The Simple Accountant

5 Reasons Why the Market Is About to Change Direction

We have been shown charts of various ETFs as proxies for the major equity indexes, gold and the US dollar. What is missing? How about charts of IEF and TLT? The above charts may not be saying much, but these are shouting rather loudly. December has been nothing but ugly for the longer maturity treasuries. Now, reconsidering the above in the light of this new information, how do the markets look?

Odd Signals from Financial Markets: Who's Wrong Here?

It is not necessary for anyone to be "wrong" at this juncture. Putting together a study of behavioural economics and history may suggest a changing paradigm for the financial markets, but this would be a very inexact science with little predictive validity for portfolio management purposes. Or it could be, as Mr. Zurbrugg and many others suggest, as simple as an all asset classes rally (except treasury bonds) representing short term mean reversion from an extraordinary all asset classes sell-off.

This appears to me to be a market in which exceptional vigilance is called for. No heroic stands, and a willingness to change outlook and allocations at the first sign of an emerging trend. Blue chip global equities are drifting and trendless, while US small caps are staging a modest rally. Investment grade bonds and treasuries are correcting together with commodities and precious metals, which is a bit odd.

My read: the bond markets fear monetary inflation, while the commodity markets fear insufficient demand. The stalemate between the deflationist and inflationist scenarios grinds on. Therefore my allocation remains quite neutral and overweight cash. At some point the markets will signal the move. Until then, as I often advise, sometimes the best move is to do nothing.

Inflation Premiums at Odds with Crude Price Behavior

As a general rule, when I see inter-market divergences, I usually go with the bond guys. They are generally a more sober lot than the equity crowd, and positively abstemious compared to those wild eyed commodity traders.

Letting the Reinflation Genie Out of the Bottle

Mr. Corcoran asks "Will policy makers exhibit the necessary good judgment to know when it is time to put the brakes on for this massive injection of liquidity?"

We should hope so. Watch the velocity of money. It has been dormant. When it starts to move up, in conjunction with the massive liquidity, then the genie could escape the bottle, and the inflation trade will be on. Long GLD / short TLT, for example, may produce spectacular winners, but the economic consequences would be ugly. Perhaps better to preserve capital or make small gains in a stable economy, than to make occasional windfalls in an unstable one.