Reflation is a word many people misunderstand. Unlike the word inflation, which is the unintended consequence of certain policies of governments and central banks, reflation is planned. To paraphrase the well-known line in the movie Wall Street, think of it as “Reflation is good.”
https://en.wikipedia.org/wiki/Reflation
I could go on, but I think you get the message.
Another matter than many people misunderstand is that when capital market prices are extremely high, as reflected by any one of a number of measures, it is not always true that the economy is in great shape. The people, the 99% — you remember, the ones who diss the 1% and their bankers – know the truth. Things are not good. Most people are not getting ahead – they are sinking. Yes, President Trump has it right. We have a dysfunctional economy. We have a dysfunctional bond market, stock market, foreign exchange market. The producers of our needed food commodities are being stripped of their farms by the suits on Wall Street. Our tax system is a mess. Our people are either Red or Blue, Black or White.
All these years of fighting for social equity has come to naught. In nature, there is harmony but where is the harmony? Things are tough because everything in our life today has been manufactured – even the water we drink, the fish we eat. People have even been reduced to numbers. We are now either a one or a zero – as seen by the 1%.
So, what’s to happen to get back to normal? What even is normal today?
I don’t have an answer any more than any reader; however, I do see that, despite his many shortcomings, many people believe President Trump is a winner and intends to Make America Great Again. I believe Trump is a classic risk-taker, a businessman who takes on probably too much debt to pay for the assets he wants to develop. When he’s right, he’s a billionaire. When he’s wrong, he doesn’t hesitate to play hardball with his lenders. He invests human capital, and the capital of lenders, not his own. To achieve his objectives in rebuilding the economy with full employment, the nation, already mired in debt and budgetary deficits, will have to go further in that direction. That means he needs the bankers on his side and that is why he talked to HB&B head honcho Jamie Dimon before hiring one of the very best, Gary Cohn, the former Goldman Sachs president and COO, as his top financial advisor.
How is it that a banker today can extend more debt to meet Trump’s needs? Ten years ago, they used the futures market and phony insurance instruments until the financial system collapsed, so that option is no longer available. Trump and Cohn know today they need to reflate the economy and the only way that is possible given that the bond market cannot go higher (i.e., rates go lower) is to re-price assets higher. That’s why the equity market is at all time highs. But how high can the stock prices of companies like Apple go based on any reasonable asset valuation? AAPL is after all just paper. The only thing left to reflate are the prices of real assets, which in turn will serve to pump the Oil & Gas and Basic Material stocks higher and keep this record-setting bull market on the rise.
Yes, I believe the market must rise. Else, the owners of equity accounts will pull their chips from the table and the broad economy will collapse. There is no question, in time it will collapse. But if Trump is to be a winner and America is to be made Great Again, then it cannot collapse just yet. There is too much work to do. Budgets must be submitted and approved. Highways, Bridges, Railtracks, Military and Homeland Security, as Trump has called for, will push the size of the budget to by far the highest in US history. And the people (the 99%) are ready to support it. In fact, I don’t see this as the best option for America, I believe it’s the only option. And, I believe Trump is the only elected representative who could make it work, which is why the people voted him into the presidency.
The world – no matter how much many of us detest the personality — must accept him because the job is not for us to do, it’s now all on him. Like it not, he’s the boss. The good news, as I have been saying, is that he has probably the most effective banker he could have at his side in Gary Cohn.
So, reflation is now the story. Let’s not get bogged down in semantics and fear-monger attacks that dote on the word inflation. Wage inflation is being beaten down by technology, which is the productivity enhancing tool that will keep America’s workforce from demanding more. Housing prices will be kept in check when people cannot afford to chase prices higher. Oil prices will be allowed to rally to the $60 to $80 level in order to pump the associated equity prices, but not too high to hold back real economic growth. Basic materials prices like steel, copper and other metals and the chemicals, wood and paper, are also slated to go higher.
In looking over the thousands of charts I do, I can see that Basic Material equities are not under pressure, but still have room to move up. The Oil & Gas stock prices have been in a bear cycle, as you know. So, amazing as it sounds, the top story from The Motley Fool this weekend is headlined “the oil crash that is about to begin”. Yes, I am quoting. And, yes, I am amazed.
I was so amazed in fact that I decided to publish a list of Oilers and their closing prices on Friday. I believe these prices will be from 5% to 20% higher before July 1. If I’m wrong, they can call me a Fool because I promise to subscribe to their stuff.
Here’s my list – 28 in total, many of the biggest companies in the world — which I put into alphabetical order so to not play any favorites:
BP Amoco (BP 34.09)
Cheniere (CQP 32.29)
Chevron (CVX 113.55)
Conoco Phillips (COP 47.82)
ENI (E 32.15)
Exxon Mobil (XOM 82.46)
Halliburton (HAL 53.87)
Helmerich & Payne (HP 69.24)
Imperial Oil (IMO 30.75)
Kinder Morgan (KMI 21.75)
National Oilwell Varco (NOV 40.38)
Occidental Petroleum (OXY 64.86)
Oceaneering (OII 27.80)
Petrochina (PTR 75.37)
Phillips 66 (PSX 78.34)
Schlumberger (SLB 80.70)
Statoil (STO 17.58)
Sunoco (SUN 25.27)
Targa Resources (TRGP 58.09)
Tesoro Petroleum (TSO 83.41)
Total Fina (TOT 50.93)
TransCanada (TRP 45.47)
Transocean (RIG 13.53)
Ultrapar UGP 20.72)
Unit Corp (UNT 25.21)
Valero (VLO 66.08)
Weatherford (WFT 5.78)
Williams Companies (WMB 29.65)
Now some explanation might be given, but let’s just call it color: WMB had a strong week. SUN has been hammered and may bottom this coming week. VLO has come so far after I discussed it last summer, but I think there is more to go.
Let’s see who is the Fool? Will it be Oil Market Crash or Bill’s Reflation Story?
Btw, I bought small positions in, I think, four Goldminers in the last 45-minutes on Friday. Regardless of our views, however, being cautious when market prices are so high is the prudent move. Otherwise I would have bought larger positions and more of them.
Enjoy your weekend.
/Bill
