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While
charting a potential bullish scenario for commodities in NFTRH 213, I became
distracted by thoughts of the deflationary mindset that has been cooked up
since 'Bond King' Bill Gross tugged on Superman's cape in the spring of 2011
by announcing his short positions against long-term US Treasury bonds, which
was in essence a bet that the monthly EMA 100 boundary (red line, chart
below) that had been in force for decades would be broken this time.
Sorry Bill,
the inflation cycle into that time frame blew out right on your signal.
For
reference, here is our favorite big picture chart once again; the 'Continuum'
AKA the monthly view of the 30 year T bond yield.
As the 100
month exponential moving average was approached once again in spring of 2011,
the inflationary noise became hysterical. Commodities topped out, the Euro
crisis kicked off and European and US policy makers
came into play in intense fashion.
Unfortunately
for inflation boosters, policy came with an ingenious sanitization aspect to
it, with the US Fed discriminating between T bond durations in its buys and
sells. Europe's ECB even tried some sanitizing of its own. There is no
inflation! Ha ha ha...
For reference, the chart above shows the spread between 30 and 2 year T bond
yields (shaded areas) AKA the Yield Curve that has been held in check,
thereby holding gold in check as well.
Since we're
using favorite macro charts in this post, let's pop up another one.
Gold follows
the yield curve and the yield curve has been managed by Operation Twist. End
of story.
But what is
important now? Anyone? Beuller? Yes... what is
important now is where we are going, not where we have been. Thus, on the
subject of inflation and inflationary signals, here is the 'interlude' that
popped up in the middle NFTRH 213...
Macro Geek Interlude (NFTRH 213 excerpt)
The market is
getting dangerous ("getting dangerous" Gary? We thought it
got dangerous in 2001, or 2007 at least) because the Fed is heavily in play
now. Asset markets and the economy are sending signals that the inflation to
date is not taking hold. Not in jobs, not in the US stock market (which has
stopped going up), not in commodities and not in... precious
metals.
So we are
back again to Operation Twist and the yield curve. If not for this inflation
signal dampening manipulation NFTRH would be going full frontal deflationist
now because the inflationary signals are just not there and have not been
there since the yield curve operation began. That is not because assets are
not going up, but because money supply is not going up. That's a deflationary
backdrop folks. Except that money supply is not going up (at least in large
part) because the Fed - as it has repeatedly and officially announced - is
sanitizing its long-term T bond purchases with sales of equal amounts of
short-term bonds. Otherwise, money supply would be going up.
Now we
consider that Twist is scheduled to end next month, whether by official decision
or a due to a lack of supply of short-term bonds to sell. My guess is it is
both. Some think that officials conveniently wanted gold to be held in check
through the election. I do not disagree with them.
So if the Fed
is going to let Twist terminate, and if they are going to continue to
purchase T bonds, and if they are going to maintain ZIRP until 2015, and if
they are going to continue MBS purchases, the adjusted money supply is likely
to rise.
We will only
know if a real deflation is fomenting if they stop meddling with the yield
curve, flat out inflate and still the money supply does not
rise. Then everybody out of the toxic pool - and I mean out of everything
other than physical gold as suits individual needs - and sit happily in cash
as we await Prechter's amazing buying opportunity,
which would come at pennies on today's dollar.
Until then,
deflation has not proven a thing because the appearance of deflationary
signals has thus far come with the aid of yield curve and money supply
suppression.
Post Script:
Why do some
people think the Fed has to try to inflate (to infinity)? Well for one, this
chart of the cyclical metal with the Ph.D. in economics vs. the barbarous
relic (Cu-Au) shows that if gold has done poorly since Bill Gross inadvertently
announced that T Bond yields were about to decline, then
copper has done worse. Indeed, the previously inflation-boosted economy has
been in trouble since 2006. This is a terrible picture for the economy.
So is the Fed
likely to continue trying to dampen inflation expectations or... promote
them going forward? Do they have a choice?
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