Green Shoots To Soggy Grass
The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, June 12th, 2009.
A skyrocketing yield curve is normally a sign the economy is dangerously heating up, and that market rates in fixed income securities are signaling the likelihood of higher administered rates soon as well. Along these lines then, short-term rates have been rising on the expectation that the Fed will need to talk about higher rates at its next meeting on July 22nd, with a corresponding collapse in both the yield curve and gold. It should be noted gold is tracing out an exact pattern match on the yield curve, and rate expectations.
Of course whether the Fed actually acts responsibly at its next meeting is another thing all together, where in fact if the Fed were to actually mumble a few stern words at this point in double speak form, it would not be surprising to see them follow up with an announcement regarding ramped up quantitative easing (QE) plans a few days later, especially if equities came under attack. They would be justified to do so in their own minds this way you see, because in their own self-important view, the end of the world would be near.
So, this is why gold and equities might see some volatility in coming days, hinging off expectations and realities related to the Fed's moves in coming weeks. And in this regard one must remember the Fed wants a lower dollar ($) moving forward to continue spurring a sputtering economy; so again, if the markets develop a hawkish predisposition prior to their next meeting we would have a potential set-up for a head fake move in any $ strength. The only question would be whether such efforts were trumped due to a renewed collapse in credit markets out of the Fed's control, stepped up QE or not, with the $ telling the story in this regard.
What I mean here is if for example the Fed came out and said 'hey guys, we're going to spend another trillion monetizing Treasuries, and the $ did not immediately break back below the monthly swing line (21 EMA) at approximately 81 right away, then Huston, we would have a problem'. This would be a signal the next phase of credit contraction within the larger (secular) cycle was underway, and to prepare for the second round of collapsing equity markets that is customary within an a - b - c patterning, which by the way MUST be in the cards at some point.
How can we say this so confidently, with a plethora of knuckleheads out there talking of 'green shoots' and such folly? Easy, because major stock averages fell in five-wave sequences from their respective tops in 2007, and after some form of a - b - c correction / retrace higher here, they necessarily must fall one more time before long-term recoveries can be contemplated. This is a standard wave principal that must be adhered to at some point. And while such an episode might take more time to unfold, with the next meaningful round of mortgage defaults not slatted to kick in until next year, the point is it's coming, so be prepared. (See Figure 1)
Above you see what is anticipated from a more elongated recovery pattern, the likes of which would match the rekindling mortgage related credit problems next year discussed in the blog attached above. The question is does the second leg of the stock market discounting a more significant slowing wait for this, or does some other element of the larger credit picture, like rising bond yields, bring an increasingly frail sovereign debt into the picture before hand. Anyway you slice it, market internals are not good with stocks rising on declining volume, so the situation remains tenuous to say the least.
One needs to consider such circumstances carefully when owning equities right now, because when the next round of deleveraging takes place, like the last one, it will take everything with it, including precious metals stocks initially. In fact, unless we see a more elongated recovery pattern in the stock market like the one pictured above, the highs in precious metals stocks witnessed last week could prove to be more important than many think. I am not forecasting this, as the long-term charts paint a optimistically bullish picture for precious metals equities moving for, however such an outcome is possible.
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Good investing all.