TSX gains after CPI shows US inflation rose 3%
Bloomberg’s Joe Weisenthal wrote an interesting article ’Maybe ‘Debasement’ Isn’t The Best Way To Put it’ (link below), sharing his opinion on the rising popularity of the so-called debasement trade. The debasement trade logic that Joe generally debunks is growing very popular in the media, per the Bloomberg graph below.
While Joe thinks the debasement trade logic is possible, he finds some flaws in it as an explanation for market behaviors. For one, rising gold prices. If the currency were truly being debased, hard assets, such as “the ultimate hard asset” real estate, should be surging alongside gold and precious metals. Per Joe:
This (real estate) is the ultimate “hard” asset, and yet, prices are barely going up. Here’s the Case-Shiller Home Price Index, which is currently growing at a pace well below most of the decade.
His graph shows home prices have been flat. Joe moves on to bonds, questioning why they are trading well if the currency is truly being debased at such an alarming rate. The United States 10-Year note has fallen from 4.70% to 4.00% over the course of the year.
Joe wisely points out that the speculative fervor in the stock market doesn’t align with behaviors associated with dollar debasement. To wit:
But when you look at some of the profit-less names that have been screaming higher, it doesn’t necessarily look like investors trying to get ahead of a steady weakening of the US dollar. It looks like retail traders trying to score a fast win. If investors were, in fact, responding to fears of debasement, I would imagine they would be more excited about investing in a stock like Colgate-Palmolive. People are always going to need to brush their teeth after all, no matter what’s happening with deficits or monetary policy. And yet.
Colgate Palmolive shares have been steadily declining as the “debasement” trade has flourished. Joe sums up his article as follows:
The market isn’t exactly a picture of health. But it’s also not obvious that debasement is the best way to characterize how the market is trading.
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Link to Weisenthal’s piece.
Original link