When the movie has 10 minutes to play, the villain often suffers seemingly fatal injuries. You yell “He’s not dead” to the screen, but the protagonist doesn’t know how the movie works. He is surprised when the bloody murderer inevitably staggers back into the screen.

This brings us to deflationary trading, which was cut by a series of small blue dots last week. But Monday came, and the main beneficiary of the transaction’s cyclical stock was aaaaliiiivvvvveee. The following are the financial, industrial and energy stocks of the day, all outperforming the S&P index:

There may be some technical reasons for this rebound. It is only one day. It may be just a dying convulsion of the idea of ??growth/inflation/buying value/selling growth/selling duration. But given that this newsletter believes that the Fed is still very dovish, and just a few days ago, we were very concerned about inflation, now seems to be a good time to check price increases and the huge asset rotation they intend to bring behind them.

Note that, first of all, before the Fed frightened everyone last week, many signs of inflation and inflation expectations—real prices and investor positions—have disappeared (by Obvious).I have written woodThe high housing prices seem to have done what they are supposed to do, and the demand there has cooled. A few other good examples. Bank of America transactions (banks love inflation) peaked a month ago:

And copper, the economically sensitive king of industrial metals, turned around in early June:

Coupled with this quarter is expected to be the peak of GDP growth, which will definitely make you wonder how long the reinflation transaction must last.

Capital Investment’s Oliver Jones gave a deflationary trading scorecard in a report released on Monday. In response to the persistence of deflationary trade, he pointed out:

• Growth expectations have now reached the highest level they can achieve

• As oil supply increases and China’s metal demand weakens, commodity prices will fall further

In order to support the endurance of trade, he listed:

• U.S. inflation, especially wage inflation, looks a bit tricky and may push up U.S. long-term bond yields over time

• Antitrust enforcement and tax policies are changing the way it will hurt Faang’s growth stocks

• Compared with growth stocks, value stocks have historically been cheaper, as shown in the following chart:

I have been waiting for valuation to be important, so much so that I think Linus van Pelt is waiting Big pumpkinBut this is still an impressive chart. Jones concluded that the re-inflation transaction “declined but not ended”, and finance and industry, even if not energy and commodities, are expected to perform well.

Other content to be added to Jones’ list. Economist George Magnus (George Magnus) late UBS, now at the Oxford University China Center, he e-mailed me with the following thoughts on supply constraints:

If there is a regime change in terms of inflation, we hope that people will now see its last place, and it has just begun. .. As our economy reopens after vaccination and pent-up demand emerges, we will definitely see some temporary price inflation. But the supply constraints pervading the global economy will last longer. Some are rooted in supply chain changes and supply constraints caused by growing trade and technological geopolitics on both sides of the Pacific and other regions. Some are still Covid-related, and the recent threat comes from outbreaks inside and outside China’s large ports. Some can be found in the commodity complex.

If you are looking for examples of constraints that Magnus is talking about, please consider This Bloomberg’s David Fickling’s wonderful column on container shipping. He pointed out:

The freight industry has been cutting investment in the hope that trade will play a smaller role in the global economy.Since March 2019, Maersk’s capital investment has only been US$2.9 billion, which is not much different from the investment in a single quarter in 2014 [Maersk is the biggest of the container shippers]This is a problem that can only be solved by building new ships, berths and port loading and unloading cranes for several years.

Ordinary readers will remember that I am a bit of an inflation skeptic. But if you are willing to bet on a reinflation deal before the Fed meeting last week, there must be reasons to hold on to your gun now.

However, reinflation trading may sow the seeds of self-destruction. If economic growth and inflation persist, the Fed will respond, at least verbally. As we saw last week, the market will react to this. If its response is significant enough, it may stifle the market and growth. Just like Ray Dalio, the manager of the world’s largest hedge fund Bridgewater Fund sum Resolve the problem on Monday:

It is easy for the Fed to tighten policy, and I think they should. .. But I think you will see a very sensitive market and a very sensitive economy, because the duration of the asset is already very, very long. The slightest touch to these brakes will hurt the market because of their pricing and will also affect the economy.

Economist Andrew Smithers recently put it in simpler terms: “Tightening monetary policy to curb inflation expectations may cause the stock market to crash. Therefore, the Fed hopes that inflation will disappear.”

A good book

recently pillarMy colleague Mike Mackenzie took a stand against reinflation trading and discussed the possibility of disappointing growth as fiscal stimulus slows, tax increases threats, and debt pressures. This is an underestimated possibility, and I will write it down in the next few days.