Trump-aggedon in 9 Days
Post the Trump conference, the USD sold off, 10 Year Treasuries caught a bid, and Gold got wings. A possible explanation is the lack of policy meat during the conference. Another could be how the market interpreted his economic related statements. The markets may have just been over-positioned waiting for some bearish news on Bonds and subsequent Bullish reaction on the USD as a rate hike would be more likely more quickly. Taken as a whole the markets probably expected some curve steepening today to come out of the Trump conference. An example would be Trump implying:
We are going to increase debt!
- Bonds dump on new issuance potential
- USD rallies on rate hike reactions
- Gold dumps on a stronger USD despitethe inflationary implications
- Stocks rally as they benefit from the bond rotation somewhat
Buying Bonds at 2% is Risk- Off. Really?
But none of that happened. Instead we got a risk-off scenario. Drug companies sold off. The Yield curve flattened instead of steepened, and Gold responded accordingly. Gold rallied with Bonds. Think about that. This is the source of the "Risk-off" moniker. We think it's horse-shit. The risk seeking to be avoided in buying bonds is liquidity or exit risk. Calling Gold a "safe-haven is like bonds is in total contrast to the liquidity risk in Gold on exit. Parking you money in Bonds for 24 hours is at least consistent. But anyonewho calls Gold a safe-haven has never had to get out in 10 seconds. Gold is money. It is a currency and the least liquid one in the world among the majors, at that. It is a protection against diminished buying power, as its supply is stable.
Being long bonds is as risky as anything else in the world. Being long gold as a safe haven is idiotic when you have to exit. None of this is tethered to reality. It is all sound bites and post hoc rationalizations. Just Saying. We aren't buying the "Risk-Off" characterization of the financial press.
We ascribe to the following reasons for the moves today this way:
- Gold is up because it is priced in USD and the dollar is down
- Bonds are up because too many people were looking for a fiscal stimulus package hinted at today and got caught short
- Foreign buyers of US bonds put their money in the most liquid product out there for redeployment later
- The USD weakened in part because protectionism means less need for internationally accepted reserve currency, and also because without a fiscal stimulation, the Fed has less reason to hike short rates.
And we are not married to those reasons above. The only thing we are married to, and even that can be divorced is that the end game is inflation.
Deflation is Coming! Stocks are Down. Man the Printers!
The irony is, the cure for a flatter yield curve, stronger bonds, and lower stocks, is fiscal spending! So Gold may be up today on a weaker dollar. But it will be up over the long run from an even weaker dollar after the Fed goes from hawk to chasing the inflation dragon from a round of fiscal stimulus.
And yes, weaker bonds do compete with Gold for investment money. But only if real rates are positive. And when the spending starts, they will not be. For now, nothing happens as long as our stock market remains stable.
The Dollar Dumped
And the 10 Year Rallied
Foreign buyers piled in today's auction driving the yield to 2.3%. Record shorts bettign on soem hints of fiscal stimulus to be mentioned today got burned.