Looking to avoid an obscenely overpriced U.S. stock market? Here’s one strategist’s advice on how to ride the inflation wave

GameStop is now the poster child for what are called “stonks,” the seemingly one-way-only ascent in often hopeless equities. Vincent Deluard, director of global macro at StoneX, expects the madness to continue. “On the one hand, the market is obscenely overpriced and I am certain that stocks will deliver negative real returns in the next decade. On the other hand, the underlying drivers of the bubble are unlikely to go away in the next months: easy-money and financial repression are here to stay,” he says.

A fresh $1,400 check is likely to make it into the hands of Americans by April, special-purpose acquisition companies will have to make purchases with all the firepower they have accumulated, private-equity and venture-capital firms have nearly $2 trillion in dry powder, and many paused corporate stock buyback programs will continue, he says.

“In the U.S., fiscal and monetary authorities have inflated a massive stock bubble. When all is said and done, Europeans will have savings under their mattresses, Asians will have even more productive assets, and Americans will have funny memes,” Deluard says.

Inflation, which investors are increasingly betting on, is the obvious answer to the problems the U.S. faces. “Inflation will act as a ‘debt jubilee,’ will restore the equilibrium between the asset-owning old and pauperized youth, and will allow a stealth default on unfunded liabilities that the boomer generation awarded itself,” he writes.

What will benefit from a period of inflation? Deluard has some interesting ideas. Latin American currencies already reflect a decade of weakness and a very poor response to the COVID-19 pandemic. On a commodity export model, Brazil’s real BRLUSD, -0.00 is 37% undervalued. The Chilean peso CLPUSD, 0.22 is 20% below its March high, while its main commodity export, copper HG00, -0.67%, is 15% above its 2018 high.

Deluard says it makes more sense to compare Latin American stock prices now to the 2000-2010 decade. “The 2010s was a lost decade for Latin America: commodity prices cratered and the U.S. dollar strengthened, a horrible combo for USD-indebted commodity exporters. If, as I believe, the 2020s will resemble the 2000s (weak USD, reflation, outperformance of EM, value, and inflation-sensitive sectors), the denominator of the Shiller P/E must be shifted by a decade,” he says.

After performing his Shiller shift, MSCI Brazil 907600, trades on just 8 times earnings, compared with 48 times earnings for the U.S.

The same analysis finds Spain 972400, -0.73% also is cheap, at 10.5 times earnings. Spain will be getting funding from the Next Generation European Union plan, may see inward migration as work-from-anywhere takes hold, and its top banks Santander and BBVA have large Latin American holdings. “Just as COVID has accelerated the migration from Wall Street to Florida, Spain, with its cheap housing, lively culture, and fantastic beaches, will attract plenty of highly-paid professionals from Northern Europe and the U.K. (Brexit will also help),” he says.

The buzz

Retail sales surged 5.3% in January, a gain far ahead of the 1% increase seen in an economist poll. “The remarkable surge in sales is concentrated in big-ticket items, particularly furniture (+12.0%) and electronics (14.7%), suggesting that some of the latest round of one-time stimulus payments found its way to retailers quite quickly. But other retailers did well too, with internet sales up 11.0%, clothing up 5.0%, and general merchandise up 5.5%.  The contrast with December’s weakness, when the surge in Covid cases and the accompanying tightening of restrictions hit spending, is stark,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note to clients.

Producer prices also rose by more than forecast, increasing 1.3%. Industrial production also rose more than forecast in January.

Some 2.9 million Texans didn’t have power as of Wednesday morning, according to the PowerOutage website. Tesla TSLA, -2.11% Chief Executive Elon Musk vented his frustration on Twitter TWTR, -3.15%, and former presidential candidate Beto O’Rourke said “we are nearing a failed state in Texas.”

Warren Buffett’s Berkshire Hathaway BRK.B, -0.15% trimmed its position in iPhone maker Apple AAPL, -1.72% — still by far its largest holding — while taking new stakes in telecom Verizon Communications VZ, +3.96% and oil producer Chevron CVX, +2.89%, his latest 13-F filing with the Securities and Exchange Commission shows. Verizon and Chevron both rose in premarket trade, while Apple fell.

Scion Asset Management — run by Michael Burry, the fund manager popularized in “The Big Short” for betting against mortgages ahead of the U.S. mortgage crisis — sold out of GameStop GME, -3.09% before its meteoric move, its 13-F shows. He bought call options in banking giant Citigroup C, +0.57%, pharmaceutical Pfizer PFE, +0.14%, and food maker Kraft Heinz. KHC, +1.78% Other filings showed Point72 Asset Management, the hedge fund run by New York Mets owner Steven A. Cohen, buying a put option on the SPDR S&P Biotech ETF XBI, -0.73%, and Bill Ackman’s Pershing Square reducing its stake in home-improvement chain Lowe’s LOW, +0.85% and restaurant operator Restaurant Brands QSR, -0.37%.

Cannabis firm Sundial Growers SNDL, -12.56% filed a mixed shelf allowing it to sell $1 billion of stock or warrants.

The markets

After the huge spike on Tuesday in the yield on the 10-year Treasury TMUBMUSD10Y, 1.288% — the most since Pfizer first said in November 2020 its COVID-19 vaccine was effective — the benchmark U.S. debt obligation was yielding 1.29%.

U.S. stock futures ES00, -0.34% were a touch lower. Gold futures GC00, -1.32% were trading under $1,800 an ounce, while bitcoin futures BTC.1, +5.27% were trading above $51,000

The chart

Via Scott Grannis of the Calafia Beach Pundit, here’s the ratio of copper-to-gold prices, compared with the yield on the 10-year Treasury. “This chart suggests that interest rates are only just beginning to turn higher. Copper and nearly every other commodity are up quite strongly since last March; crude oil prices have nearly tripled over the same period,” he says.

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