Hey There Income Hunters,
The Delta Variant has put the commodities and metals bull market into hibernation.
I think we’ll see a turnaround by the end of September and I see crude oil as the greatest beneficiary of a return to the reflation trade.
There is not much time left for the Democrats to resolve their infrastructure and debt ceiling issues. They must act quickly to avoid running into an election year, and the debacle in Afghanistan is already going to make the mid-term’s a tougher chore.
Bear in mind, Biden and most of his team already lived through the disastrous 63-seat beating of 2010. I’m sure that pain lingers on and will ensure they go BIG on more fiscal stimulus before the year is out.
We will also see a swift change in direction for China’s Central Bank (PBoC), which should boost global growth later this year …
The winter Olympics begin on Feb 4. and you know the last thing President Xi and co. want is an embarrassing economic downturn to depress China’s burgeoning new era of global dominance …
The reflation trade will be firing on all cylinders into the end of the year and today I’ll show you why crude is one commodity you must own to capitalize on it.
Here Come Reflation
One reason I believe the reflation trade will be back in Q4 is that the media has only focused on how contagious this variant is instead of its extremely low mortality rates.
Just check out New York, which has been dragging along at the lowest point …
The US will plow through the Delta variant in the weeks ahead, and the ramp-up for personal and business travel will accelerate quickly
What stands to be a major beneficiary?
Crude oil — which is highly correlated to inflation expectations, as defined by the 10-year interest rate minus Treasury inflation protected securities (TIPs).
Notice in the chart below the gap between crude oil prices and the breakeven inflation rates today. Oil has a lot of room to run and OPEC+ told Joe Biden right to his face that is not willing to ramp up supply to hold prices down …
United States Oil Fund (Ticker: USO)
USO is a liquid ETF with $2.75 billion in assets under management and a daily average volume of $245 million. It has liquid options, as well.
I am looking to purchase a USO 48/53 call spread to Nov. 19 expiry for $1.75 …
Notice the volume in the chart below …
The up days have, in general, shown higher volume then the down days, and volatility has traded lower, indicating less concern for even lower prices.
Bring It Home
#IncomeHunters have to take in the data and look for trades with a high probability of success.
Energy has been a start sector during the reflation trade. It has also corrected when signs of deflation have shown up.
I think this recent fear of deflation has been ginned by the Fed and the media. The inflationary forces we’re facing are powerful and long lasting.
The Biden administration will ensure inflation remains the dominant force driving the markets — and that shifts the probabilities in energy’s favor in the coming months …
As always …
Live and Trade With passion My Friends,