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The
30 year / 2 year Treasury yield curve has been on a steady march higher since 2007. This makes sense since that
was the year things started falling apart in inflated, debt saturated developed global economies, led by the nation that showed 'em how it's done
when it comes to economic management by
inflation; the US.
When long term yields are rising faster than short term yields, it is a sign
of stress building toward either
a breakout in inflation expectations or, as has
been the case thus far since
2007 (and really, since
the age of Inflation onDemand began
in 2001), impending
reversal of the excesses. Unfortunately,
in an age where economies are managed by
inflation (by monetization of Treasury/Sovereign debt in service to increasing money supplies) these
reversals tend to be shall we say,
violent.
Without conjuring too much theory
about the Treasury bond market's
yield relationships, let's just say
that a rising curve (top panel) has accompanied
ever higher moral hazards being baked into the macro cake. As shown, the monetary value anchor, gold, has moved up
right along with the curve. But like the curve itself since the Euro ignited blow off in 2011, Au has been mired in an intermediate down
trend. It all makes sense,
at least when comparing the yield curve with the monetary relic which has not yet by the way, broken down from what still
qualifies as a Symmetrical Triangle, which is usually
a bullish pattern.
But enough on gold, it will go up or it will go down in the short term.
What we are interested in today is what the yield
curve in the top panel may
be indicating for the
nominal 30 year yield in
the lower panel and from there, what the nominal yield may forecast.
Very clearly, when the curve has increased and then played out a consolidation/correction (red dotted lines)
as it is now doing, a decline in nominal 30 year yields and a deflationary
and/or crisis episode has
played out each time within a few months. The 2008 decline in the curve forecast 'Armageddon 08', centered
in the US (this was the
'lever' to QE1), the 2010 decline forecast the 'Flash Crash' and associated
liquidity problems (this was the 'lever' to QE2)
and the decline in 2011 forecast the phase where Europe's sovereign debt structure began to come apart at the seams (this was
the lever to the ECB's version of QE as its balance sheet was expanded to deal with the crisis, while the US financial media got to pretend it was Europe's
problem and if not for that
all would be fine).
Well, the yield curve has been in decline since the acute phase of the Euro crisis
and its correction has been exacerbated
by the Fed's stated
intention of selling short term
T bonds and buying up long ones.
This has painted 'Goldilocks'
into the picture, pressured the precious metals and commodities, and given the stock market a reason to bull without those nasty inflation concerns that tend to make the Fed's policy makers sensitive to criticism.
But we have another red dotted line indicating a correction/consolidation on the chart. Is it different this time or is the curve again forecasting that a deflationary 'issue' will be cropping
up later in 2012? Taking it further,
would it not be a convenient
excuse for Dear (monetary)
Leader to come to the rescue once again?
We have been following
the RPG (real price of gold) and other macro 'tools' closely and they have not yet given a signal as to sufficient pressure for coming
QE-style inflationary policy.
But the picture above says that in this election year, it could
be coming soon if previous relationships prove valid in the current situation.
Considering how low
nominal yields are already,
what kind of policy response would you think
might meet a deflationary episode? I think it could
be a decisive one.
Then again, maybe this time it will be
different.
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