The time has come to make sure we are tuned and paying attention. The markets are not a game. We should not take them lightly; brag when we win or cry when we lose. The markets are the markets and just as a well-coached football team knows that it must leave every game in the past and immediately begin game-planning for next week, we asspeculators in the markets should continually update our plans, only over various timeframes; next week, next month, next year and even next decade.
Short Term - Prechter Masks for Halloween?
You may already understand that I have an attitude problem with regard to the major financial media and many of the smart alecks that come out of the woodwork to cheer already mature trends. As the media and gurus happily touted a new inflation cycle this spring, my newsletter and blog sought to calm the noise by showing the “line in the sand” between inflation fears getting out of hand and yet another deflationary ‘event’ – as per the ongoing cycle that has lasted decades.
This “line in the sand” or 100 month exponential moving average on the 30 year US Treasury Bond was very important, because if it had broken to the downside (as yields break to the upside), this would have represented a secular change to something that had been in force since most of us have been actively participating in the financial markets. It would have been a BIG deal and it would have signaled that our inflationary future – which may be part of the intermediate term plan and is most definitely part of the long term plan – would have come sooner than expected, and that Uncle Sam would now have a hellish time attempting to finance operations through confidence in his bonds. That is because rising yields would come hand in hand with declining confidence [regardless of whether said confidence is real or ginned up] in Uncle Sam’s debt notes.
So what has our illustrious Fed chief now done? Why, he has decided to be a buyer of last resort in Treasury Bonds, using the principle payments on worthless garbage no less:
“To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.” –FOMC Statement excerpt, August 10, 2010
In the springtime we repeatedly noted the dangerous proximity of yields to the EMA 100 but could not commit to the “inflation trade” until confirmation of a sustained break though the EMA 100. Then, we – you, me and even the blog – were among the few to view the hints of an improbable rise in Treasuries. It was as if the charts knew of the Fed’s plans before they were announced. Go figure.
Reference:
Suddenly Treasury Bonds Are Not So Bearish, Are They? (April 27, 2010)
Various Treasuries Updated (May 5, 2010)
At the time, it was stated here that the Fed, Treasury and US government needed a deflation scare of some intensity to put the herd back into bonds, thus reloading the “inflation gun” AKA policy makers’ ability to continue to do the one thing the Ponzi economy needs to keep running – inflate the money supply.
Robert Prechter once again kicked open the door to the media and the junior deflationists followed right along in his wake. All good for our plan, as we have been awaiting the deflation ‘event’, ‘impulse’ or ‘scare’ all along. This would be the event that triggers new inflationary policy, the likes of which the mainstream media propaganda robots are now increasingly demanding. The Fed just happens to have the ammo now – unlike in the spring when yields were threatening to break out – to continue the great inflation.
But there is an issue that potentially muddies the analysis. The question ‘to what extent is Bernanke supporting the bond?’ is an important one. Because if he is THE buyer of last resort, this is nothing more than an incestuously manufactured deflation mirage with the implication that our big picture view (long term) of breakout inflation expectations could arrive sooner rather than later; perhaps even in the intermediate as opposed to long term.
Think about the implications of the United States buying its own debt obligations. Think about Enron and the many billionaires who parachuted out of the cockpits of the varied financial Ponzi schemes in the run up to 2008’s crash. Think about conventional financial services providers putting people in Treasury Bonds right now. These debt obligations are intrinsically worthless because they can never be repaid; at least not without setting fire to the currency, in which case T Bond ‘investors’ will be eaten alive by rising yields.
Now think about the ‘transitional’ asset class, the precious metals and in particular, gold. As far as stocks go, think about the one sector that stands to gain from an environment of a decelerating economy that is in need of more inflationary policy. As the paper wizard attempts to blow smoke and use mirrors to keep traditional asset markets afloat, the gold miners gain leverage and revaluation as gold’s ‘real’ price – as measured in many commodities and asset markets – increases in the contraction and/or deflationary environment.
The gold stocks should outperform as we transition from the short and/or intermediate term pretense of deflation to our inflationary future in the longer term. At some point, I expect the digital and paper money created basically out of nowhere during the 2008 panic and its ongoing aftermath to result in a new world order, which sees inflated currencies that denominate a relative lack of productivity in areas that are on the decline, and sees areas of resource and productivity attracting capital.
In other words, the world may feel like it is ending for some, but it will feel like birth for others. As still-free investors and speculators, we may cast our view and our accounts out into the great wide world of opportunity beyond the complications of the short term. Meanwhile, we manage the short term still, with the indicators like the Gold-Silver Ratio (GSR) still heavily in play.
With the GSR still indicating a nice looking weekly Inverted Head & Shoulders pattern, the implication is for draining liquidity into the climax of the short term plan as speculators continue to pull in the reins in anticipation of a deflationary ‘event’. This would signal the transition to the intermediate view.
