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Custer's Ghost

By: Erik Swarts | Tuesday, May 13, 2014
Custer's Ghost

A bookend to some of the contradicting and confusing conditions witnessed these days, 2011 was another important - but confounding, time period in the markets. Many participants were on the lookout for runaway inflation after Bernanke unleashed the second salvo of QE in the back half of 2010. Back then, risk appetites across broad swaths of the market were basically running unbridled, closely correlated and at full-bore. The hard commodity markets were out in front leading the charge, with silver and gold taking their respective calvary positions - and the US dollar horsewhipped on a routine basis by the likes of the Austrians, the monetarists and the survivalists.

With great but tragic irony, the casualty count would rise in Custer-like fashion as expectations were slow to turn with the inflationists - and realizations too far gone that it was their last stand. Hyperinflation? Not a chance. In the second quarter of 2011, disinflationary trends had just begun to take a foot-hold and would ride roughshod over the inflationists for the next three years. Blinded by their biases in battle, the inflationists failed to look down at their peripheral bearings and realize the US dollar was actually putting in an important low and long-term yields were cresting at the top of the wave. What followed was a long battle of attrition, waged in the face of a gathering quantitative tide - the very element and condition the inflationists expected would unleash hell and win their war.

Today, with the quantitative reservoir now brimming at the Fed's flood gates, we can still hear and see the ghosts of 2011 walking and squawking among us. Bereft of capital, but still haunting us with their battle calls of inflation is coming - inflation is coming! For those that rode the disinflationary trends on the short side of commodities and precious metals from Q2 2011 to Q2 2013, the last year has been an awkward and long transition of alignments with their loss cause. From our perspective, another pulse of inflation has been moving through the system as retracement trends in the US dollar and long-term yields converge with complete retracements of the ill-timed calvary mounts of silver and gold in 2011. The bottom line from a macro point-of-view is that real rates should continue moving lower with the US dollar as inflation trends find another foot hold to climb up on.


A few things worth watching:

US Dollar Monthly Chart
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US Dollar 1994 versus 2014 Chart
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Silver, US Dollar and 10-Year Yields Chart
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US Dollar and 10-Year Yields 2014 Chart
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US Dollar and 10-Year Yields Weekly Chart
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Silver and US Dollar Weekly Chart
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Gold and Silver Weekly Chart
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Gold Weekly Chart
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Silver Weekly Chart
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Because of the broad and complicated structure of the prospective long-term yield top, precious metals have languished in a narrowing range as the US dollar converges with what we would expect is a more typical correlation environment with major cyclical pivots in precious metals and long-term yields.

Gold and 10-Year Yields Monthly Chart
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Gold and 10-Year Yields Monthly Chart 2
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Gold:TNX versus Gold Chart
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Although still low by historical standards, we continue to work from the perspective that by the end of 2013, 10-year yields became stretched to a relative extreme and were marking the top of a prospective long-term range between 1.5% and 3.0%.

Unlike its secular exhaustion peak in 1981 characterized by a relatively swift pivot lower, 10-year yields have been making a process top with the broader equity market structure expressed in the SPX. While higher beta indexes as well as the yield dependent financial sector have been more closely correlated with the eroding yield backdrop in the market, we still expect the SPX to eventually follow suit and complete a cyclical top this year.

50-Year Chart of 10-Year Yields
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10-Year Yields 1994-1995 versus 2013-2014
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BLX and 10-Year Yields Monthly Chart
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SPX and Gold Monthly Chart
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10-Year Yields Yearly Chart
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Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

Copyright © 2011-2014 Erik Swarts