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Gary Tanashian is proprietor of Actionable, hype-free technical, macro economic and sentiment analysis is provided in the premium newsletter Notes From the Rabbit Hole ( Complimentary analysis and commentary is available at the 'Biiwii Blog'... More
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  • Is The Yield Curve Really Flattening?

    There is a lot of talk now about a flattening of the yield curve. This talk has been among the most intense right here at the website you are reading at this moment. A flattening curve is commonly viewed as bad for gold, and according to Mark Hulbert, is an indicator of a coming recession.

    Why you should care about the yield curve

    But is the curve really flattening or is this all hype based on Janet Yellen's press conference comments? Here is a chart the likes of which we have been using in NFTRH for many months now, the 30 year vs. the 5 year yield.

    (click to enlarge)

    MarketWatch shows a similar chart in its article…

    Treasury curve now flattest since 2009

    Here we should lend some perspective. Okay Beuller, I ask you what is different this time from the last flattening?

    (click to enlarge)

    I am not going to pretend to sit here like some genius blogger and post all the conclusions so that we all know exactly what is going on (according to one guy's imperfect world view). But what we do know is…

    • In 2004 Alan Greenspan began to get the memo that his ultra lenient monetary policy had instigated a growing bubble in commercial credit.
    • As the stock market and economy began to show favorable signs this policy was incrementally withdrawn, which in normal times would be the thing to do. The curve flattened in line with policy making goals (of tamping down inflation expectations).
    • Unfortunately, it also tipped the leveraged system into a domino effect of high profile corporate financial failures, that resolved into the crash of 2008.
    • Enter ZIRP in December 2008. This was brave new policy decreed by the will of man and endures to this day.
    • The curve has been flattening for over a year now.
    • Some Fed jawbone "you know", flapped about a withdrawal of ZIRP sometime well out in 2015, "that sort of thing".
    • There is a distortion built into the system. This is not opinion, it is a fact presented by the chart above. Now, how it will resolve is up for debate among various eggheads.

    But there is a running distortion on the fly and not you or I know how it will resolve. It is not normal and it (in my opinion) belies desperation on the part of those promoting it. To me, it looks like the latter stages of an 'all or nothing' operation that was put in play years ago. 'All or nothing' implies all in and totally committed. Otherwise, why has ZIRP not already (and long ago) begun to be incrementally phased out?

    One conclusion that can be made is that this alignment continues to be favorable to whomever it is that borrows from the Fed Funds window exclusively. That is of course due to the beneficial (and again in my opinion, immoral) ZIRP. They can lend out at any other point on the curve for a favorable spread.

    The curve is not flattening when ZIRP is used as the short term measurement point, as it is when the 5, 3 or 2 year yields are measured.

    And people wonder why the rich get richer. They should stop looking at politics and start looking at finance (okay, the post rambled a little).

    Mar 26 9:33 AM | Link | Comment!
  • Gold's Macro Fundamentals

    Excerpted from the 31 page NFTRH 283 (dated 3.23.14), which also thoroughly analyzed the precious metals and several other markets from a technical standpoint.

    Gold's Macro Fundamentals

    (click to enlarge)

    This spike in short-term yields (2-year shown) is what harpooned gold last week and finally got it under control.

    (click to enlarge)

    More importantly, this spike in the 2-year vs. the 30-year really hurt gold.

    These spikes predictably came as the FOMC successfully managed to get the market thinking about an end to the damaging Zero Interest Rate Policy, ZIRP.


    Yes, it is that time again when the letter writer veers off course into a brain dump. You, dear long time subscriber, have heard this before. But for newer subscribers I feel a point needs to be made so that your expectations of this market report are well in line with its raison d'être.

    This is not a 'go gold!', 'got gold?' style pump house. Simply stated, I would rather live in a world where I do not feel gold is a necessary asset class. I would rather live in a world where bureaucrats were not in control of interest rate functions and hence, to some degree in control of financial markets.

    Under this interest rate manipulation, the concept of saving has been utterly torn apart in the United States via the now 5+ year old ZIRP. If you do not speculate, you do not profit. The problem is that the risks in speculation are rising with every lurch higher in the stock market and junk bonds, to name two of the primary beneficiaries.

    So it's everybody into the (risk) pool and everyone foolish enough to depend on savings… screw you. So I [omitted, not for public consumption] because I continue to unwaveringly believe that this big macro operation, going in one form and degree of intensity or another since 2001, is little more a than racket to be unwound.

    But if the moment were to come when I feel we really are on the right track - and folks, withdrawing ZIRP [could] theoretically at least be considered one component of 'on the right track' - this market report would simply move on from the precious metals sector because frankly, I find it a strange place inhabited by some strange people.

    The problem though is partially represented by the distortion built into this chart…

    (click to enlarge)

    Something is just not right here. Long into an economic recovery and even longer into a bull market in stocks the Fed Funds rate (FFR) is still pinning T Bill yields to the mat. Now, the Fed Chief babbles about a rate hike out in 2015, "that type of thing". Gold then reverses its ascent (it was ripe, given the Ukraine hype coming out of the gold 'community') on the implications of rising short-term yields.

    Using the 2003-2007 bull market as a template, the FFR should have begun to rise in 2010. Now it is 4 years later than that and the Fed is talking about a rate hike out in 2015, "that type of thing". Please. They are playing poker against the market and for now the market is not calling any bluffs.

    Back on the Funda's

    So last week we had a group of interest rate manipulators meet for 2 days and then a press conference by the group's leader. She "you know" intimated that the ideal timing to begin phasing out ZIRP would be approximately "you know" sort of like maybe 6 months after QE3 is entirely tapered. "You know", if the economy is still strengthening then; that sort of thing.

    Okay tell me now, who knows what the economy will be doing then? As things stand now last week was a negative for gold, which was in need of a correction. But the key question going forward will be whether or not these negatives will endure or go back to business as usual as FOMC day fades to background?

    (click to enlarge)

    So the long-term / short-term interest rate fundamental dropped to its lowest point of the gold bear market last week. What can we conclude from that?

    • Gold's fundamental underpinning took a hit.
    • When measuring the length of the sideways channel on the yield spread, we note that gold may have already discounted this drop as its price is much lower than it was in summer of 2012 when the spread first declined to 80.
    • The yield spread, driven down by a jawbone and a lot of market emotion and media hype last week is at a potential bounce point.

    So fundamentally speaking, gold bugs want to see last week's hysterics fade pretty quickly and by extension, the spread hold the support area (notwithstanding a day or two of down spiking for good measure).

    If the market comes to believe that the Fed means business on the Funds Rate and 2, 3, 5 year yields continue to rise relative to long-term yields, it would be bearish for the price of gold. I make the distinction between "bearish for the price of gold" and 'bearish for gold' because price is a reflection of the value assigned to gold at any given time.

    For as long as it lasts, a phase where the market perceives itself to be under the sound monetary stewardship of the Fed - regardless of sustainability - would be gold price bearish.

    Of course last week may have been a flash in the pan, as the Fed got the respect it always seems to get from the market during the ongoing phase of stock mini mania and economic mini revival. There are other phases you know, when the market gives them the finger. That is out in the future.

    Let's watch the dust settle on the interest rate front and evaluate weekly.

    Postscript (current, 3.25.14)

    So tell me, what was China doing late last week and early this week as gold got harpooned? Did gold suddenly decline because of the much hyped 'China demand drop'? Did supposedly massive physical demand suddenly dry up on the spur of a moment? There's always a seller on the other end of that demand you know.

    Ukraine hyperbole unwound and that was expected to take something off the top. But chasing funnymentals like China, physical demand (vs. COMEX shortages) and Ukraine around is what got the gold community in trouble in the first place.

    There is no debate, real interest rates jumped last week and gold got clobbered. There are other key fundamentals as well. Unfortunately with the media just pumping out story after story it is no wonder people get so confused.

    NFTRH is a serious market management service (including 'in-week' technical updates), and is a value at only $29 per month (or 10%+ savings on an annual subscription). | Notes From the Rabbit Hole | Free eLetter | Twitter

    Mar 25 5:19 PM | Link | Comment!
  • Zirp Up Next?

    Everyone expects Janet Yellen to be a rolling over, inflationist stooge just like they did Ben Bernanke. Bernanke came on board after Alan Greenspan had taken the Fed Funds rate up to around 5% if I remember correctly. Inflationists and gold bugs thought they had it in the bag when 'Helicopter Ben' assumed control.

    Indeed, Bernanke did what he was supposed to do (per the 'Helicopter 'Ben' script) as systemic stresses began to gather in 2007, addressing that pesky Funds rate, culminating in December, 2008′s official ZIRP (zero interest rate policy). Here again is the chart showing the S&P 500′s 'Hump #3′ attended by this most beneficial monetary policy.

    (click to enlarge)

    As noted again and again, the much trumpeted 'taper' of QE is not only not a negative for the economy, we have made a strong case that its mechanics are actually a positive, in the near term at least. But putting ZIRP on the table would be a whole different ball of wax.

    We need to ask ourselves what kind of distortions the above chart represents, and what would be the implication of these distortions? The S&P 500 has, at the instigation of ZIRP formed a grand Hump #3 and yet this was done without the usual attendant rise in T Bill yields. In other words, the Fed has held ZIRP and continues to hold ZIRP, despite what Janet Yellen ruminated during her post-FOMC press conference:

    How long after QE tapering ends will the Fed wait to raise the Funds Rate?

    "So the language that we used in the statement is 'considerable period.' So I, you know, this is the kind of term it's hard to define. But, you know, probably means something on the order of around six months, that type of thing." -Janet Yellen

    Nothing has changed, other than a new Fed Chief was asked a provocative question and she bumbled along with an answer. Sort of.

    The key questions are…

    What sort of inflationary pressures have been built into the system as a result of a fully formed Hump #3 having grown along side still-ZIRPed monetary policy?


    Does this have inflationary or deflationary implications?

    The answer is for all the marbles where investment (that benefits from inflationary cost effects) or non-investment (cash) are concerned.

    Again, as part of the above linked post, we have noted that an incentive is built in for banks to lend if ZIRP is maintained on the short end and the Fed tapers out of the QE bond buying business on the long end. Banks have indeed been lending. An end to ZIRP out in 2015, per Yellen's answer above, starts a clock ticking on a constriction of this carry trade racket, theoretically at least. All she did after all was wrestle with the English language ("So I , you know, this is the kind of term it's hard to define") a little and give an answer (sort of).

    But the 2009 to 2014 portion of the chart above is a distortion, no matter how you slice it. Normally, the S&P 500 runs positively with elevated or rising T Bill yields as it seems to test the will of policy makers every step of the way. This is the oldest contrarian play in the book; everybody fears rising interest rates, bears think it's in the bag and yet the bull continues.

    But this time the seed corn has already been used. I would argue that ZIRP should have been withdrawn long ago, let alone the vague "hard to define" timeline put out by the Fed Chief yesterday. The fact that ZIRP was not ended back in oh, 2010 or 2011, when inflation began to get out of control, was telling. What have they been afraid of? They say they want more 'jobs', less unemployment and more vibrant economic activity.

    But you do not use something as powerful and potentially damaging as ZIRP for years on end unless there is something else going on.

    This post has outgrown its original scope and so it will be concluded now.

    Bottom Line

    The conclusion is that it does not matter what Janet Yellen babbled yesterday, the market is going to balance the sheet sooner or later. That balancing will either come through accelerating inflationary pressures already seeded into the system as the Fed is compelled to raise interest rates or it will come in the form of a deflationary clearing of distortions as inflated asset prices come back in line. The problem is, using the T Bill rate as a proxy, that line has been crawling along the floor for 5+ years now.

    Financial markets promise to be very interesting during Ms. Yellen's first year at the helm. Let's keep our preconceptions and biases under control and gauge what is actually happening every step of the way. | Notes From the Rabbit Hole | Free eLetter | Twitter

    Mar 20 8:50 AM | Link | 1 Comment
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