The economy and the stock market depend on inflation. Get serious giddy stock bulls, they inflate, you make money. They fail to inflate and the tide turns deflationary, your gains go poof, money heaven. I’ll dig out some of those policy-profits-S&P 500 corollary charts again soon enough.
The relationship between TIPS (inflation protected) and TLT (regular long-term T bonds) is one indicator of inflation expectations and while it seems to have spent the last 2.5 years in bottoming mode (allowing Goldilocks to pig out on porridge) it is still going nowhere.
TIP-TLT ratio weekly, from NFTRH 277
What more needs to be said? The stock market has been inflated along with the unsavory likes of Junk Bonds and many other ridiculously over valued items in this phase of ‘risk ON’ speculation. 3 Amigos of ‘risk OFF’ are also shown on the chart.
Guest Post by Elliott Wave International
Robert Prechter: “Charts tell the truth. Let’s look at some charts.”
During QE3, the latest round of the Fed’s quantitative easing, the stock market rose. We all know that.
But did you also know that commodities fell? [ed. errr, a Captain Obvious moment guys?]
That’s right: QE3 had zero effect on commodities — or maybe even a negative effect. In fact, an unbiased observer of the trend might conclude that the Fed drove commodity prices down.
This chart was put up a while back as the USB stabbed down below the supportive weekly EMA 350. With copper, oil and other commodities plunging one wonders about the ‘D’ word. At least this one wonders about it.
The long bond is at a critical point right now. Given some improving technicals on the US dollar and negative ones in commodities (and their currencies; seen the Aussie and the Canada dollar lately?), what the bond does at this juncture will be telling.
Everybody’s ready for the ‘Great Rotation’ out of bonds and into stocks, especially with anticipated Fed QE tapering being Thing 1 to start the year. The title asks whether deflation or inflation lay ahead. Of course we could have more of the same, with Goldilocks eating her just right porridge for another year, but I don’t think that is the most likely scenario.
Of course, deflation has been rendered little more than the lever needed by chronic inflators as they rationalize the endless bailout through monetary tricks. So disinflation remains a macro economic manipulator’s best friend.
By Steve Saville
The following is excerpted from a commentary originally posted at www.speculative-investor.com on 29th September 2013.
For the entire history of the Federal Reserve prior to October of 2008, the Fed was not legally able to pay interest on bank reserves. However, the Emergency Economic Stabilization Act of 2008 gave the Fed the power to pay interest on reserves and the Fed has since made use of this power. We are going to explain why this change was made and why it greatly reduces the probability of future US deflation.
Here is the chart we have been using in NFTRH, showing inflation protected T bond fund TIP vs. regular T bond fund TLT.
This ratio has been bottoming for months now and in the last few weeks had made some failed efforts to break out. Last week it closed above the bottom pattern neckline.
From NFTRH 252:
“TIP-TLT can be thought of as a barometer to ‘inflation expectations’. That could be what the precious metals, led by silver, are indicating in tandem with the above ratio. At the very least, it looks like a ‘deflationary expectations’ phase – which helped feed Goldilocks and croak precious metals – may be ending.”
Goldilocks lived by the deflationary pressures that Europe’s meltdown and China’s slow down exerted upon the world. Now, with the latest TICS report showing China and Japan selling T bonds we suddenly have the Fed’s Huey, Dooey and Louie jawboning a ‘taper’ of bond buying in the media. Ha ha ha… as if they have a decision to make.
The Treasury TIC data are only through June, which just happens to be the month we observed the breakout from bottoming patterns in 10 year and 30 year bond yields. But the play always (and I am talking nearly a decade since we began following this dynamic) been that America’s voracious consumption habits would be used to build out the Chinese economy on credit. They would not let us abuse our ability to inflate without consequence forever.
Do they perhaps feel built out enough for the time being? We’ll find out in future TICS reports. But I’ll just say that everybody thinks they know that there is no inflation and in this market what everybody thinks they know could well stand to be wrong. I have rarely seen so many of the right people on the wrong sides.
Last week we noted an upward break but then TIP-TLT closed the week in ‘move along nothing to see here’ mode, i.e. back below the neckline. Now it is back above, which makes sense with the dollar down today but does not make sense with commodities also down. Or does it?
TIP-TLT ratio, weekly
Well yes it does make sense because it is a market that has been fed (no pun intended) intravenously all sorts of unnatural stimuli and no human should pretend to definitively state they know what the outcomes will be. Too many moving parts my friends.
But for now, an indicator that did what it was supposed to do during the 2008 liquidation, the 2009 inflationary recovery, the 2011 inflation top and the Euro crisis mini hysteria has formed a bottoming pattern and is at least flirting with a breakout. If the indicator stays normal, that would indicate inflation effects coming somewhere on down the road. If…