The Long Bond
Here is a most important long term sign post, the long bond and its EMA 100.
Against the backdrop of the long bond's uninterrupted rise from the 1980's, Alan Greenspan was able to portray himself as the great Maestro, always at the ready with inflationary policy when the market and economy needed it most. This is what I have viewed as a wellspring, compliments of Paul Volcker's tough inflation-fighting policy of the late 1970's and early 1980's. This policy sprung a new bull market in paper stock and bond certificates as confidence was restored in a secular way.
Greenspan used this sound policy as a lever with which to self-aggrandize and inject moral hazard into a global economy ever more dependent on debt and leverage to keep itself afloat. The new bureaucrats in charge, Bernanke, Geithner and Summers, have taken Greenspan's play book and run with it.
But they will run as far as the long bond says they will run.
It turned out that Q4, 2008 was merely an opportunity to push the mother of all panic buttons and introduce inflation policy into the system like never before. This was a lay up as Larry Summers implored the public to buy treasuries right into an inflationary impulse that has been nearly equal to last year's deflationary one. This trade has been like taking candy from a baby.
And the game of hide the cheese will continue to frustrate both the 'inflationists' and 'deflationists' at important turning points, as long as the secular trend remains intact. I am of the opinion that there will never be outright deflation as long as the public maintains its...... I can't call it confidence... as long as the public maintains its penchant for thinking in conventional terms.
Because as the public does so, it makes no effort to stop the ongoing and official gaming the long bond, which sees policy makers ramp the money supply every time treasuries rise strongly, giving them license if not imperative, to do so.
The game will end if and when the EMA 100, the secular backbone of the trend, is broken. Then we are in uncharted inflationary waters. I am looking for another test of the 100 as per the daily chart of 30 year yields shown in this post. At that point, I will have to say the risk is substantial for the inflationists as another deflationary liquidation is probable. From this event would come future inflationary policies in a continuation of the wash, rinse, repeat cycle.
Either that or the game ends and a new era begins. That would be the era of hyperinflation. We should be hoping the current trend in the long bond holds.