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Gary Tanashian is proprietor of and Actionable, hype-free technical, macro economic and sentiment analysis is provided in the premium market report 'Notes From the Rabbit Hole' ( Complimentary analysis and commentary is available at the... More
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  • ZIRP Gains More Attention

    We have been talking about how there had been no bubble in US stocks and how the economy is doing just fine. We have also been talking about how the bubble is in policy and that the economy and stock bull market have been created - yes, like Frankenstein's monster once again - out of this policy bubble.

    Enter economist Joseph LaVorgna of Deutche Bank… Fed needs to start raising rates, top forecaster says.

    Will wonders never cease? As you may know, I read the financial MSM to get a feel for what the casual market participant is reading, what the majority is being told is the truth. Usually it is some combo of self-promoters and agenda (sometimes political) driven bulls and bears.

    "The economy is improving much faster than the Fed is willing to acknowledge, LaVorgna said in an interview. At the current rate of hiring, more jobs will be created this year than in any year since 1999."

    Exactly, and still they inflate. He correctly puts the focus on the financial (and national) disgrace called ZIRP as opposed to the theater surrounding QE's long term bond purchases.

    "In six months, the unemployment rate will be below 6% and the core inflation rate will be at 2%," he said. "We are way ahead of schedule. We're going to get to 5.2% or 5.4% a year ahead of schedule."

    "The Fed is behind the proverbial curve," he said. "The Fed should be raising rates."

    It's all that this corner of the interwebs has been hammering on for over a year now. If the economy is at all real, get rid of QE and end ZIRP.

    "I would have raised rates years ago," just enough to get the federal funds rate off zero after the emergency passed, he added. He argued that ultra-low rates may not be doing anything positive for the economy, anyway. "It's not about the cost of money; it's about the provision of credit," he said.

    It is about that provision (or better yet, attempted force feeding) and to this credit, which goes right into the pockets of asset owners there is also a debit, right out of the pockets of the dying breed that used to be a majority, savers. You know who savers used to be, right? They would be the ones who used to deploy capital at appropriate times, investing in opportunities provided by the economy's natural up and down cycles.

    Today there is one cycle; the BOOM/BUST cycle. Right now we are on a BOOM. But the funny thing about cycles is… they cycle!

    He's not worried that quicker-than-expected rate hikes will choke off the recovery. The level of interest rates is more important than the change in interest rates, he said. "If the Fed raises rates because the economy is better, that is a good thing."

    Yes yes yes. This refusal to even entertain a rate hike until some shady day out there in 2015 begs us to ask the question 'what are they afraid of?'. Well,what are they afraid of? The economy is fine on the surface of things.

    He's encouraged that Fed officials are at least talking about the risks of financial instability, but he's worried that the Fed is too focused on its main goals of maximum employment and price stability to pay attention to financial markets.

    The Fed can continue to put the pedal to the metal because gold is in a bear market and the outward signs of inflation are muted. This is the same Fed that did not see the credit bubble, the housing bubble, the tech stock bubble, the commodity bubble in anything resembling foresight.

    As for this 'price stability' thing, since it is a system of Inflation onDemand, what they are saying is that declining prices is a bad thing because it would errr, undo the system. If the system is undone, they are undone (cue Sgt. Barnes… "if the machine breaks down, WE break down"). So inflation it is.

    LaVorgna hesitates to identify potential trouble spots in the financial markets. "We don't know for sure where the bubbles are," but he's confident that the stresses will reveal themselves once rates start to rise. Now is the time to prick those emerging bubbles before they get any bigger.

    The answer is right in front of you. The bubble, as we have been writing for too long now, is in policy. Why, just look at this…

    Yes, it's this chart again with its stark reminder of why the Fed keeps the pedal to the metal. Now, as certain financial assets (read: stocks) start to threaten bubble-like behavior, the 5.5 year long ZIRP (green line above scuttling along the floor) is put into context, very disturbing context, against the backdrop of robust employment and economic acceleration. Here we reference the increasing 'Cost' component in the monthly ISM manufacturing reports.

    Unfortunately, I don't think there is a manageable way for them to back away from ZIRP. Sure, if it were to go as it usually does the market could continue to rise for a short time in the face of ZIRP's withdrawal, but an end to ZIRP would mark the beginning of the end for the bubble economy. The policy bubble is going to need to pop either sooner or later and I don't know about you but I find the one-way aspect of this situation pretty scary.

    The economy itself doesn't exhibit any major imbalances right now, he said. Inventories and sales are well-balanced, banks have recapitalized, and consumers haven't taken on excessive debts.

    Which is exactly where the bears (both economic and stock market) have gotten it wrong. Conventional analysts who were bearish on the economy were just not paying attention or did not look in the right areas (ref: our highlight of the Semiconductor sector in January of 2013, ratios like a rising palladium vs. gold as but one example). The stock market as well has presented technical targets to the upside since the big breakout in 2013.

    The article goes on to glad hand Mr. LaVorgna on his forecasting prowess among a host of other establishment gurus. I won't bore you with it. But nothing, absolutely nothing has changed in our analysis that sees the last refugees of the 'Great Recession' (handy nickname isn't it, with its implication of something that is well in the past?) being sucked back in by the seemingly endless run of ZIRP. The process is completing.

    Or as the poor pre-retirement couples in a sad John Hancock commercial put it…

    "We felt better holding onto our money…"

    Her: "But waiting?" Him: "Hmmm, we shouldn't wait anymore."

    Him: "So here we are." Her: "I mean, we need to invest again."

    "We just need to find the right thing to do." The look on the guy's face is classic.

    So here they are… finding the exact wrong thing to do as instigated by policy making. | Notes From the Rabbit Hole | Free eLetter | Twitter

    Jun 12 8:33 AM | Link | Comment!
  • Us Treasury Bonds, Gold And The Stock Market

    The following is one of a wide range of analytical topics covered in NFTRH 293′s 35 pages this week, much of which is straight ahead technical analysis. But the T Bond market is usually central to an overall macro view at any given time. This segment is not meant to provide actionable direction (other than perhaps to prepare for a potential rise in T bonds yields), it is meant to dig into the mechanics beneath the financial markets in an effort to have people consider that there is much more going on with markets than simple nominal TA or conventional fundamental analysis (PE ratios, growth metrics, reported economic data, etc.) can account for.

    US Treasury Bonds

    (click to enlarge)

    10 & 30yr yields have declined to support as NFTRH projected

    Yields on long-term Treasuries have continued to decline in line with our view that was contrary the 'Great Rotation' (out of bonds) hype. The [30-year] especially is now close to support and the next play seems like it could be rising yields and declining T bonds.

    (click to enlarge)

    Our long-term 'Continuum' chart; yields approach support

    The 30-year 'Continuum' view above makes the simple case that players had to be put offside believing in the 'Great Rotation' at 4% yields. The nearly half-year decline since then has now satisfied the chart as yields have come to our 3.1% to 3.2% target range, where there is support.

    It is interesting that stocks have continued to rise despite declining yields, whereas previously they had been rising with yields. One victim of this phenomenon however, has been a stock market leader, the banks. It is no surprise at all that bank leadership broke down as yields broke down because ZIRP provides in essence free money where they borrow (Fed Funds) and higher long-term yields provides the implied profit incentive, where they package this stuff out to public and commercial borrowers.

    Moving on, we'll close with the 10yr vs. 2yr yield curve with gold juxtaposed in the background.

    (click to enlarge)

    It continues to be in the realm of possibility if not probability that the gold community's trials and tribulations of the last 2.5 years has been fully earned as the most vocal boosters of the metal looked like utter geniuses in 2004 through 2007 when gold went up while the curve went down and we might add, gold went nowhere vs. commodities (ref. Gold-CCI on page 21).

    That was a time when the fundamentals for gold and the gold stock sector were 'not good' and 'flat out awful', respectively. That is because it was a time of economic expansion, not deceleration.

    So tell me now Bueller, does the ongoing 2.5 year precious metals bloodbath make sense given that the economy is working relatively as current policy wants it to? Yes, it does make sense.

    There is hype in the financial media about how a flattening curve is bad for stocks and the economy, but this chart puts a lie to that lazy analysis. The analysis claims that the curve is still elevated (nice understatement) and thus there is little to worry about.

    A flat yield curve worked well enough in the secular bull into 2000, when the situation began to change and a rising curve attended the bear market out of the tech bubble. A flattening curve also attended the 2003 to 2007 cyclical bull market. In the post-2000 age of 'Inflation onDemand' a sharply rising curve has gone hand in hand with unprecedented upset in global financial markets. Most recently however, the curve has dropped in accordance with economic recovery (ref: Operation Twist, which helped kick things off as it pressured short-term yields upward while pressuring long-term yields downward).

    Again, much like with the Gold-CCI chart on page 21, if this big picture view breaks down so too must the analysis change to allow for its implications, which would be that a new era of prosperity has been created out of monetary policy. The thing is though, they have not broken down yet so instead, NFTRH stays the course and marvels at these charts showing just how desperate policy has been in its effort to keep the picture intact.

    Dow & T Bill rate, long-term relationship

    (click to enlarge)

    Closer view of the 3 month T Bill rate pinned to ZERO, 5 years & counting | Notes From the Rabbit Hole (NFTRH) | Free eLetter | Twitter

    Jun 02 9:56 AM | Link | Comment!
  • Gold, Silver And The Macro

    Those micro managing the precious metals are fixating on the Symmetrical Triangle (bearish continuation) and a coming 'Death Cross' of the MA 50 below the MA 200.

    The Sym-Tri has been apparent for about three weeks and the Death Cross is hype put forth by those who would make grand TA statements. The Death Cross means next to nothing. I mean, how much good did the Golden Cross that the "community" was pumping in March end up doing?

    (click to enlarge)

    Gold is bearish and has been bearish by its technicals (below the 50 and 200 MA's), and ever since the economic soft patch was was put behind us (cold weather, remember?) by its apparent macro fundamentals as well. NFTRH has been keeping this situation locked down and in a box for future reference. The box will be opened when the time is right.

    Meanwhile, I'd suggest that people avoid micro managing gold. It is not an idol or a religion, and while there is a whole industry champing at the bit to begin promoting it again, it is just a tool for retaining the value of money. Sometimes tools sit in the toolbox.

    As for silver…

    (click to enlarge)

    Poor man's gold is scuttling along the floor of what is major support dating back to 2009-2010. The daily chart above shows two previous failures to get above the SMA 50. Silver is going to make an important break upward or downward within a matter of weeks. Check out the weekly chart for reference…

    (click to enlarge)

    With the bearish analysis showing up out there you'd think silver had already lost the big picture. No, all the noise is from technical people keeping the masses enthralled with prognostications based on daily charts like those above.


    1. Silver is just above critical long term support
    2. Silver has not broken down from this support
    3. Silver has not broken up from trend line resistance*
    4. One of these must give way in the next several weeks
    5. No amount of pom pom waving or doom saying is going to influence it in one direction or the other

    So why not realize that the precious metals are just another asset class that is in a holding pattern, pending further developments? Why not tune out the caricatures in the media that have been wrong for years now and understand gold's real fundamentals and silver's relationship to gold within the macro processes?

    Indeed, why do not gold and silver bugs just relax and wait for macro signals like the answer to the question 'what is silver going to do in relation to gold?'

    (click to enlarge)

    There is a world of assets out there depending on the answer to that and similar questions that would indicate whether the next phase is going to be inflationary or deflationary. Why, even stock market participants should be paying attention to the macro.

    Notice how the S&P 500 (bottom panel), which had been in positive correlation with commodities (2nd panel) and the Silver-Gold ratio (SGR) has taken advantage of global deflationary pressure over the last couple of years and actually gone against the outgoing SGR and commodity tide. That would be our little friend Goldilocks enjoying her 'just right' porridge.

    We are working on a thesis that a big picture breakdown in the SGR (breakout in the Gold-Silver ratio) would end Goldilocks, however as deflationary pressures mount. Conversely, if silver breaks out vs. gold we would be talking about an inflationary phase. Either way, Goldilocks gets kicked out of the house.

    The gold and silver ratios are just one tool in the box. As Bob Hoye describes them, a sort of metals related credit spread. Speaking of which, actual credit (bond) spreads are in play along with several other tools in helping determine what the coming phase is going to be.

    Nothing is as simple as one post can try to make it appear, so I will not try. There are so many moving parts in play and they seem to be coming down to the next several weeks or few months, as indicated by the weekly chart of silver above. So the point of this post is…

    • Relax and tune out the short term micro management. If you're too heavily positioned in a way that makes you feel uncomfortable, get things in alignment with a sleep test of your choice.
    • Change is coming, but there are valid and very different arguments as to what its nature will be. Let the change reveal itself at least in strong hints before strong commitment.
    • Being in alignment with these changes will likely be very profitable while being on the wrong side, quite the opposite. Using the stock market as an example, both manic upside blow off and resumed roll over and decline remain in play. As for the precious metals and indeed the greater inflation-deflation debate, the story is the same, the pros and cons are not yet definitively sorted out.
    • Avoid taking easy to digest info bites as instructions and await definable and real data points. They're coming and I suspect that gold, silver and the relationship between the two will be front and center in the macro toolbox.

    * With reference to the weekly chart of silver above, as NFTRH subscribers will recall we tracked a very similar situation (creeping along at support toward a definite break OUT or break DOWN point) on the weekly chart of the CCI commodity index for many months right up until the day of its eventual breakout.

    (click to enlarge) | Notes From the Rabbit Hole | Free eLetter | Twitter

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: No positions mentioned.

    May 27 9:50 AM | Link | 1 Comment
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