Beachcomer asks: “Still think Jackson Hole won’t bring QE (probably on steroids this time), and that it hasn’t been widely leaked?”
He offers an in-depth analysis for you to decide – Enjoy
Odd isn’t it that Treasury yields have spiked in the face of such persistently bad economic news? Absent prospects of growth and anything resembling recovery-generated inflation, wouldn’t you have expected the admittedly over-crowded Treasury bond trade to continue working, at least short-term?
Well, not only are Treasury yields spiking, their up-move shows primary trend proportions. That’s what we saw developing two months ago. The question is, why? And remember, the primary trend positive divergence in the TNX is the first such divergence Treasury yields have shown in decades. This would not seem merely a trading issue. Whatever is approaching would seem to reflect structural change.
And at least in the short-term, whatever’s coming would seem to have inflationary implications. TIPs, like Treasury bonds, have begun to break down. However, TIPS are not breaking down as hard, so far, as Treasuries. So, whoever is hot to sell T-bonds, they’re a lot less anxious to sell inflation-protected bonds. But why, given that the economy is showing increasingly unarguable signs of deflating?
And why would the inflation inference show primary trend promise, as well as trading class proportions? What does the T-bond market now see coming that it hasn’t seen since Q4 of 2010?
TIP vs. TLT Weekly
Well, whatever the Treasury market sees, the Morgan Stanley Cyclical stocks also sees, because their index – after badly lagging the June 4 rally through July – suddenly decided August 1 to join in. Interesting that managers would jump into these stocks, just as manufacturing index report after manufacturing index report revealed slowing orders, rising inventories and reduced hiring plans, right?
And how about the Dow Transports bounce the past two days? Is this just catch-up in the laggards? Maybe, but the chart below also shows through the TRAN’s relative strength breakout yesterday that someone didn’t buy into the horrid results this week reported in both the Empire State Index and the Philly Fed Index. In fact, the intrepid buyers who ignited yesterday’s 1% rally in the S&P and even the TRAN didn’t wait more than 30 seconds, following the Philly Fed’s disappointing numbers, to begin their buying. I hadn’t even read the report yet. It was almost as if they were waiting to get that bad number out of the way.
In parallel to these seemingly odd developments, the precious metals also have begun to look and act better. Gold’s improvement actually followed the signal from the gold mining stocks, which diverged positively approximately one month ago, something they hadn’t done since their bear market low back in October 2008. Interesting, again, that gold hadn’t responded upward during any of the global turmoil of the past 12 months. Even more interesting that it might respond now, when deflation has taken center stage, at the expense of inflation. Admittedly, the positive divergence in the mining stocks isn’t the most convincing signal I’ve ever seen. That might mean the upturn signaled won’t be a lasting one. So what could cause gold to rally, and possibly rally hard, but not do so for all that long. Because the long-term indicators that suggested a year ago that gold had peaked still suggest its top is in.
$GLD vs. $GDX Weekly
Silver actually diverged positively itself, and silver’s proclivity to rise correlates best with increased economic activity. Yet there are no prospects of increased economic activity; actually, quite the contrary. Still the trading signal is fairly obvious, even if it is more a trading-class signal than a primary trend indication. So, what could cause silver to perk up only long enough for a trade? What could suggest a return of growth to investors short-term, but leave them unconvinced it might be sustained?
Even if stimulus speculation were responsible for all these otherwise largely inexplicable coincidences, I doubt the most bullish investors could be persuaded that such a proposal could still work. Certainly not after the experience in China, depicted below. Because after the largest stimulus ever injected into an economy in 2008, China managed no better than a 38% retracement of its 2007-2008 decline, before rolling over into what is now a three-year bear market. As for China’s economy, think what you will. But appreciating the propensity of government statistics to reflect the election agenda of government officials, I choose to rely on independent indications of economic progress. And unless the Chinese nationals who invest in the SSEC just didn’t want to upgrade their economic standing, following the recession, their persistent selling since 8/4/09 signal to me that maybe growth in China was more accurately portrayed by electricity consumption, cement prices and the like than by the government’s quarterly GDP representations. In any event, both China and numerous of its economic indicators today reflect that the record stimulus of 2008 bore them essentially no improvement (judging by the chart below). Who believes a second, this time smaller stimulus will work at all?
Yet, despite the round-trip down in China’s economy (and what that means for the rest of Asia), with numbers growing worse by the day, the accelerating downward spiral of economic activity in Europe, and the unarguable erosion – or worse – in the U.S. economy, investors recently have chosen to sell volatility to the absolute lowest level of the entire so-called recovery cycle. That is, with more reason at any time this cycle to fear for the global and U.S. outlook, investors have recently sold their fear insurance to levels not seen since the ‘90s. Hmm.
Put-call ratios suggest similarly odd complacency. The chart below needs no annotation or explanation. So what possibly could be responsible for investors’ seeming assurance that they need not fear for much in their otherwise seeming dim future?
$SPY vs. Put Call Ratio Daily
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