The Only Four Charts (Plus One) Which Matter
Trader Scott’s Market Blog
January 29, 2017
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Let’s make this simple. We all know about the explosion in debt, especially since the “small Government”, “free-market” President, Ronald Reagan, was inaugurated. And every President since then has continued that brilliant policy (yes even you Slick Willy). Actually in percentage terms, President Obama increased the debt less than George, Jr. But this is misleading because yields were so much lower during Barack Hussein’s terms. However no one can compare to the Gipperfor % increases in debt, but once again a bit misleading, because in his case there were the much higher (and peaking) yields. But those trusty old debt charts, which I wrote about here, are not what worries me nearly as much as the following charts. We were in a bull market in bonds which lasted 30-35 years, depending on which rate. Meaning the very shortest rates have been in an uptrend (bottomed) in 2011. The thirty year yield bottomed 6 months ago. And as you can see from the first chart, 35 years is not unusual for a bond bear, or bond bull. But those charts about debt aren’t actually the most important ones, grotesque and frightening as they are. I’ve written numerous times about what is the most important chart in the world. First though let’s look a the following four charts.
There have been boatloads of articles about the CBs ability to “extend and pretend” for as long as they wish. That is correct, but only because of the first chart – the decades long falling yields. Their “ability” to extend and pretend has been mainly because of these falling yields. I have mentioned this several times, and how it’s the bear market in bonds which will erode the CBs “control levers” which they literally believe they have. These clueless academics don’t even get where their omnipotence comes from. It has nothing to do with them, it’s just the “normal” 30-40 year bond market cycles. The CBs days are numbered, but they’ll go down fighting anyway, and they will NOT change – guaranteed. Because they’re smarter than the rest of us – yes you Larry Summers. So the first chart shows where their “powers” come from.
The second chart, along with the first one, shows why “Morning In America” was possible with Ronald Reagan. The long term cyclical peak in both interest rates and inflation occurred during his tenure. And neither he nor Chairman Volcker had anything to do with it. They were just there – the cycle drew them in – the trends/forces were already in motion. So just like Trump today, he is just the figurehead (from this post). What worries me now is these two forces, are reversing back up after decades of falling/going sideways, and there is a post here from 2015 about the inflation starting to creep back into the general economy. This is going to be a YUUGE problemo for our new Economist-in-chief, who has already shown he has some wacky economic theories.
And the last two charts shown pertain to the handwringing/worries about “what the heck is wrong with velocity”. Velocity has plummeted since the Reagan Presidency and his (happenstance) massive top in yields. I’m no economist certainly, but my firm belief (from 2015) was/is the following. It is the rising interest rates which leads to inflation, yes it’s a symbiotic relationship, but I’m sticking to my guns on this one. It’s economic theory that it’s the inflation which leads to the higher rates, but it’s not as easy as that. They work together and it’s often not clear cut what’s going on. And it’s the rising rates, along with the inflation, which will cause the more persistent bouts of volatility which will then lead to —- the uptrend in monetary velocity..finally – and a major top in the US$. And a ton of problems for Mr. Trump.
So this is the most important chart in the world, showing the massive selling climax in bond yields (buying climax in bond prices) in 2008 and the ongoing bottoming process in the US thirty year yield. The long term bottoming process is still ongoing, and is adding onto an even more dramatic rise in yields down the road. Though on a short term basis, I turned bullish on bonds (prices) into the hysteria and the “that’s it, the bond bull market is over” crash last December. Of course per my approach to markets, the rally in the bond prices/TLT, allowed me take out some profits (and reduce risk). And it wouldn’t be surprising to see yields go to, and temporarily above, 3.25%, which could set up a fairly dramatic drop in yields. But this is all first half of 2017 stuff. The bond bear market will kick in again later in the year, This is going be a major problem for the CBs and governments around the world, and it couldn’t happen to a nicer bunch of folks.
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.
January 29, 2017 @ 2:56 pm Jon
Ironic the commercials are record long T bonds so a dovish FED this week could start the fireworks. T bond shorts are on borrowed time just like the PM longs were last summer..
January 29, 2017 @ 3:20 pm traderscott
That is one of the reasons I got long last month Jon, but it was mainly the yield resistance, selling climax and the retests, and the hysteria about a collapsing bond market. It was a sight to behold. There’s a big hedging component to bonds via mortgages and CDSes, etc., but that speculative short position is quite amazing. And remember the “employment” report. Maybe Soros can pay off enough people to make Trump’s first report a big dud.
January 29, 2017 @ 6:40 pm Jon
So here’s my scenario guess for the week. Monday-PM’s up to 1200 ish resistance to take out some remaining OTC option shorts, T bonds flat to down. Tuesday -PM’s flat to down around 1190 ish to take out remaining OTC option longs, T bond’s on hold. Wednesday-FED on hold with semi hawkish mumbo jumbo based on subpar Q4 GDP numbers and uncertain jobs report on deck. PM’s down hard (regardless of what FED says) and T bonds sell off. Thursday- backing and filling for PM’s and T bonds. Friday- PM’s down hard regardless of job numbers (as almost always) and T bonds up with a weak number (which I expect). I’m usually wrong so take the opposite trade and you can retire…
January 29, 2017 @ 7:32 pm traderscott
January 29, 2017 @ 8:26 pm Jon
January 29, 2017 @ 9:00 pm traderscott
In case you haven’t seen it, here’s my post about Jim Cramer’s best moments.
January 30, 2017 @ 8:00 am Jon
Looks to be a volatile week…