Stocks are celebrating inflation's demise prematurely and the big money isn't buying, says Larry McDonald

Larry McDonald of "The Bear Traps Report" warns that the market is prematurely celebrating an end to inflation, as institutional investors are focused on "supercore" inflation, which at 3.21% last month, significantly exceeds the 2.7% headline CPI that fueled the equity rally. This underlying inflationary pressure is seen as negative for bonds but is driving major hedge funds to accumulate hard assets like gold and copper, and especially natural gas, given its critical role in powering AI data centers.

Analysis

A significant divergence is emerging between equity market optimism and institutional investor caution regarding the inflation outlook. While the Dow Jones Industrial Average rallied on a headline July CPI of 2.7%, the bond market simultaneously signaled concern as the 10-year Treasury yield moved higher. According to Larry McDonald of 'The Bear Traps Report,' this skepticism from institutional clients is rooted in 'supercore' inflation—which excludes food, energy, shelter, and rent—running at a more persistent 3.21% rate. This specific metric is reportedly a key focus for the Federal Reserve, suggesting monetary policy may remain tighter for longer than the equity market anticipates, creating a headwind for bonds. Consequently, large hedge funds are reportedly accumulating hard assets, including precious metals, copper, and especially natural gas, which is noted for its low relative valuation and its critical role in powering AI data centers.

Key Decisions for Investors

• Investors should look past the headline CPI and monitor 'supercore' inflation metrics, as the divergence between equity and bond market reactions signals a potential mispricing of inflation risk.
• Consider increasing allocations to inflation-resilient hard assets, such as gold, silver, and copper, to align with the reported positioning of institutional investors.
• Evaluate long positions in the natural gas sector, potentially through instruments like the First Trust Natural Gas ETF (FCG) or producers such as Antero Resources (AR), which are highlighted as undervalued assets with a strong demand catalyst from AI.