The ongoing
NFTRH thesis has been that the Federal Reserve System, the US Treasury and ultimately the government’s ability to fund its adventures will be severely compromised without the confidence of the Treasury bond market. This is the reason we have followed the 100 month EMA “line in the sand” on the long bond as the yield has risen steadily out of the destruction of Armageddon ’08.
With rates rising toward a level that constitutes a secular change to a decades-long continuum of compliant interest rates, the desperation on the part of policy makers – whether admitted publicly or not – must be palpable. Step 1 toward confidence: The Fed raises its discount lending rate (or emergency loan rate) by a ¼ point to .75%.
The first segment of today’s report is being written Friday, pre-market specifically so that it will not be influenced by the opening of the US market and the millions of combined emotional decisions that will go into this Op/Ex extravaganza. Regardless of today’s fallout or lack thereof, the Fed has made the first move in acknowledging the forces in play, to which it must submit.
Folks, this is not brain surgery. We have looked at this simple picture many times, but to the writer (and the thesis), it is so profound that it remains front and center at all times. Break and hold above that line (EMA 100), and prepare for asymmetry or even perhaps, an end to the system as we know it. I would think the people in charge of [the] system would not like that very much. Hence, they would dearly like the line to hold.
The gentle, decades-long downward slope of the long bond yield chart implies confidence, whether real or manufactured, against which the government funds itself. It is imperative to policy makers that rates back off of that line because with the potential Inverted Head & Shoulders pattern we have looked at by weekly charts and with the outward signs of evaporating confidence, the risk is just too high of a game changing event.
Pressures had been building within the system all throughout the inflation-born recovery from 2003 to 2007. Going back to a theme I used to highlight frequently during this most recent cyclical bull, newly printed ‘funny munny’ is borrowed into existence and then seeks to become real, to transform itself, through investment. But really, it is just hot money looking for speculation. Or is it the other way around?
Some of the ‘munny’ landed in vital resources (commodities), but massive amounts were funneled into Ponzi rackets like mortgage and credit market speculation and specially engineered derivatives vehicles sliced, diced and put up for sale by the happy troubadours on Wall Street.
The smartest of the ‘munny’ looked to the sound monetary anchor, gold, and got in… quickly. Why was gold the smartest route to go? Well, the crash of 2008 showed why. As the entire inflationary construct melted down, gold declined as well in USD terms but, as we all know, held relative value and quickly regained footing to new nominal (USD) highs. Gold is the barometer to the climate of monetary policy.
NFTRH will never seek to be a ‘go gold!’ rag and in fact, its writer wishes he could believe that the Fed’s initial hint toward sound policy was anything other than a move coerced by the chart above. The goal should not be to root for a shiny metal and rail against society as all too many gold bugs tend to do. The goal should be a more sane and whole society. Yes I know, keep on dreaming Gary. But theoretically, gold is a tool. You don’t eat it, you don’t make friends with it and it does not listen when you tell it your problems. Use it for what it is, but don’t get lost in its meaning.
So to summarize, I would rather have a Fed and a Treasury that really care about doing the right thing as opposed to doing what they need to do to continue on with business as usual; even if it meant gold going back to $300/oz. I do not believe however that we have anything close to this dynamic in play and I continue to project the metal to the $2200 an ounce range over the next very few years, for those keeping score at home.
For now, the Fed makes the first small step toward reloading the gun. They will surely need the ammo for when the current construct, born of inflationary policies once again, begins to unwind. Ironically, it may be the Fed’s own actions – forced upon them though they may be – that eventually unwind hopeful markets and a recovering economy, before the whole game of cat and mouse begins anew. It is either that or the treasury market gets out of control in a rebellion that severely transforms the current system, with funny munny – created in the most recent inflation by policy – in an all out panic, seeking assets and driving up prices (blowing up the Fed’s comical ‘price stability’ mandate).
