A Comprehensive Discussion of the Economy and Financial Markets

The Incrementum Fund’s advisory board has held its quarterly meeting on January 10, and the transcript has just become available. Readers can download the transcript via the link below this post.



Unfortunately two board members (Dr. Frank Shostak and Rahim Taghizadegan) were unable to attend this time. We hope that you will nevertheless find the board’s discussion of a wide range of topics relevant to today’s financial markets interesting.


1-Gold vs commoditiesGold rises to an all time high against commodities – a strong sign that economic confidence is waning – click to enlarge.


We would especially point to the debate surrounding central bank credibility (or the “confidence bubble” as Mark Valek refers to it), which we believe is probably the most important subject investors need to confront these days. As we have recently mentioned, Jim Rickards has as always made a number of very interesting remarks on the finer points of Fed policy.

He inter alia pointed out that the Fed’s flexibility tends to be hampered in election years, as it doesn’t want to be seen as influencing the election outcome. This could be especially relevant this year (a similarity to the years 2000 and 2007/8, we might add), as it happens just as the economy and the markets appear to be at a crossroads.


2-DXYUS dollar index, daily – the board’s consensus was that the dollar would no longer make much headway against major currencies, as the Fed was likely to soften its stance. So far this seems to be the case – not even the ECB and the BoJ were able to put pressure on their currencies beyond a single trading day – click to enlarge.


Recent moves in the gold price and the fact that a number of other markets have also begun to act in a manner that seems no longer consistent with what the planners would presumably like to happen, certainly appear to indicate that the irrational faith of market participants in the “central bank put” is slowly but surely crumbling.


3-SPX vs. CommoditiesThe growing gap between stocks and commodities – this is a divergence crying out for mean reversion – click to enlarge.


Inevitably the “inflation vs. deflation” debate was revisited as well. Deflationary pressures are currently enormous. On the credit side, low-rated debt is in crisis conditions, while commodity prices are going down and consumer price increases remain well below the arbitrary “targets” set by central banks. This provokes the usual reactions by the central planners, which in turn is apt to build up ever greater tension in the markets (especially as it becomes increasingly obvious to all that their methods are not working).


4-breakeven inflationUS 5-year breakeven inflation rates have been under pressure for years and have been plumbing new lows for the move in 2015 – click to enlarge.


How long will this trend continue? Ironically, after the Fed’s rate hike, the US yield curve has flattened even further. This greatly undermines the “everything is awesome” narrative and indicates that the promised series of rate hikes is highly unlikely to happen.


5-yield curveThe US yield curve has continued to flatten following the Fed’s rate hike – click to enlarge.


6-junk bond yieldsA “stealth” credit crisis has been underway for some time – these days it is no longer as stealthy as it used to be – click to enlarge.


As always, all kinds of markets were discussed and one unavoidable topic was crude oil – is there anything on the horizon that could reverse its trend? There is nothing obvious, but at some point the market will have discounted every eventuality. Global demand is actually at a record high, and with producers pumping all out because they need the money, there is no longer any spare capacity. This creates a set-up in which surprises are possible.


7-March CrudeWTI crude – a relentless downtrend – click to enlarge.


As of January 10 when the meeting took place, the board’s consensus in terms of trade allocations consisted essentially of a bullish bias on gold and US treasuries and a bearish bias on stocks – in line with the members’ views on the economy and the expected reactions of central banks to economic developments.

In the short time since then things have actually played out that way, but these trends are all still young. Readers should keep in mind that when it comes to trading ideas, opinions can frequently and quickly change, depending on developments. We would however say that the essential elements on which these deliberations were based remain definitely in place at this time.


8-Incrementum Inflation signalThe proprietary Incrementum inflation/deflation signal vs. inflation-sensitive assets – click to enlarge.


Download Link:

Q1 Incrementum Advisory Board Meeting Transcript (pdf)



Please note that the transcript is dated “2015” – this is a typo, it should of course be 2016.


Charts by: StockCharts, St. Louis Federal Reserve Research, Incrementum AG



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