A nice, trim 17 pages was all it took. I like it when it writes itself.
Are we convinced yet that there is no inflation? Well, if not every last player then most seem to be convinced. But I wonder if the TIP-TLT ratio is making a bottom here? I also wonder if just maybe the Fed’s exit strategy noise is timed with a bottom in inflation expectations?
Could the stock market bubble they are blowing be indicating more undesirable guests (like commodities) are going to join the party and they want to tamp things down a bit? Just asking questions here.
I have made no bones about the fact that some of the tools I have depended on have stopped working, at least temporarily. For example, the gold-silver ratio would normally have croaked junk bonds and the stock market by now. For another, the 30yr-2yr yield spread would have pulled gold up as opposed to its current bear market state. There have been other indicators that have just stopped working and the temptation is to rave “Bernanke this!” and “Bernanke that!”
But that does no good. Bernanke is winning (duh) and he is the man on the cover of the Atlantic, smugly grinning out from behind the bold headline The Hero. I on the other hand am just a schmo with some broken tools. But I also have nominal technical charts that have helped avoid the hazards that we might believe active policy making have wired in to the markets.
By the way, speaking of indicators that don’t seem to make sense, why on earth are T bonds (which do not like inflation) and commodities (which do) both getting hammered today?
The hit to commodities of course has something to do with the strength in the USD* (which we have noted over the last several weeks is on a bullish – not bearish – signal by weekly chart), but what on earth is up with T bonds if inflation is not an issue? Could it be that somewhere in the T bond market lies the future undoing of the Hero’s myth?
I am going nowhere with this post other than it is an over-stimulated market with policy makers front, center and every which way screwing with normal market management. Within that context, survival in the short term in service to proper positioning in real value over the long term is vital.
Gold bugs may be right with the hysteria (like that showing up in my inbox) about Cypress being the first leg kicked out from under the neatly set table, and oncoming confiscatory policies. But those that went all in with ideology are paying the dearest price in the interim. This is speaking of the paper markets, anyway. Gold is gold (value) in the monetary realm and ain’t nothing gonna change that.
The play remains to be intact first and ready to capitalize second. That is because the other way around, trying to capitalize (on ideology) first and be intact second is not working and has not worked for over a half a year, and has not worked well for 2 years.
* Here is the weekly USD chart from NFTRH 230, created 7 weeks ago noting a bullish moving average cross.
We have not looked at the Continuum (TYX monthly view) in a while. The long term structure of the 30 year bond’s yield is a massive but gentle downtrend. That is all it has ever been for decades, in a downtrend since Volcker whipped inflation in the early 80′s.
Last week yields got a bump and it will be interesting to see if TYX can get back up into the channel and indicate is was not a bear flag. The Parabolic SAR (green dots) indicates that the trend is still up. Could we have an uptrend yet?
It would be a long way up to the 4% area where the next financial accident could be indicated as the monthly EMA 100 (red line) halts the party once again. Nobody’s expecting inflation, right? Beuller?
You may have read me calling long-term T bonds just that in the past; garbage. Why, even lead dBoy Robert Prechter calls them that in different words. But this worthless garbage is breaking out of a Falling Wedge in defiance of the ‘Great Rotation’ media hype that attempted to rationalize chasing the maturing stock bull.
There is a difference between fundamentals (T bonds don’t have any good ones that I can see other than a pumping Fed, which is ultimately artificial) and short-term liquidity and technical status.
The last week has been a fright fest for the gold “community”. But these are the financial markets, not a community. There is a world outside of what ever is going on in gold and silver. A macro economic backdrop filled with entwined and correlated assets and markets all trying to form a message when taken as a whole.
Sure, gold – as a monetary metal – is a big one when it comes to macro indications, but what is really important is the great question that has been ping-ponged about for many years now between intellectuals on either side of the debate; inflation or deflation?
This post dials things out from the hysteria of the gold bear market (it is a savage cyclical bear, and we will certainly deal with it in a constructive way on the market’s terms) to the big picture and the eternal debate between ‘inflationists’ and ‘deflationists’. Really, as I have felt all along, we have inflation and we have deflation… all along the continuum, as illustrated by the monthly chart of the 30-year T bond yield.
The continuum of gently declining interest rates on long-term T bonds implies a deflationary backbone spanning decades. Against this firm disinflationary signal, policy makers have had license to print money at various times and with varying intensity. The MACD trigger on the chart above implies that a new inflation phase is trying to get started, but this is restrained by what looks like the second of two bear flags that have formed just below resistance at a 3.5% yield.
As long as rates remain below that resistance level, the deflation argument is alive and well. The last time the ‘continuum’ hit the red line (100 month exponential moving average), which has been the limiter of inflation expectations for decades, the second phase of the commodity bubble was exploding to new highs, Bill Gross made a highly publicized short against the long bond (in essence, meaning he was bullish on inflation) and the CCI commodity index topped in early 2011; 2 years ago.
While commodities have not experienced the drama that is the gold market, their persistent weakness has encompassed important ‘indicator’ commodities like copper/base metals and crude oil. Technical damage is being done in those areas. We have been following the progress of this degradation each week in NFTRH and asking ourselves the question ‘could it be deflation on the horizon?’
Folks, that is a breakdown on the weekly CCI chart above. Not only is the index losing a channel, but a moving average cross (red dots) has taken effect that has signaled strong bear phases in the past. Respect the deflationary argument.
But the post is titled ‘Gold and Silver as Macro Sign Post’ so let’s get down to it.
The gold silver ratio (GSR, bottom panel) would indicate market liquidity contraction and associated deflationary forces. That is because though gold obviously gets hurt badly with a coming deflationary phase silver, the cross-dresser precious metal/commodity gets hurt worse. So is the breakout of a trend that has been in force since 2008 a warning to deflation?
Just as we watch the T bond ‘continuum’ for indications on yields, we need to watch the GSR for its would-be signals about liquidity, which after all is what the current QE operation is all about. So far, the GSR ain’t buyin’ it (QE 3, ‘to infinity’, etc.) as it did in 2010′s inflationary kick off. No, the GSR is rejecting the policy and hammering gold (but silver worse). Gold is a monetary asset that recovered first in the 2008 crisis. This time gold and silver are declining first and hardest and their relation ship (GSR) should be watched as an indicator to coming events.
The deflationary case has not yet been confirmed, but it is strengthening. Likewise, all of this going on today could be a prelude to the mother of all inflation problems. But it is so vitally important that we subordinate ourselves to the market and its indicators because there are super smart people on either side of the ‘i’/'d’ debate and half of them are going to be very wrong.
If the GSR remains on this signal (in breakout mode), then watch for the US dollar to become strong – not because of any intrinsic value it may have – but because it is a claim on liquidity, which is intensified by its reserve status. Remember how they knee-jerked into gold during the euro crisis and how they knee jerked into USD and then gold during ‘Armageddon 08′? That is what happens in a rush for liquidity.
As for the USD’s technicals, it is actually losing one of its weekly moving averages, but a new bear signal would not come unless the moving averages cross down. The most recent cross down (first yellow shaded area) was a fake out, as could be the current cross to up, prior to silver beginning to out perform gold and commodities regaining lost support.
But the signals are the signals and if deflation is in the near future – as currently indicated by T bonds, precious metals and the commodity complex, then the USD is going to ramp up.
It is a complicated situation, and that is why I say you have got to be willing to do the work to stay on the right side of it. Or, if you are a normal person with a normal job and life, then associate yourself with people who are willing to do the work with an open mind subject to the many twists and turns that this wonderfully complex macro situation is going to present. People should know by now that nobody has all the answers. This is a work in progress on the macro. Dogmatic beliefs will be (and have been) punished.
It would be my pleasure if you’d join me – if you so desire – at the hardest working newsletter (and dynamic interim ‘in-day, in-week’ update) service I know of if you are so inclined. We are not trying to predict anything. We are simply using hard work, discipline and open minds to remain on the right side of a complex situation.
Otherwise, I’ll keep writing these public articles and I hope you’ll keep reading them. Tuning out the usual hysteria, what is happening on the macro is happening and we have all got to be willing to realize we do not have all the answers and there is always learning to do.
You are saying that 10 year T bonds are now bullish because JGB’s are being sopped up by the BoJ? Buy the Treasury debt of one inflator because the debt of the other inflator is yielding less?
But Bill, what about spring of 2011 when you announced to the world that the long bond was a short as you apparently expected a downtrend (in yields) that has endured for decades to break upward? Yields have since declined relentlessly and you forecast further decline to be buying at current yields?
Hey look Bill, I have got a few UST bond positions myself (only extending up to 7 years) but I think we both know the potential contrary indicator stuff in play here. It was 2 years ago on the nose that your T bond short put the final ‘!’ on the previous inflation cycle. I know you have forgotten more about bonds than I’ll ever know, but I cannot help but wonder if you are helping to birth a bouncing baby inflation cycle.