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From Bloomberg on Friday [13th]: “Stocks
fell, trimming a weekly gain, while the euro and commodities slid after
reports that several European nations will have credit ratings cut by
Standard & Poor’s. U.S. Treasuries rose…”
This is the news of one failing major currency benefiting the exchange rate
of another, along with the Treasury bonds it denominates. Deflation is not
global hot money hysterically running from one intrinsically worthless
currency to another any more than the 2005-2008 “death of the US dollar
cult” represented hyperinflation.
This is a global race to the bottom, headlined by two major debt-mangled
currencies as waning confidence ping pongs from one to the other over years,
decades and over the ‘continuum’ (our trusty chart is again
reviewed below because well, there still may be one or two readers out there
who have not fully taken in its message, which I have beaten you over the head
with over these last three plus years).
You know that I am not shy about highlighting
the folly of the manic ‘inflation bulls’ and their hyperinflation
hysteria every time the ‘continuum’ is threatened by a rise in 30
year yields to the monthly EMA 100 (most recently in spring of 2011,
featuring Bill Gross’ highly publicized and ill-fated Treasury bond
short play), which has neatly framed and contained inflation expectations for
decades.
Nor am I shy about highlighting the folly of those getting all wrapped up in
deflation and the certainty that it is finally going to happen this time, as
those cultists would have us believe. There is inflation and there is
deflation, all along the continuum.
 
The long-term picture of the 30-year Treasury
Bond yield is one of a deflationary backdrop as the TYX gently slopes
downward (like America’s prospects for real productivity) over the
decades. Against this downward slope are periodic inflationary impulses,
which arise as a result of currency-compromising policy promoted as needed
for an economy dependant on monetary inflation
rather than productivity.
During the inflationary impulses, the majority gets greedy and hysterical
about rising prices just before the whole mess reverses downward (red arrows,
generally at the 100 month exponential moving average) and it generally
becomes very hard for the Federal Reserve to justify manufacturing more
currency by monetizing debt.
Then there are the deflationary impulses. Those would be the unpleasant
downward spikes in ‘inflation concerns’, which could eventually
morph into all out fears of a deflationary depression. This would be the
hysterical opposite of what is going on at the red arrows.
There is no guarantee about the future, but we can state conclusively that
each time a green arrow has appeared it has been an excellent time to cast
off the deflationary hoopla and deploy as a contrary investor for an
‘inflation up’ cycle generally lasting a year or more. Similarly,
the red arrows have generally provided excellent opportunities to preserve
capital in anticipation of future asset buying opportunities. So now, what do
we have going on? If the chart above arrests its decline at the green dotted
line, we are likely at the start of a new inflation cycle, which would target
– you guessed it – the EMA 100 (red line).
Unfortunately, there are two channels with a newer, less downwardly biased
one (dotted lines) targeting a bottom now, and the
original EMA 100 and straight green channel line targeting something that
would be truly painful in the near term, with asset price destruction
potentially visiting markets far and wide. I would still debate whether this
would be attended by actual deflation. But that is an argument we would leave
for the appropriate time, because the answer would be dependant
on the capacity at which policy makers are running the money factory.
We want to know whether the next inflation cycle is beginning now, or will
begin after a final and terrifying downward spike in yields. We should have
an answer when the current price cluster (yellow shaded area on the chart
above) breaks one way or the other.
Flipping the market over from yields to bonds,
above is the monthly chart of the 10-year US Treasury Note. A version of this
chart was shown on the blog http://is.gd/fK4asB repeatedly last spring as Pimco
shorted and inflationary hysterics were peaking.
As I recall, the analysis I derived from the chart (and other events going on
at the time) as to short-term market activity was by no means perfect, but
the main point was that inflation fears were getting over done precisely at a
time when players should have been preparing for a swing to the other end of
the spectrum. Lo and behold, what has transpired?
The yellow shaded area was the point in question as the financial media and
blogosphere were telling us that this was the big one, the inflationary
reckoning. Unfortunately, the 10-year had not relinquished its bullish stance
so this simple chart guy went on the alert for a cycle change along the
continuum.
Recall that ‘deflation’ was considered crazy talk as a new
austerity movement was being lifted in the US, crude oil was rising into a
post ’08 crash peak, silver was accelerating toward its blow off top
and copper was above $4.20 per pound.
Since the long bond’s yield (TYX, top chart) has yielded no
decision yet and since the 10-year Note (UST) remains in a bullish stance
targeting higher levels, it would be wise for people not to make fun of
premier ‘d Boy’ Robert Prechter just
yet. The stock market is coming due for a significant correction (at our
long-standing target of SPX 1340 to 1360?).
When a correction finally arrives, the state of long-term US Treasury Bonds
will be one of the important components used in defining the nature of what
comes next. If the continuum is to remain intact, what comes next will be a
whopper of an inflation cycle.
The T Bond structure is among several reasons
that NFTRH is moving to a view of an ultimately inflationary 2012, just as we
were on guard for a deflationary 2011 per this chart (from last spring), and
per the most recent red arrow on the monthly TYX. Yet until a reversal is
clearly defined, caution is heavily in play. You see?
NFTRH170 then proceeds to an updated 'Current Outlook' and
all the usual sentiment and technical tools in the toolbox used to keep us on
the right side of macro markets, along with reviews of gold, silver, gold
miners, commodities, stock markets and currencies...
Gary Tanashian
http://www.biiwii.blogspot.com
http://www.biiwii.com
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