The “Escape Velocity” Myth

Guest Post by Steve Saville

Making sense by replacing “despite” with “because of”

In February of 2009 we wrote that if the story unfolded as we expected then a lot of future economic commentary would begin with the word “despite”, but that in most cases the commentary would be a lot closer to the truth if “despite” were replaced with “because of”. Our 2009 assessment remains applicable in that most commentators still don’t get it and still say “despite” when they should be saying “because of”. For example:

1) Here’s the way it is often put: “The US economy’s recovery following the 2007-2009 recession has been much weaker than average DESPITE the most aggressive monetary stimulus in US history”. Here’s the way it should be put: “The US economy’s recovery following the 2007-2009 recession has been much weaker than average BECAUSE OF the most aggressive monetary stimulus in US history”.

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Gold vs. SPX

While we have been charting a constructive gold vs. commodities big picture view, we have also kept track of a disgusting gold vs. SPX big picture view as gold has been “boxed in” as it grinds around looking to close the gap from 2007.  That was the kickoff to the financial crisis as the first institutions began melting down.

gold.spx

This cycle really has done amazing work in repairing (some, including myself would say sweeping under the rug) the damage and resetting the gold bug psyche as well.  It is important to remember that gold bugs were the kings of everything back then, with their ideology unquestioned.  But these are the markets and they don’t care about egos.  Actually yes they do, they care about crushing inflated ones.  The job appears to be in its final stages.

The All Everything Phase

Dialing in the theme from Friday’s post to a shorter-term view, the 2 year yield has more than compensated for the rise in CPI over the last year, as the CPI-2yr ratio shows.  That earlier post had shown a bigger picture in which the 2 year yield had declined dramatically vs. the CPI, but is in a gentle incline lately.  Flipped over and dialed in time-wise, that gentle incline (decline) is not so subtle.  Goldilocks lives there.

cpi.2yr

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NFTRH 305 Out Now

With gold and silver near critical support and the CCI commodity index at the brink we ask the question ‘what if?’ with respect to the prospects for a coming ‘inflation trade’.

Frankly, after doing the work I continue to see no reason to be a commodity bull as an ‘inflation trade’ has not given even the faintest clue yet (well, silver is trying to put on a micro bounce vs. gold, which would be the first glimmer if it were to happen).

But whatever lay out ahead, we’ll be more than ready.  The analysis is a divining rod, not a crystal ball gazer.  NFTRH 305 covered the inflation topic and a whole lot more… and it’s out now.

nftrh305

Deflationary Straw Man

straw.manNo matter the debates over inflation vs. deflation, increasing employment vs. sound monetary policy or systemic health vs. fragility (and whatever else is flying around in Jackson Hole this week), the CPI marches onward and upward.  That is the system and it is predicated on creating enough money out of thin air while inflation signals are (somehow) held at bay.

The Straw Man* in this argument lives in the idea that inflation is not always destructive, that inflation can be used for good and honed, massaged and targeted just right to achieve positive ends to defeat the curse of deflation that is surely just around the next corner.  Currently, the Straw Man is supported by the reality of the moment, which includes long-term Treasury yields remaining in their long-term secular down trend.

Indeed, right here at this very site was displayed much doubt about the promotion having to do with the “Great Rotation” out of bonds and into stocks (i.e. that the yield would break the red dotted EMA 100 this time).  We noted it right at that last red arrow on the Continuum© below.  Now, with commodity indexes right at critical support and precious metals not far from their own, the time is now if a match is going to be put to that dry old Straw Man and silver is going to out perform gold, inflation expectations barometers (TIPS vs. unprotected T bonds) are going to turn up and the Continuum is going to find support.

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PALL-Gold vs. CCI-Gold

A good question would be which is more valid as a leading economic indicator, Palladium vs. Gold or broad Commodities vs. Gold?

PALL-Gold continues to indicate economic strength as positively correlated Palladium has just made a new high vs. Gold.  This chart along with information I got on the Semiconductor equipment sector pointed to a coming up cycle well over a year ago.

pall.gold

CCI-Gold is in a more precarious position.  These indicators do not always correlate well but have eventually come in line with each other for important economic up and down cycles.  Today PALL-Gold is flying high while CCI-Gold rolls over.

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