|
But a funny thing happened along the way to a well choreographed "deflation scare"; the stock market, carrying the hopes, dreams and assumptions of millions, has carried on higher. Some gold bugs may feel the Fed has them in its gun sights and its evil henchmen, "da boyz" are carrying out the decimation of "honest money" so it will not shine the light of truth on the monetary games where credit creation runs amok and indeed becomes the economy. But I think there is something much less dramatic at play here; a mini-bubble is being inflated in the stock market that we may call a safe haven or refuge bubble. In a global casino, the participants are not aware of exit signs, they only see the next "play". Risk management is all but bred out of them. The slots have run cold? A small cluster of highly visible patrons migrate over to the black jack table. The herd eventually takes note and you know the result. The stock market is the black jack table. Now, enough with the metaphor. This is more serious than finding the next hot game. Philly Fed chief Charles Plosser's views on inflation were noted on the blog last week as were my remarks about same. To this point, I have discounted Fed officials as merely playing their respective roles in the "deflation scare" script; jaw boning inflation while having every intention to ease policy, which would have the ultimate effect of you guessed it, inflation. But with the stock market, jobs/wages and even commercial real estate still in expansionary mode, it is apparent that market casino patrons are trying to hide out in still-hot games. Fed heads like Mr. Plosser see them and want them figuratively executed so that the Fed may finally stand down. Last week the bond market made a strong, impulsive move toward higher rates, challenging the assumptions of the bond herd with a hard slap in the face. Ten year yields are near resistance and have not broken the recent downtrend, but this bears watching, as does the ratio of long rates to 3 mo. T-Bills (yield spread) which is also trying to turn up amid bullish divergence.
Conclusion: While I have speculated on the possibility of a new stock bubble, considering the trepidation of certain Fed members along with herds of convention-minded bond investors fully buying in to the slowing economy (and by extension, inflation) story, along with "Dow all-time high!" headlines that may be at least moderating the public's bearishness on the stock market, and considering the technical setup of the precious metals and commodity universe, I would not be surprised to see a reversal over the coming weeks of assumption-based market trends that have held sway since mid-summer. Also note the charts of the VIX and VXN we have presented over recent weeks; they are not bullish. I do not discount a new stock bubble, but have remained firm that a correction of some substantial degree is needed first, during which Goldilocks is caught red handed with the baby bear's porridge, the yield spread bottoms and turns up, gold ends a multi-month (and healthy) correction and the stock market gives back recent gains as we find out that embedded and systemic inflation is not so easily eradicated. Relevent ETF symbols to this commentary are GLD, USO, DIA, SPY and QQQQ, along with bond funds TLT, IEF and SHY. Good luck whether your bias is long, short or sidelines.
CONTACT
INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
