Investors and market strategists are excited about the rallies in equities
and economically sensitive commodities, but the declines in gold and Treasury
yields are likely warning of deflation. Coincidentally, a similar scenario
existed in July 2008 when investors embraced equities even though a stock market
crash was directly ahead.
In July 2008, a Lehman Brothers report about Fannie Mae and Freddie Mac contributed
to an equity market panic (link),
but that panic turned into a short-covering rally that lasted through the beginning
of August 2008. During that rally, investors embraced equities because it was
believed that Hank Paulson's "bazooka" (link) and
other government action would protect the economy and financial markets. However,
gold and 10-year Treasury yields did not confirm the rally in equities; rather,
they signaled that liquidity was tightening and that financial markets were
under significant stress (Figure 1).
Figure 1. 2H08 Relative Values of Gold, S&P 500 and 10-Year Treasury
Yield
Source: Yahoo! Finance, Continental Capital Advisors
In hindsight, the market's crash in the fall of 2008 seems as though it should
have been expected, yet equity investors completely ignored the deflationary
signals that existed during the preceding summer. In a repeat of 2008, gold
and Treasury yields have recently declined as equities rose (Figure 2). We
think investors again are ignoring obvious deflationary signals because they
are hoping that future moves by the Federal Reserve will bolster asset markets.
Figure 2. Relative Values of Gold, S&P 500 and 10-Year Treasury Yield
Since June 15, 2010
Source: Yahoo! Finance, Continental Capital Advisors
Economic statistics are significantly weaker than they were in July 2008
even though the government has spent trillions and the Federal Reserve has
already cut interest rates to 0% as well as bought over a trillion dollars
worth of assets. Additionally, the 10-year Treasury yield below 3% and gold's
decline indicates deflation and liquidity strains. Consequently, the stock
market today poses as great of a risk as it did during the summer of 2008.
Continental Capital Advisors, LLC was formed to offset the destruction of
wealth caused by the global devaluation of currencies by central banks. The
name Continental Capital symbolizes the 1775 US Currency, "the Continental",
which was backed by nothing and quickly became devalued.
Disclaimer: The above is a matter of opinion and is not intended as
investment advice. Comments within the text should not be construed as specific
recommendations to buy or sell securities. Individuals should consult with
their broker and personal financial advisors before engaging in any trading
activities. Certain statements included herein may constitute "forward-looking
statements" with the meaning of certain securities legislative measures. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of the above mentioned companies, and / or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Any action taken as a result of
reading this is solely the responsibility of the reader.
Continental Capital Advisors, LLC was formed to offset the destruction of
wealth caused by the global devaluation of currencies by central banks. The
name Continental Capital symbolizes the 1775 US Currency, "the Continental",
which was backed by nothing and quickly became devalued.
Disclaimer: The above is a matter of opinion and is not intended as
investment advice. Comments within the text should not be construed as specific
recommendations to buy or sell securities. Individuals should consult with
their broker and personal financial advisors before engaging in any trading
activities. Certain statements included herein may constitute "forward-looking
statements" with the meaning of certain securities legislative measures. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of the above mentioned companies, and / or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Any action taken as a result of
reading this is solely the responsibility of the reader.
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