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2.5%, Nuff Said?

by Andy Hoffman, Miles Franklin:

With each passing day – particularly, as we approach Trump’s inauguration – the confluence of “PM bullish, everything-else-bearish” headlines grows larger, and broader.  Consequently, the list of vital questions to be answered is as long, as it is broad.  Such as, will the outgoing Obama Administration’s last ditch attempt to sabotage the incoming Trump Administration succeed?  Will plunging currencies like the Euro, the UK Pound, the Mexican Peso, and the Turkish Lira find their footing – or continue to implode?  Will the Chinese allow the Yuan/dollar exchange rate to breach7.0/dollar (it’s back up to 6.91 this morning, from last week’s PBOC-orchestrated “plunge” to 6.78) – potentially, unleashing the “cataclysmic, financial big bang to end all big bangs?”  Will Trump be able to enact any of his campaign promises?  And if so, at what cost to society – positive or negative?  And last but far from least, will OPEC’s increasingly tenuous “production cut” deal be called out sooner or later?  As if yesterday’s plunge to nearly the all-important $50/bbl level is any clue, “sooner” appears far more likely.

Frankly, I have no idea how any of these issues will ultimately resolve, as only the sands of time will tell.  I strongly suspect 2017 will be far less “normal” than any in recent memory; likely, a year of “money printing”; “draconian government actions”; and “monetary revolution.”  During which, we are all pondering, how will the ultimate safe haven assets – physical gold and silver – react; as clearly, extreme supply/demand tightness must at some point, likely sooner rather than later, overwhelm the historically suppressed paper markets.

On the topic of “safe haven assets,” nothing has ever replicated gold and silver’s ability to preserve wealth over time – and potentially, ever will – which is quite the powerful statement, given how far humanity – and technology – have advanced in 5,000 years.  Bitcoin – in my view, an “ally” of Precious Metals rather than a competitor – has the potential to one day join this elite “wealth preservation circle”; but for now, it’s still in its nascent stages – and thus, subject to the type of short-term volatility that makes it extremely difficult to stomach.  To wit, this morning’s plunge to the low $800s from the low $900s – due to a terrified Chinese governments’ draconian intention to investigate Chinese Bitcoin exchanges – depicts exactly why it remains a highly speculative investment, despite the fact that I personally believe strongly in its future.  Which is why my Bitcoin holdings remain barely one-eighth of my physical gold and silver holdings – a level I expect to maintain for the foreseeable future.

The People’s Bank of China published an announcement this morning that it will carry out site inspections on January 17th, to check whether enterprises dealing in Bitcoin have the correct licenses; if they have implemented anti-money laundering systems; and whether there is market manipulation.”

Quite obviously, Bitcoin will be viewed by desperate governments as warily as gold, silver, and any asset class that threatens the dying – but still powerful – status quo.  Which is why, more than ever, the time to be conservative in one’s investments has never been greater.  And that goes double for anyone still holding mainstream assets like equities, given all-time high valuations, “risk appetite,” and complacency; amidst, in my view, the worst political, economic, and monetary backdrop of our lifetimes.  This, in contrast to, care of those very same factors, the “most undervalued Precious Metal prices of modern times.”  Which at $1,188/oz and $16.70/oz, respectively, as I write, are inching closer to the first “key upside hurdles” in their quest to erase the Cartel’s post-election night technical carnage; i.e., their 50-day moving averages of $1,195/oz and $16.93/oz, respectively.

I’d like to address yet another topic that few, if any, are discussing.  Which is, that perhaps the “bond vigilantes” have not awaken at all; and thus, the benchmark U.S. 10-year Treasury bond – which hit an all-time low of 1.35% in the chaotic, post-BrExit markets, is as likely to plunge from today’s 2.38% level, thansurge.  True, foreign Central banks have been selling Treasuries at record rates – of more than $400 billion in the last 12 months alone; largely to staunch the declines of their own, crashing currencies.  However, at today’s 2.38%, rates still remain near their lowest-ever levels; this, despite the so-called “Trump-flation” meme, which suggests surging inflation expectations have in fact awakened, perhaps permanently, said “bond vigilantes.”

No matter how one spins it, the fact that rates remain so low – amidst “Trump-flation” expectations; and surging costs of “need versus want” items like energy, health insurance, education, and taxation of all kinds; certainly calls this argument into question.  Although rates should rise sharply in such an environment – let alone, amidst an historic debt edifice that must parabolically explode; and a “hawkish” Fed, intimating further rate hikes are imminent; they aren’t.  Which quite obviously, suggests that either the bond market anticipates deflation to overwhelm even the Central banks’ and politicians’ most fervent inflationary attempts; or that further, far more extreme levels of monetary easing are forthcoming – which even the “bond vigilantes,” for the foreseeable future, won’t be able to overcome.  To wit, the 10-year yield chart below, which for now, appears to have peaked on November 15th, one week after the election, at 2.6%.

Back in early 2014, in a rare instance of making an actual short-term “call,” I vehemently espoused my view that the 10-year bond yield – and thus, Western bond yields in general – would top at the key psychological level of 3.0%, as discussed in January 2014’s “3.0%, ‘nuff said.”  This, because I knew the flailing economy – which back then, was much stronger than today – couldn’t handle surging interest rates.  And three months later, when the 10-year yield fell below the 2.6% support level it had held since February, I penned “2.6%, ‘nuff said“ – suggesting said “bond vigilantes” were about to be routed, which they decidedly were.  Which by the way, demonstrates just how detached from reality the Fed is – given that they theoretically “ended” QE in October 2014, just as rates were plummeting (due to reduced economic expectations), as depicted below.

The reason I bring this up, is because two of the world’s largest bond managers, Bill Gross and Jeff Gundlach, commented on this very topic in their latest commentaries.  Not that I hold as gospel what any single person, or persons, believe – particularly book-talking mainstream money managers.  However, the fact that they are looking at exactly those same yield levels certainly caught my eye, as 2.6% and 3.0% clearly represent key technical “resistance” levels – even in markets as rigged as U.S. Treasuries.

To start, we have Gross, the former “bond king” whose title has recently been usurped by Gundlach.  Both of whom, have benefited greatly from – and as you’d imagine, vehemently encouraged – the Fed, and allthe world’s Central banks’, “99%”-destroying monetary policies.  In his latest commentary – again, for what it’s worth – Gross espouses the following.

If 2.60% is broken on the upside, a secular bear bond market has begun. Watch the 2.6% level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important than Dollar/Euro parity at 1.00. It is the key to interest rate levels, and perhaps stock price levels in 2017.”

More important than Dow 20,000, $60/bbl oil, or Euro/dollar parity?  I’m not sure how to quantify “importance” – especially as all such metrics are integrally entwined; but unquestionably, rates surging above the recent 2.6% high; which just happens to coincide with the aforementioned support level of May 2014 (which has since become resistance); would unquestionably be a major technical blow; which equally unquestionably, would awaken more than a few fence-straddling “bond vigilantes.”

Subsequently, Gundlach patronizingly referred to Gross as a “second tier” bond manager for calling 2.6% the key level.  To the contrary, he views the 3.0% level that represented the 2014 top as the level that, if breached, would “define the end of the bond bull market.”  From a technical perspective – again, for what it’s worth – I have to agree with Gundlach; as not only is 3.0% an incredibly powerful resistance level, but an equally psychologically powerful “key round number.”

The $86,000 question, thus, is whether or not “inflation” can really gain momentum in an environment of – irrespective of rampant “Trump-flation” propaganda – unprecedented, parabolically-surging debt and historically weak economic activity; which will certainly not be helped by the historic level of political uncertainty; potentially exploding trade wars; and equally damaging currency wars (like, for instance, the aforementioned, massively deflationary impact of a major Yuan devaluation).  Let alone, the fact that every time rates rise, the dollar tends to surge along with them – yielding additional plunges in foreign currencies; which in turn, yields additional deflationary pressures.  To that end, recent Treasury auctions – such as yesterday’s – have been extremely strong; and the fact that mere weeks after the Fed’s ¼ point rate hike (to LOL, “preserve credibility”), the money markets are already discounting the Fed’s guidance of three rate hikes in 2017, should tell you all you need to know about what the true consensus is (and potentially, why equity valuations are so high!).  That, and the fact that, maniacal Cartel suppression notwithstanding – Precious Metal prices appear to have bottomed shortly after the Fed’s December meeting, at the height of “Trump-flation” madness.

I guess only time will tell if indeed, 2.5% – which recently, has served as particularly strong overhead resistance – will prove to be 2017’s ‘Nuff Said’ level.  Or, for that matter, Gross’ 2.6%, or Gundlach’s 3.0%.  Irrespective, don’t forget for a second that Precious Metals have been the world’s best performing asset class – throughout history – in instances of both inflation and deflation.  And I assure you, if the benchmark 10-year yield falls to the 2.00% – 2.25% range, as Gundlach anticipates in the coming months; or surges above 2.6%; or, God forbid, 3.0% – the economic and monetary ramifications will be equally “PM-bullish, and everything-else-bearish.”  So, as we head towards the end of Trump’s pre-inauguration “eye of the storm,” it’s time to make some serious decisions regarding how you want to prepare for the future.

Read More @ Milesfranklin.com

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2 comments to 2.5%, Nuff Said?

  • Ed_B

    It does not surprise me that two very astute bond managers disagree on which 10-year UST levels are critical. Such is the way of markets. If everyone agreed with each other, there would be no market because a market cannot function when everyone tries to buy or sell at the same time. There has to be a mix of buyers and sellers for any exchange process to work.

    As to the “bond vigilantes”, they have exerted enormous pressure on the Fed via their pushing up of bond interest rates. They are literally dragging the Fed, kicking and squealing, to raise interest rates, which the Fed really has no interest in doing (pun not intended). The UST 10-year bond interest rate rose by nearly 100% in about 6 months, an unprecedented move in the bond markets if ever there was one.

    Added to this is the fact that there are about $14T worth of bonds in the world debt markets that pay little to nothing in interest. This lack of compensation to bond buyers for the risks they take on has caused a lot of capital to flee places that adhere to the NIRP and ZIRP policies and come to the USA where at least SOME positive reward is possible in the debt market. This effect is enhanced by the US$ being the world’s most stable currency. One look at the price of gold in all fiat currencies, except the US$ and the Swiss franc, tells the story on which currencies are strong. The US and Switzerland are the only 2 countries I know of where gold is relatively cheap. Everyone else is paying through the nose for gold because their currencies are so weak compared to the US$ and Swiss franc.

    The days of bond buyers buying every bond issuance that comes out are over. Buyers are being more selective and they are demanding better compensation for the risk to their capital that owning bonds entails. And they are getting it. Unfortunately for those countries that are dedicated to NIRP and ZIRP policies, however, this capital flight has weakened their economies and it will continue to do so until they offer rates on their bonds that are competitive with those offered in the US. Until they do, however, the US is benefiting enormously from this huge influx of capital, most of which is coming from Asia and the EU. It will help build up our economy rather than theirs and that is a high price to pay for continuing to stick with failed Keynesian policies, no matter what results from that crummy choice. I don’t know. Maybe they simply have not felt sufficient economic and financial pain yet to make a better choice. But they will… oh, yes, they will.

  • Eric

    The 3.0% level is definitely strong technical resistance and is obvious on any long term chart. I would have to concur with Andy’s assessment in this case. Personally I find coffee to be a far more attractive investment…

    http://finviz.com/futures_performance.ashx?v=17

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