“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)

"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Tuesday, May 27, 2014

TIPS Spread

I have had some private emails discussing the TIPS spread as well as some posts recently dealing with inflation expectations so I thought it might be helpful to post a chart of the TIPS spread to portray what the market is currently expecting in that regards.

The TIPS spread is calculated ( I am using the 10 year ) by essentially subtracting the yield on the 10 year Treasury Inflation Indexed Constant Maturity Security by the yield on the 10 year Treasury Constant Maturity Security. The difference between the two is the market's expectation of the inflation rate over that period.

Here is the chart that I have created using that data.

As you can see, the expectations have risen and fallen since the start of this particular data series. As you look at this chart, you can practically see the shift in sentiment as the market looks for deflation, then looks for inflation, then shifts back to deflation, etc.

What is interesting is to observe this chart starting near the end of May 2013 - beginning of June 2013 and move forward to the present time. Note how the pattern on the chart constricts with the inflation expectation oscillating somewhere between 2.30 on the top and 1.93 on the bottom. Then the range tightens on the downside moving up from a low near 2.06 and rising towards lows near the 2.11% level.  The top has come down somewhat as well.

What this tells us is that the market is reaching an inflection point where this indecision will eventually be resolved. One would think that the resolution would be to the upside if the economy were to begin really improving. I maintain that it is slack in the labor markets that is keeping inflation low as wages remain relatively flat. Thus the Velocity of Money continues to either move lower or remain flat. As long as that is the case, it is difficult to see inflation pick up to any degree of noteworthiness. If however, wages begin to move higher, this would have significant impact on the Velocity of Money as many businesses might begin to feel more comfortable passing along any price increases at the wholesale level. So far, it seems that many are trying to absorb as much of those costs as possible to retain pricing competitiveness among very price-conscious consumers.

Along this line, a strengthening Dollar will generally tend to put pressure on commodity prices.

I do want to also point out that the constricting range in the spread above corresponds very closely to the range trade that we have been seeing in gold. In looking over the price chart for the metal, one can see that same sideways pattern going back to last spring and continuing to the present day.

I am going to fine tune this chart as time permits this week and will overlay the price of gold over it. I think you will find the results rather remarkable. One thing I can already tell you in advance from doing a cursory examination of the two, is that peaks in the price of gold have tended to correspond rather closely to peaks in the TIPS spread.

That would confirm that gold is moving based on inflation expectations or the lack thereof, something which I feel confirms the idea that gold is doing exactly what it ought to be doing during a period of uncertainty in regards to the future of inflation expectations. At the risk of again angering the gold manipulation crowd, if the gold price is moving in sync with the TIPS spread, then asserting that the price is being manipulated is a big stretch as one would have to make the serious case that the inflation expectation of the market place over the last several years has been completely misguided. Given the ( up until recently) rather mediocre at best payrolls numbers, stable to falling commodity prices in general, and a steady US Dollar, that would be a very difficult case to make except for all but the most imaginative.


  1. http://globaleconomicanalysis.blogspot.com/ this guy Rickards is showing

    up everywhere as he promotes his 2nd book. The first one was a good read, but I have not read the latest one. Has anybody?

    1. The first one was indeed "a good read", but 10 years later not an awful lot of his predictions have come true. He does appear to excel at self-promotion, though

  2. Yes a good read, the gist is the problems of 2008 are now bigger and the probability of the next crisis has increased exponentially. He has certainly got in depth knowledge of economics both hands on and in theory.

    1. Rim and Zhang; Yes, when I start seeing guys on Greg Hunter's show, or Max Keiser, I start getting nervous, as they are beginning to resemble carnival barkers. He is quite cocksure of himself also, which I find unnerving; take care

  3. Another excellent point, thank you.

    As I'm clearly still as undecided about gold's future, I'm trying to remain patient and am watching the beautiful uptrend on the SP500.
    Rarely I saw on long term units such a perfect "tendance en ligne" with a channel parallel to a linear ma20 back from...june 2012, so 2 years now!

    Next week/month, the support channel line will be at 1850. I'll monitor that area to go long.
    Resistances expected : 1950 then 2000. I'll monitor those areas to go short (and pray :))


  4. For the record as usual, I'm trying a little short here on Copper at 318.50.
    It is a horizontal area of support / now resistance on the daily time unit, and it coincides to the area of the descending triangle on my chart on the weekly time unit.
    I can put a stop loss around 5 points higher near 324 because of the failed attempt to break 323 (see green circle) lately.
    So I'm risking 5 points, and my first target would be to get back once more towards the 290 horizontal support area of the triangle, so overall 20 points and a ratio of near 4/1.
    I'm probably a bit hasty here but I see also some divergences on the MACD on smaller time units, so...let's see, it's not the worst time to try a small trade either.


  5. Mark, your buddies Turk and Russell are in another sprint to the bottom of the credibility barrel once again this morning. One thing though, you gotta take your hat off to kwn, as he continues to dredge up names out of the past lately, like Sperandeo and today Charlie Maxwell, who had oil going to $300 back in '08 at the top and who I thought was dead, since I have not seen or heard from him since. Turk+Backwardation=the lie continues; sparks

  6. Steve,

    Yeah those guys are laughable.

    Just think of the rock star status they would have if they were proclaiming the "New Nirvana" of financial markets today, with:

    - 10-yr. yield down to 2.47%
    - ES trading over 1900
    - Zero inflation

    They would have been the most sought after soothsayers on Wall Street.

    And just think of the exotic escorts Eric King would be enjoying now if he had interviewed the CEO of Nordstroms, Williams-Sonoma, or Michael Kors instead of the "gloom and doom" crowd.


  7. Bonds and USDX going absolutely vertical this morning.

    Never before in financial market history has there been such an insatiable lust and thirst for U.S. Paper assets.

    Commodities of every stripe, race, and color are being dumped en masse in order to raise more cash to buy more paper assets.

  8. Let's give credit where credit is due here. Silver is hanging onto 19 like grim death.

    1. I still think we'll see 15.99 in the next few years though.

  9. "At the risk of again angering the gold manipulation crowd, if the gold price is moving in sync with the TIPS spread, then asserting that the price is being manipulated is a big stretch as one would have to make the serious case that the inflation expectation of the market place over the last several years has been completely misguided."

    Barclays was recently wrist slapped for gold price manipulation (downwards, I might add). http://www.reuters.com/article/2014/05/23/us-barclays-regulations-gold-idUSBREA4M06620140523

    Did yuo miss this?

  10. I agree with you that Stock Market Tips: The Best Intraday Tips Provider by seeing the chart one can practically see the shift in sentiment as the market looks for deflation, then looks for inflation, then shifts back to deflation, etc.


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