rates correlating to a peak in inflation and commodities prices. Albeit that turn has started, in those same commodities (and many others) listed.

To be clear, I think that inflation abates, not collapses.

The other cryptic quip in that July 2021 post mentioned a ‘ballsy’ trade shorting technology stocks which were then trading at nutty price to revenue multiples.

The stock samples I mentioned in that original post (July 9, 2021) were Peloton, Snap and Pinterest.

When they were respectively trading at $120, $66 and $77 per share.

Today, they have plunged to trade at prices of $8.50, $14 and $20, respectively.

All 3 charts are attached below have circles around their July 9, 2021 prices.

When U.S. 10 year bond yields started breaking above 1.8%, many more technology stocks commenced a concerted cascade.

A host of tech stocks are now poised to mean revert higher (not lower). They have been bludgeoned to the point that they traded to, through and mightily below their long term means.

What if organisations seek greater cost cuts to offset wage and price inflation by employing and exploring more technological replacements and alternatives?

What if political pressures fold to ‘re-embrace’ globalisation in order to reduce the cost of living?

What if more commodity prices mean revert?

What if supply chains repair and shorten?

well…….interest rates will decline again and inflation will ease.

Although many can’t see that case amidst today’s environment, technology stocks will benefit in such a scenario.

p.s. banks will make a fortune, as I predict that while they are swift to increase interest rates commensurately to central bank hikes…..they won’t be so accommodating to reduce the cost of borrowing should either central banks become dovish or if credit market yields ease.

p.p.s. the decline in commodities will be selected as some are already finding their lows (see my recent Macro Extremes weekly note)

July 18, 2022

by Rob Zdravevski


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