Let's Twist Again

By: Gary Tanashian | Thu, Jun 21, 2012
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The previous post of the same title was put up by a bemused blogger to express the idea that the big brains on the FOMC must think we are a bunch of drooling idiots, we Americans... and we global financial market participants. Similar sentiments have been expressed on this blog in the past with my personal favorite nugget from popular culture era gone by:

"There is nothing wrong with your television set. Do not attempt to adjust the picture. We are controlling transmission [the T bond market]. If we wish to make it louder [appear as if there is little or no inflationary policy], we will bring up the volume [short term yield]. If we wish to make it softer [appear as if we are doing all we can do to inflate], we will tune it to a whisper [buy bonds across all durations and asset classes]. We will control the horizontal. We will control the vertical [mostly the vertical]. We can roll the image [yield curve], make it flutter. We can change the focus [of conventional trend following market participants] to a soft blur or sharpen it to crystal clarity. For the next hour [duration of the lifespan of the current system], sit quietly and we will control all that you see and hear. We repeat: there is nothing wrong with your television set [remotely managed bond market]. You are about to participate in a great adventure. You are about to experience the awe and mystery which reaches from the inner mind to -- The Outer Limits. [That is all, calmly go about your business and we will take care of everything]"

TYX-IRX (30 year T bill) yield curve
Larger Image

Above is a log scale (I normally use linear scale charts for their more literal view) chart of the 30 year yield vs. T bill 'yields' (so to speak). Due to extreme volatility, a linear chart obscures the message that the most extreme yield curve (until they introduce 50 and 100 year Treasury bonds perhaps?) remains elevated even after it was pressured downward after last year's kickoff to the euro crisis.

The point of yield curve analysis is to show that when long term yields are rising strongly relative to short term ones, the system is indicated to be under stress and under inflationary pressure all at once. In this scenario, economies are decelerating, policy is accommodative and inflation fears are rising.

30yr - 2yr yield curve - Linear Scale with the gold price
Larger Image

But what does Operation Twist do? It seeks to negate the natural forces (and thus the signals we derive) of the T bond market in favor of painting a handy picture. As for gold, the monetary barometer to systemic and inflationary pressure, it has - since the acute phase of the credit bubble implosion began in 2007 - tended to follow the spread between 30 year bonds and 2 year bonds.

How convenient; the Fed now states it will continue through year end to buy long term bonds and sell equal amounts of short term bonds. A nice, quaint and sanitized way of going about interest rate manipulation that seeks to bail out and fund the areas of the economy (housing, mortgages, etc.) that experienced the most egregious abuses while pretending that all bonds are equal and selling short term (excluding 'Fed funds' of course, the inflationary ZIRP) notes to sanitize the process.

A potentially positive side effect for the manipulators will kick in if gold continues to dutifully follow the curve in the chart above; assuming of course that the Fed is able to control the bond market completely. The curve is after all, still elevated and a candidate to turn back up from near current levels, regardless of who is attempting to control the transmission.

Yet as I type this post, gold is getting hammered in pre-market. I often write that this is war if you are a precious metals player; and in this war you fight it on the terms of powerful people with clearly defined agendas. So manage risk and be aware of what is in play. The time will come for manipulations and half measures to be cast aside and you need to remain whole in order to survive and then benefit from the process. That is exactly what NFTRH is doing week to week. Markets need to be managed on their own terms, especially since those terms are so routinely influenced by policy makers.

Post Script: The market just opened and it is a disgusting display indeed with the gold sector doing exactly what yesterday's policy release and the charts above said it 'should' do. We have parameters for short term risk management and we have intermediate term plans, always subject to revision. It's the only way to go about markets that are so routinely managed as they are these days.

 


 

Gary Tanashian

Author: Gary Tanashian

Gary Tanashian
http://www.biiwii.com/

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