FED has been buying a large share of TIPS recently – approaching 20% of the market this year. So at the same time they are talking up inflation they are artificially driving up inflation expectations.
That should obviously have some inflationary impact on the TIPs premia, hence an artificial boost of the apparent breakevens.
Even before FOMC last month, it seemed clear Fed would allow inflation to rise. Gold was front-running that expectation with real-yields.
The better Tell: Low real yields are negative banks and banks couldn’t hold any pop in higher yields. Speaking of banks, they are still on sale…
U.S. banks trade for less than book value, while euro-zone banks trade for less than half their book value. John Authers, Bloomberg
Banks and Markets have acted as if Yield Curve Control is in place or will be. As a result, nominal yields have stayed put while inflation break-evens have risen sharply.
That was my baseline conviction until I saw the percentage of Fed ownership in TIPs. Now it seems clear TIPs are rigged, and not a harbinger of inflation but falsely inflating INFLATION EXPECTATIONS. With that, I suggest keep a keen eye on Gold.
My baseline assumption (since August 6th when I made my Short Gold call) is the longer Fiscal relief is put off, the greater the chance Gold, Silver and Miners will sell and keep selling off – especially with the short-covering rally underway in the US dollar trade as discussed and timed well past few weeks.
Further, my Gold Miners Bullish Percent Index has not yet indicated a bottom and turn. I will let you know when it does, but I am not expecting it until lower bollinger band tags…
FED will have to address this deflationary impulse in metals and miners in the future by increasing asset purchases of some sort (QE), but until then, I believe precious metals will remain under pressure with equities – even if a US fiscal package comes before the election.
As discussed in recent videos – here, here and here – I spy volatility across multiple asset classes brewing. Coiling charts of EVZ, VXN, and GVZ warn that volatility is ready to reappear, and with that, a long bond bet makes sense – for a swing trade to and through $166 resistance in TLT to near $170, but then I suspect pressure in bonds and yields to pop.
Cash is also a very good trade, as seen in recent charts:
Despite Biden being declared net bullish for corporate profitability and markets in general, according to Goldman Sachs and Moody’s, I contend the potential tax cut roll-back is not for Big Tech – which is heavily-weighted in the SPX and Nasdaq market weightings. So despite the potential for a Biden-rally on potential Fiscal relief, I expect a knee-jerk reaction lower in growth plays before factoring in the potential tax receipts that can spur economic growth for more than just the stakeholders of those particular stocks.
