The tiny little bounce continues as the curve rises again today, with all maturities declining. A little risk off’y here.
May as well throw in a couple other indicators while we’re at it. TIP vs. TLT indicates that a little counter trend support could be setting for a bounce in precious metals, commodities, etc. Depending on what USD does with its over bought status. Junk bonds are weak but still showing a bullish hint vs. Treasury (and Investment Grade) bonds.
TIP-TLT is breaking the short-term downtrend line, while Uncle Buck remains very over bought on a short-term basis. That is all…
Folks, this chart is from yesterday’s close. Commodities are down hard again today. They are also deeply over sold, yet I still want nothing to do with them (note to self… don’t let silver drop too far with those calls still in hand). 500 is the key level per this weekly NFTRH chart we have used since well before CCI’s breakout early in the year.
It is time to be considering that the age of inflation or more accurately its cost-effects may be over.
It is time to be considering that inflation gurus set up a cottage industry in scaring everybody about hyper inflation.
It is time to be considering that for now the US economy and stock markets benefit from a transitional Goldilocks phase.
It is also time to consider the message that commodities may be sending for a day when that pendulum (the lack of inflation expectations) swings too far.
Well, the inflation is going on globally 24/7, but it is the manifestations or effects of it that 99% of people care about. I’ll tell you what I care about. I care about the cost of my heating oil going down for one thing. And for another, I don’t much care about the price of the gold I may or may not have . So all things being equal, I’ll take declining prices for $1000, Alex.
The TIP-TLT inflation gauge has bounced a little in line with Treasury yields, and if it were to break the downtrend line recent trends in other inflation sensitive items might get a bid. But as of this moment, TIP-TLT is in a downtrend and thus, so remains the entire ‘inflation trade’. It’s not just gold, guys… are they manipulating oil, grains, uranium, REE’s, coal, platinum and now palladium and base metals too?
I just bought some T bonds after yields ramped over the last couple of weeks with the idea that recent trends will hold and inflation will remain muted for a while. My personal investment stance has little to do with inflation hysterics. And that includes my interest in the gold mining sector, which is not for inflationary reasons but is also currently compromised by incomplete fundamentals, especially in the drubbing gold is taking in ratio to the stock market.
If TIP-TLT breaks trend and starts to rise, then we can talk ‘inflation trade’.
A constant struggle in writing about the precious metals is in trying to be clear about the differences between the gold stock sector and other sectors when it comes to inflation. That is because there are two types of bullish environments for gold stocks…
- The ‘play’, where all the inflatables rise with inflation expectations; this would be the ‘gold is silver is copper is oil is hogs is corn’ trade. This is the play where the inflation and commodity gurus tell you to buy resources to protect yourself from the US dollar crash that is going to happen any day now. A problem is that in this environment many resources often out perform gold, thus hurting miners’ fundamentals.
- The other is a longer trade or dare I say it, investment. This is where commodity prices are declining and the USD is firm. Gold is stronger than silver and the inflation oriented gold bugs get bearish because they can’t understand how gold will not go down with oil and indeed, inflation expectations.
I have often called #1 a ‘SELL’ on any strong rally that results. #2 is a more difficult animal because it can be a grind as it sets up. That grind would be the misperceptions game kicking in where the majority gets fooled into thinking if copper goes down so will gold. After all, China’s gonna decelerate again!
It is rather obvious that the Silver-Gold ratio (SGR) will need to rise for any sort of inflation trade to whip up. I think we can get a bounce in commodities here because they are over sold, Uncle Buck is over bought and I might add, UUP hit the upside target of 22.10 measured off its bullish pattern. Beyond a trade however, the USD still looks bullish and commodities, not so much.
I found this old chart that tells the story of a declining SGR (post-2011) and a commodity index right in line with its dis-inflationary message. In this environment Goldilocks has lived quite comfortably and kept the stock market on track.
Three options here…
- A little inflation phase whips up and beaten down commodities and precious metals (led by silver) out perform stocks or…
- The whole mess continues to drop and dis-inflation turns to something more impulsive, taking stocks with it.
- The fairy tale goes on and on into perpetuity, with silver gently under performing gold, inflation expectations gently declining… and they all lived happily ever after. Nite nite little dreamer.
And two of the above are viable.
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.
No 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.
Just setting the table for the Jaw Bone of Jackson Hole? You know, if you look at the markets with a certain sense of humor it can be very funny. I mean, I don’t know who da boyz is dat is behind da scenes but my late friend Jon used to know all of them; all da COMEX boyz. He sat on dat deer COMEX after all.
Anyway, all I know is that it is awfully convenient as a table setting measure that we have no inflation effects (see, look at gold bowing below… look at commodities, look at TIP-TLT… look at silver!) as the Jawbone warms up this week. Just the imagery alone makes me laugh. There is no inflation! Ha ha ha… ZIRP infinity?
In the previous post’s video Esther George talked about how it is difficult to know what is ahead with regard to a build up of inflationary pressure. She rightly wants to make sure policy is out ahead of it, although I suspect that if the inflationary horse is going to get out of the barn it will not be put back in an orderly manner that catch-up policy can handle.
In this post we present a couple tools for viewing the inflationary backdrop (or more accurately, the current lack of one) and also a guest post by ‘Inflation Trader’ Michael Ashton.
First, here is the Silver-Gold ratio, which simply must bottom if commodities and the inflation trade are going to get a boost. It is no coincidence that commodities are on a tiny bounce along with the same situation in the Silver-Gold ratio.
Next is the TIP-TLT (inflation protected vs. unprotected Treasuries) ratio, still burrowing southward…
Guest Post by Steve Saville
 Highly recommended because it gets to the heart of our big picture view…
Prior to 2002 the Fed would tighten monetary policy in reaction to outward signs of rising “price inflation” and loosen monetary policy in reaction to outward signs of falling “price inflation”, but beginning in 2002 the Fed became far more biased towards loose monetary policy. This bias is now so great that it seems as if the Fed has become permanently loose.
The following chart comparing the Fed Funds Rate (FFR) target set by the Fed with the Future Inflation Gauge (FIG) clearly illustrates the change in the Fed’s tactics over the past two decades. The Future Inflation Gauge is calculated monthly by the Economic Cycle Research Institute (ECRI) and should really be called the Future CPI Gauge, because it is designed to lead the CPI by about 11 months.