Alibabazon

I have been watching with great interest the U.S. Federal Reserve's increasingly quixotic quest to achieve the perfect world, where everyone has a job and prices inflate at a constant, prescribed rate. Unfortunately, their utopian vision has taken another major hit this week. The acquisition of $WFM by $AMZN has again reinforced the Fed's most vexing dilemma, secular deflation.

Although Whole Foods' national market share in the low single digits, the company will be transformed, providing the model for the rest of the industry to mimic. Under the pressure of Amazon's business model, Best Buy had to re-imagine theirs. But imitating it won't be painless for the likes of Albertsons and Kroger. Price is their key weapon. These incumbents will need to seriously up their cost control games if they want to stay relevant.

With their e-commerce DNA, and asset-light growth model, companies like Alibaba and Amazon are big data wielding disrupters, hell-bent on destroying the bricks and mortar crowd. Having obsoleted the entire department store industry and effectively vapourized most traditional book and music stores, they are now setting their sights on the slow-footed grocery industry. Food retailers are prime candidates for this 'creative destruction' and it's a just another reason to lower inflation expectations.

Now that he has a new toy to play with, Jeff Bezos will has immediately cut prices and will install Amazon Lockers in every Whole Foods location, lowering unit labour costs dramatically. Prior to the take-over, cost reductions were already on the way, following WFM's recent strategic review. These efforts will only accelerate under the new ownership. I can even see a catchy new store nickname, (applicable to customers and employees alike)... Half Paycheck. The first pink slips will probably go to the cheese sommeliers.

Worldwide, central bankers have been pushing on a deflationary economic string for eight years. Inflation targets have been routinely revised downward or pushed out. These discouraging results have frustrated central bankers, revealing the central flaw their inflation models that has resulted in a chronic undershooting of forecasts.

It is now becoming obvious that, with technology's effect on productivity, pricing power has been systematically reduced for every consumer facing business. The rise of the machines is upon us.

The 10 yr bond yield, having been depressed by central bank hoarding, is unlikely to generate significant upward momentum until the QT program is fully rolled out. The outcome of this prolonged period of low real rates is a force-feeding of risk appetite. With most lower risk assets picked over and expensive, reluctant risk takers are now forced to bid up the only remaining assets with any value. Now it seems they have discovered a new playground, commodities.

First copper, and now recently gold, has begun to out-pace the stalling S&P. These stealth bull markets have yet to catch the attention of the masses that are fixated on the QQQs. With the Missile firing in North Korea and the impending debt ceiling theatrics in Washington as a backdrop, speculators have just pushed the yellow metal through $1300 for the first time this year. As if that wasn't enough, some pundits are now openly questioning the validity of the Greenback's role as the world reserve currency. The destabilizing Trumpian passion play that oozes daily from CNN is less than confidence-inspiring for the dollar bulls.

Now, the dollar bears could be just talking their book. The COT data is showing massive spec USDEUR shorts. But I think something else is at work here, causing gold to have a bullish run.

Gold, perversely, is actually being helped by deflation. I have always said, gold has a case of multiple personality disorder. It operates best at the extremes; duress and excess. But now we seem to have both.

Is it reflecting the duress of political dysfunction? Or could it be the ineffective monetary string-pushing of central bank QE? Either way, the lack of a competitive real rate on treasuries is up driving asset prices, including gold.

In the land of Alibabazon, things are never gonna be the same. But before you accuse me of the dreaded "this time its different" thinking, remember the march of technological change has been relentless. Since Gronk said to Ork in 10,000 B.C. ,"Hey, this round piece of wood rolls really good", humans have constantly found better ways to produce and deliver goods at lower costs. Periods of benign inflation and even deflation are statistically dominant throughout economic history.

Low inflation expectations have depressed discount rates all along the risk curve, inflating the value of everything in its path. Forget it Fed, deal with it Draghi, cool it, Kuroda. Until central bankers have the guts to get ahead of the curve, the pain trade for commodities will be higher. I actually think this rally is only the usual seasonal 'trade' not the big reflation move. But as long as central bankers stay dovishly biased, I think someday we'll be asking; "Where is Paul Volker when we need him?" Ahh the seventies, I remember them well!

RISK MODEL: 2/5 - risk off

Only Copper/Gold and the 200 dma remain bullish so we need a rally soon to keep the secular story alive. A 2.15% 10 yr yield has bank stocks are grovelling again and oil doesn't quite know what to do with the Houston mess. Seasonality is weak and the assault on the U.S. dollar is disconcerting. It's no fun being sidelined.