Tag: inflation

Gold: What A Long And Not So Strange Trip

Posted on by Gary Tanashian

The Gold Miner correction was well earned, but it was not a bubble.

Even today there is some pablum out there talking about how if inflation is good for gold it is especially good for gold miners. I will simply repeat once again that if gold usually does not benefit fundamentally by cyclical inflation (i.e. inflation promoted for and currently working toward economic goals) the gold miners never do, unless they rise against their preferred fundamentals as they did during two separate phases in the last bull market, which were justly resolved with crashes.

Here are a couple charts we used in NFTRH 648 in a segment written to set the record straight. We have also used these charts – especially the first one – since the caution flags went up last summer, visually by the first chart and anecdotally by the usual suspects aggressively pumping the unwitting masses. Buffett buys a gold stock!… okay, well so much for that. Sentiment became off the charts over-bullish and now, as we prepare for the final act of the correction, it’s the opposite. That’s perfect.

HUI had far exceeded the Gold/SPX ratio and so it was very vulnerable from a macro fundamental perspective. Why on earth would players want to focus on miners digging a rock out of the ground that was starting to fail in a price ratio to the stock market? They wouldn’t, and since last summer they didn’t.

Gold

But from a sector fundamental perspective the Gold/Oil ratio (Oil/Energy is a primary driver of mining costs) and HUI show that the 2020 rally was nothing like the two bubbles of yesteryear, when not only did HUI hit danger signals (!) noted above by a macro fundamental indicator, it also made two separate bubbles vs. this sector fundamental. This time? Nope, no bubble here. Continue reading "Gold: What A Long And Not So Strange Trip" →

Which Way Will The Fed Blow?

Posted on by George Yacik

Let’s see if I have this straight. For the past dozen years or so, dating back to the 2008 financial crisis, the Federal Reserve and other major central banks have been trying to raise inflation and thereby generate economic growth. (I’ve never quite understood that thinking; I always thought economic growth generated inflation, not the other way around. But that’s just me.)

So now it finally appears that inflation is about to rear its head, or so the bond market thinks, on the prospects of a nascent economic boom fueled by pent-up demand, fiscal stimulus, a decline in Covid-19 cases, and a vast rollout of vaccines. And what is the market’s reaction? Total panic. Sell bonds and tech stocks that have soared during the pandemic. And beg Jerome Powell and the Fed to save them from losses once again.

Let’s see which Powell responds—the one who has told us over and over again that the Fed will be “patient” and be pleased to let inflation run hotter and longer if it means boosting the employment market; or the one who repeatedly rides to the rescue whenever investors start to lose money and beg for relief.

On the surface, it should be the first one. Over the past month or so, bond yields have risen sharply on fears of rising inflation. Rather than a cause for worry, this should please Powell and the rest of the Fed. After all, they’ve been preaching for months that this is what they want, so this should come as no surprise to anyone. Plus, it’s a good thing – rising rates signal economic growth. Yet, the market’s reaction is shock and dismay. Continue reading "Which Way Will The Fed Blow?" →

Why Inflation?

Posted on by Gary Tanashian

The simple answer is that is what they are doing, inflating.

The slightly less simple answer is that they inflated in 2001 and it worked (for gold, silver, commodities and eventually stocks, roughly in that order). It also worked in 2008-2009 (for gold, silver, commodities and eventually stocks, roughly in that order).

The more complicated answer is that we are down a rabbit hole of debt and the hole appears bottomless. What’s a few more trillion on top of un-payable trillions? As long as confidence remains intact in our monetary and fiscal authorities – and COVID-19 or no COVID-19, stock mini-crash or not, confidence to my eye is intact, speaking of my country, anyway – they will inflate, and what’s more, they will be called upon to inflate.

Confidence may be failing in other parts of the world but the average American is behind this thing they don’t even really understand, known as the Fed. The average American expects the bailout checks from the fiscally reflating government too. Angst, of which there has been plenty lately, is much different from lack of confidence.

I can’t include here all the ways and means the Fed has (frankly, I don’t know about them all) to prop the system, but if you go to the St. Louis Fed website you will find a whole slew of Keynesian egghead stuff. They are on it! Continue reading "Why Inflation?" →

Wooing Inflation

Posted on by Gary Tanashian

The Continuum (the systematic downtrend in long-term Treasury yields) has for decades given the Fed the green light on inflation. Sometimes it runs hot (as per the red arrows) and sometimes it runs cold. One year ago people were confused about why a declining stock market was not influencing Fed chief Powell to reverse his relatively hawkish tone.

tyx-Inflation

The orange arrow shows exactly why, per this post that will be one year old tomorrow (Dec. 19)…

FOMC at Center Stage (NFTRH 530 Excerpt)

Inflation is what the Fed does, after all. But it needs periodic deflationary episodes in order to keep the racket going. I will stick with my original view that the Fed is not adverse to a market correction or even a bear market. It is exactly what is needed to reload the next inflation gun.

The “BOND BEAR MARKET!!!” stuff ran very hot on this cycle as the 30 year yield broke the Continuum’s limiter (monthly EMA 100) before failing over the last few weeks (to the surprise of many, but not us ;-)). As I have noted previously, in my opinion the Fed does not want a bond bear (breakout in yields) or its running mate, a breakout in inflation expectations because the Fed is an inflation machine. But it has inflated against this pleasant continuum of declining yields over the decades that has encompassed the entire training of most of us as market participants.

Inflation

I am not saying that a red dashed line is the be all end all of market analysis. But it is a marker that we have used in NFTRH since 2008 in order to correctly interpret the macro situation. My interpretation today is that the Fed has countered the cost-push inflationary pressures that by definition are injected through fiscally (political) stimulative policy by withdrawing liquidity until something breaks. Ironically, that has involved raising the Fed Funds interest rate and withdrawing QE, which theoretically would raise long-term yields. But when something breaks, the risk ‘off’ herds buy the bond driving yields down.

Fast-forward to today. The herds bought the bond alright; they bought it for most of 2019 amid ‘trade war!!’ and ‘inverted yield curve!!’ headlines and associated economic fears. And so the Continuum dropped again, along with inflation concerns and logically, the Fed’s hawkishness after the Q4 2018 orange alert. Continue reading "Wooing Inflation" →

Where Do We Go From Here?

Posted on by George Yacik

As expected, the Federal Reserve left interest rates unchanged at last week’s post-Election Day monetary policy meeting, while signaling another 25-basis point increase in the federal funds rate at its December 18-19 get-together.

But the results of last week’s elections, which returned control of the House to the Democrats, may put future rate increases next year in doubt. That bodes well for long-term Treasury bond prices – i.e., yields may have peaked.

As we know, Maxine Waters, D-California, is now the likely next chairman of the House Financial Services Committee. To put it mildly, she doesn’t like banks. Her first order of business, no doubt, is to impeach President Trump, as she’s said countless times. But a more realistic second goal will be to roll back all or most of the recent bank regulatory measures made so far by the Trump Administration, which, of course, rolled back much of the regulatory measures passed under the previous administration, mainly through the Dodd-Frank financial reform law.

If she’s successful, that will reduce the mammoth profits the banks have been making the past several years, which were boosted further by the Republicans’ tax reform law. That sharply reduced corporate income tax rates, not just for banks but all companies, although the banks seem to be the biggest beneficiaries. No doubt Waters and her Democrat colleagues have that in their gunsights also.

But that won’t be the end of it. Continue reading "Where Do We Go From Here?" →