An email from a reader (of the eLetter, I think) calling me out on trying to make too many correlations in a dysfunctional market (I think that was his bottom line point, and he’s got a good point) got me thinking about the Silver/Gold ratio and some pretty interesting post-2011 dysfunction (so it seems) in the markets.
Markets that made sense in certain ways prior to 2011 no longer make sense in the same ways. For instance, the S&P 500 used to be correlated to the Silver/Gold ratio, which itself was positively correlated to inflation and/or inflationary economic growth. Gold also liked for silver to be leading it, not the other way around.
I used to make fun of the FOMC rate hike “decision” language in the mainstream media because under the Obama administration and its economic policies overseen by the Fed’s monetary policy, there really was no decision, was there? It was ZIRP-eternity, interrupted by a lone and token rate hike in December 2015 (the Dec. 2016 hike does not count because the transition to a new administration and policy regime was already known; in effect, the Fed has already made its first hike under Trump).
According to the traders who make up the Fed Funds futures, there is no decision tomorrow, either. From CME Group, we have virtually no one predicting two successive rate hikes.
The title was not meant as a play on words in reference to Operation Twist, but now that I think about it, maybe it should be. The Post-Twist financial world is far different than it was before the genius that is Ben Bernanke’s ‘bigger than yours or mine’ brain concocted a maniacal plan that would “sanitize inflation” signals from the bond market and break the then highly elevated yield curve.*
So, why is today like early 2013 and why is there a twist to that view? Because two indicators have come together to point to economic stability (at least) in the US, with the twist being that other indicators are pointing to a potential unchaining of inflation this time, unlike the 2013 time frame, which was in the grips of global deflation (and Goldilocks in the US).
For further thoughts on inflation and the content of this article
The post title is best when drawled in Gomer’s thick southern accent. (e.g. “Surprise, surprise, surprise!”)
I realize Gomer Pyle was way before the time of much of my reading audience, but for the last few weeks I’ve been hearing him in my head as not only NFTRH, but now the wider financial media get on the idea that things are not as bad as had been generally perceived going into the hype fest known as Brexit. Most recently, a writer who always keeps an even keel, Chris Ciovacco, has summarized the situation nicely (as posted at Biiwii).
We have been tracking the coming of an economic bounce phase for a few months now. This dates back to pre-Brexit when market sentiment was over bearish but leading economic signals from the Semiconductor Equipment sector and manufacturing were arguing for economic firming. Voila! We have since had ‘economic surprise’ indexes turn up and it is now two strong Payrolls reports in a row. Funny how leading indicators… lead.
But another component of this economic view is the prospect that this firming could come with an old friend that always shows up eventually after policy makers have been given too long a leash (and since inflationary policy has been in effect in one form or another since Q4 2008, I’d say that is a pretty long leash). Yes, our plan is currently operating to the Greenspan era blueprint, an inflationary blueprint that can see asset markets from the Precious Metals to Emerging Markets to Asia to US Technology rise in tandem.
Yes, it’s another inflation post going up even as inflation expectations are in the dumper and casino patrons just cannot get enough of Treasury and Government bonds yielding 0%, near 0% and below 0%.
Feel free to tune out the lunatic inflation theories you’ve found at nftrh.com over the last few weeks. But if by chance you do want to look, here’s a visual path we have taken to arrive at the barn door, behind which are all those inflated chickens, roosting and waiting. All sorts of animals will get out of the barn if macro signals activate.
Recently I have gotten wordy about the decline in ‘inflation expectations’ beginning on June 2, right on through yesterday’s update of the TIP-TLT ratio and TLT in essence, attaining their targets. The implication would be that the mini deflation whiff is coming to its limits.
As often happens at potential limit points, the market’s crosscurrents are strong. As noted yesterday, USD, gold, silver and the gold miners all did in-day reversals as items that had been risk ‘off’ got hammered. ‘What, USD and gold in lockstep? What is the meaning of this?!?’ think inflationists. See yesterday’s in-day post Strange Bedfellows.
The meaning is that these items, along with the VIX and US Treasury bonds have been plays for a risk ‘off’ market as it got the jitters over deflation. Gold miners had been, however fleetingly, rising in line with their counter-cyclical fundamentals and this is the mirror image to the reasons why I so often parrot that if you are a gold miner bull, at least realize that fundamentally at least, the sector is done no favors in an inflationary backdrop (price, for long stretches of time, can be something else all together).