Headed Lower
The 30-year long bond yield for this move peaked on March 18 at 2.45%. The 10-year yield peaked on March 31 at 1.74%, barely beating 1.73% on March 19.
US Treasury Detail
It’s Not the News Matters
It’s not the news that matters, it’s the market’s reaction to it.
Yields had been inching lower. Then last Thursday there was a sudden large drop in yields on the 30- 10- and 5-year treasury yields.
Q: What Happened?
A: Retail sales surged in a blowout beating all expectations.
I discussed sales in Retail Sales Surge Nearly 10% In March as the Covid-19 Recovery Strengthens
The consensus estimate was 5.6%. Instead we saw a 9.8% surge in an enormous blowout.
When I saw the retail sales numbers, I quickly looked at bonds and gold. My expectation was that yields would head higher and gold lower. Instead the reverse happened.
Gold Daily Chart
Technically speaking, gold double bottomed over the past two months. Then yields fell and gold rose smack in the face of the strongest retail sales beat in history.
Email Exchange
Last Thursday, I pinged Sitka founder Brian McAuley as follows.
Brian – Note the reaction in bonds today smack in the face of massive retail sales beat.
Retail Sales, What’s Hot? What’s Not? And What About Amazon?
Look at how Covid-19 made winners and losers in 5 select categories. Three charts.
Also some comments on disinflationary forces in play.
I asked yesterday if I could share his response. Here goes.
It seems the turn over the past few weeks may be significant. The dollar appears to have topped in late March, and now yields are falling too.
It is too soon to say what the 10-year Treasury yield will ultimately do with the support/resistance between 1.5-1.6%. That area defined the low end of the trading range in the decade after the financial crisis, and this is the first test from below.
The rise this year slightly above resistance may just end up be a technical clear out of the shorts. We’ll see. Overall sentiment seems to regard lower yields as a near impossibility.
Gold, however, is acting like we’ve likely seen the highest real yields, regardless of what happens at 1.5-1.6%. It looks as if the precious metals correction from the high last August may be over.
Another Exchange
I had a different sort of exchange with a close friend who responded “Gold has been in the dumps for a year.”
To which I replied, “Well, when do you want to buy it?”
Comments on Buying and Selling Gold
Long time readers know that I have never issued a sell recommendation on gold. Call me a gold “hodler”.
For those unfamiliar with “hodl” it is bitcoin slang for buy and hold. I have be hodling gold since it was $300 or so. Occasionally I trade some for silver or even equities and have written about gold-to-silver swaps a couple of times.
Although I have not said “sell”, on some occasions I do step up to the plate and suggest “now is a good time to buy gold”.
This is one of those times.
And with nearly everyone looking for stronger inflation and higher bond yields please consider The Fed Wants to Stimulate Bank Lending, Charts Show the Fed Failed
For further discussion of disinflationary trends please see comments from Lacy Hunt in my post Expect Inflation to Accelerate? Here’s 8 Reasons to Expect Decelerating Inflation.
Mish
Gold really taking a shellacking this morning, Probably a buying opportunity.
Your well-diversified portfolio will only make the market return over the long term, subject to your ability to pick winners and avoid losers.
I’m old school, economic/political fundamentals will always be key in the long term. I watch cycles, buy low, hold, and sell high. In the Dot-com boom,I said clicks don’t matter unless they produce income. After 9-11, I said the world changed and the US will be at war ‘forever’. In 2007,I said house prices should increase at the rate of inflation. Each time, I bought accordingly. Now, I buy gold because I believe the fan is about to get over-loaded.
Retail Sales Surge Nearly 10% In March as the Covid-19 Recovery Strengthens
This does NOT necessarily mean business is doing better, getting more productive, employing more people, nor does it mean that data is getting more reliable.
If you produce 100 widgets at $100 but then lay off workers and make 90 widgets that you then sell for $110 it will reflect growth similar to the headline above.
Because if you raise prices (what a consumer of widgets calls inflation) it will be called an improvement in the economy.
It should not be so, once upon a time they used to measure prices and report those honestly. Then they discovered that they could underreport the CPI and as long as people believed the new and improved methodology, the economic consequences were that growth was not being discounted for an appropriate inflation.
Why you ask would they do this? Really pretty simple, it supports the monetary policy of extreme loose credit, and the fiscal policy of borrow and spend. If you look at our post war economic history you will find it got started during the late sixties as the financial impact of Vietnam combined with towering social spending began to really bite when Nixon was president. I remember when 4% inflation had the government and Fed aghast at this horrific inflation rate. If you do not believe me look up wage and price controls Nixon instituted. And even that was underreported, I distinctly remember my mother sending me to the store for two pounds of hamburger with 40 cents (it had been 19 cents per pound the week before), and she was devastated when I came home with one pound of hamburger and a penny.
Nixon issued Executive Order 11615 (pursuant to the Economic Stabilization Act of 1970), imposing a 90-day freeze on wages and prices in order to counter inflation. This was the first time the U.S. government had enacted wage and price controls since World War II.
I also remember getting 1-2% raises for my annual cost of living adjustment in my Air Force salary when inflation was officially between 11 and 15%. It does not take long to be priced out of everything and into poverty at that rate. A few years later and you are living under a bridge.
Inflation like deflation all by itself is not that bad, but, only if it is honestly reported. When all sectors of the economy can adjust to the new value of the legal tender appropriately then price is not much of a factor in economic decision making. But, otherwise price is about 94.5% of all economic decision making in the end. Without tools of price discovery vast swathes of the economy are at risk. How do you value anything (price discovery) if you do not know what something is worth by supply and demand which no longer dictates any part of pricing? Or, if you cannot count on a stable store of value which will indicate the profitability of investments in future productive units?
Misallocation of capital is the number one cancer in any economy, and you cannot determine the appropriateness of any investment if you cannot rely on fundamental value of the currency (credit) being allocated. At that point you have to become a speculator hoping for luck. This is why I say you have a better chance of achieving financial security (no less sybaritic wealth) via the lottery than you do from honest toil and ingenious discovery. Work might get you by in the very short-term, but it is not ever going to get more than about 0.01% of us rich, or about 10% of us even middle class. Inheritance maybe, but that genetic lottery is also just luck. It does not come from anything you worked for.
Selling two houses in the Denver suburbs and buying one as we combine the family. The market is crazy and it is snowing and 30 degrees on April 21st. Thank goodness we are sellers as well as buyers. I have a masters in finance and a masters in accounting. Something is wrong. I know it in my gut.
Spot Gold is still trading pretty much flat to futures, which is a bullish sign, and has been since early March.
The “handle” on Gold’s DECADE LONG cup-and-handle formation appears to be complete. If not, it is very close.
When it does complete, fireworks will ensue.
How do you account for manipulation of precious metal prices? Answer: You can’t.
I predict you will be doing a post on covid variants that will be coming out of countries that are unvaccinated. India is #1 on that list and still permits travel. The CDC is recommending not travelling to 80% of countries and the state department is adding countries to their list. Get ready for a tsunami of covid variants that are going to need new vaccines for the next 2 years. This is why it was important to get to the most vaccines to the parts of the world where global travel via planes occurs.
Third world countries like Michigan and Florida
Maybe a bond or gold injection will help, with a stock booster shot.
Does anyone else smell a rat? A bat virus with unbelievable human to human transmission, even though the DNA of both animals screams “No way.” Chinese exports off the chart. Life is good in Beijing.
I don’t understand the gold recommendation if you feel that Treasury rates will rise but I guess you feel that real rates will still decline. I hold gold mostly as a hedge, I don’t expect to make money on it. If I do make money on it then it means my life is probably going to take a turn for the worse (in other areas). Sort of a mixed blessing.
Correct call Mish, and nicely contrarian…buy both gold and bonds, and especially gold miners.
I’m in agreement that gold is now in an uptrend, at least. That much is obvious. But the dollar looks to have just made a swing low, so we might face headwinds for a few days. I stepped out of my gold trade yesterday after the dollar turned.
For hodlrs, I know the tiny moves don’t matter. I expect gold to rise, but I’m far from being sold on gold as anything other than a dollar hedge, and there are better dollar hedges, in my view.
Look at that melt up prove me wrong. The dollar and gold are moving up together today, something I haven’t seen for quite a while.
Look at gold & silver mining stocks coming off 8 month lows. No other stock market group is making as much money, with low PEs, paid off debt and 5 qtrs of increased CFOs
I don’t know if you’re right, but I do know you are a helluva lot smarter than me about these things. I think I’ll dip a toe or two…