Guest Post by Tom McClellan
February 21, 2014
One of the really fun leading indication relationships involves the yield curve, the spread between interest rates on similar securities across different maturities. The real yield curve has too many data points each day for visual modeling, and so a simplistic model of the yield curve can suffice to make for easier modeling. In this week’s chart, the role of the entire yield curve is portrayed by the spread between the 10-year T-Note yield and the 3-month T-Bill yield.
The brain work done, it is now time for brawn work. Out to the yard I go.
Even as yields decline and bonds rise, the spread between 30 year and 5 year yields continues to rise, similar to TLT 20+ year bond chart we reviewed yesterday. Again I say that people can make all kinds of noise in the media about rates rising or falling, but it is their relationships that are one of the somewhat hidden tools that right-minded people want to be using to get a leg up on events yet to come.
30-5 yield spread, daily
The world expects the FOMC to update its expectations regarding a tapering of Treasury bond asset purchases tomorrow. The world thinks that a tapering of these purchases would be bad for gold.
I think a decrease in T bond purchases would be anything from neutral to a potential positive (see post coming later today on the matter). Regardless, it is time to be looking out beyond FOMC with regard to the precious metals, a most sensitive sector to monetary policy.
So here is a check list of what we want to see in order to press the bull stance.
Well I don’t know how it went for you but for me it was just another in a string of somewhat annoying days. I screwed up Apple (may buy back after it settles and after FOMC), took a loss on SGI and profits on NVDA and SIMO. Given some things going on in Treasury yields (curve rising) I got a little spooked on the short term, so I did some selling.
We had the ‘New Economy’ into 2000. This was the economy where tried and true creators of value and wealth were shunned for the revenue-free start ups that were going to lead us into a brave new world. The new economy worked well until tried and true traditional laws of economics and finance once again asserted and the pitch was revealed for the scammy promotion that it was.
Now we seemingly have entered a phase of ‘New Economics’, where things like gold’s correlation to the yield curve no longer matter. The rising yield curve indicates stress upon the system, against which Dear (Monetary) Leader [DML] continues full inflationary speed ahead, buying those long-term bonds with newly printed money. That is called inflating, yet it is keeping the yield curve from looking even more bullish (bearish for markets and the financial system). And gold goes the wrong way, along with many commodities.
There are no signs of inflation because they are inflating, see? They are buying bonds to keep yields low (or lower than they would otherwise be). They are inflating to keep the signs of inflation low here in Wonderland.
30yr-2yr yield curve w/ gold
For the last little while things have not made sense. Meanwhile the stock market is rising with gusto and what feels like a desperate attempt to prove something; to prove that bullish is the way to be and that everything is okay in the rapidly heating economy. But considering the promotion and considering that laws of economics really do not change, the conclusion is that when this ends (up for serious debate) it is going to end really badly.
If there is no inflationary boogy man laying beneath the surface and if deflationary liquidation is not in near future, why on earth has the yield spread not gone down? Why on earth for that matter is the DML continuing the systematic inflation in the face of rapidly improving economic data? He should declare job done and stand aside as the organic economy takes over and momentum takes takes us the rest of the way to 6% unemployment and better.
With the inflation that he has somehow managed to get into the system while keeping the lid on prices and inflation expectations thus far, you think about things like champagne bottles and corks, slingshots, etc. Or may trap doors. The transition to inflationary or deflationary resolution doesn’t seem like it will come by up or down escalators. Those are much too slow and gradual.
This is either going to resolve in an unbelievable failure – with criminal implications to come – or Ben Bernanke truly is ‘The Hero’ per the Atlantic magazine cover. All or nothing. That’s our Ben. That’s our DML.
If the top part of this chart looks bullish to you, then the stock market and a sense that all is well in the financial system should not look bullish to you. The next crisis would be indicated by the long ‘bowl’ shown on the chart turning up hard. Although right now, it just continues to gently round upward, above a supportive moving average.
30 yr / 2 yr US Treasury spread w/ gold
Gold, now squarely a ‘risk off’ investment, should follow the curve ultimately. Over the last 1.5+ years gold has shaken out the herd and people who counterfeit official money have drawn that herd right back into ‘risk on’.
It will errr, not end well.