Why I Smell a Rat...
You will recall that one year ago we witnessed an epic market glitch called the 'Flash Crash', that took market sentiment down from very unhealthy (over bullish) to quite healthy (overly bearish). You will recall that the blogger had up to that point been managing a pained and laborious Inverted Head & Shoulders in the gold-silver ratio (GSR) which, if activated would have put an end to bullish markets.
Instead, dumb money came out of markets, the H&S broke down and silver launched its epic leg up toward 50, as the boring old fart sitting in his library wearing a smoking jacket, gold, lagged behind repeating to yawns everywhere "I am money I tell you; these markets and these currencies are not real... just buy me, relax and go to bingo on Friday night or take the wife out to early bird special."
Well, the casino got cooking and ultimately, per this chart shown many times before (and modified today), the yield curve led the GSR into its recent upward impulse, compliments of the expected crash in silver. Here's the problem, however; was the 'Flash Crash' not an impulsive thing? Did it not reset sentiment but good? Is the Fed Chief not looking to continue his mad policies aimed at destroying the dreaded deflationary beast? Mustn't he have shut the bad cops (Plosser, Fisher, Bullard, etc...) up so he can go about his business?
The herd is out of silver (http://biiwii.blogspot.com/2011/05/okay-one-more.html), the herd is coming out of commodities (http://biiwii.blogspot.com/2011/05/smell-rat.html) and guess what; this by definition means that inflation expectations are coming under control. Now, as recently as last weekend NFTRH was leaning toward a deflationary situation brewing in the near term, which would ultimately serve the purpose of getting the public good and bearish - with inflation the last thing on its collective (and lagging) mind.
Well, these sentiment figures are forcing me to reevaluate whether the expected decline in inflationary fears is already upon us. This would be policy makers re-loading the inflationary gun, with an eye toward QE3 and beyond. For visuals, here is the long term chart of the T bond 'continuum'. The little model shown in black appeared in NFTRH136.
Maybe it is time to consider the model shown in blue as well, because the GSR is at resistance after an amazing impulse higher, nobody is bullish silver, and commodities (unlike American Idol and Arnold Schwarzenegger and his Baby Mama) quickly fell off the public's radar. In rigged markets dependent upon newly created money to chase after a spectrum of assets, the old boilerplate rules about economic cycles must be thrown out. This is Wonderland, and here in Wonderland, sentiment - while not everything - certainly is a major thing. This is the kind of thinking that the sentiment graphs shown here yesterday, have conjured up in this blogger.
NFTRH137 is sure to revisit and fine tune pending the week's conclusion and a settling of my thoughts.