Pro Perspectives 11/7/19

November 7, 2019

We’ve talked about the ingredients in place for a “melt-up.”  And it’s not just stocks.  It’s an economic “melt-up” scenario. 

Remember, back in ’95 when the Fed did a u-turn on monetary policy, stocks went crazy and so did the economy.  The economy did 4%+ growth for eighteen consecutive quarters.

So, we’re beginning to see broader global financial markets react to a world where indefinite trade war overhang has been cleared from a fundamentally strong economy with tailwinds of fiscal and monetary policy.

We’ve seen stocks on the move.  Now yields are making a move – with big technical breakouts.

Here’s a look at the U.S. 10 year yield …

Here’s a look at the German 10-year yield, moving aggressively from deep negative yield territory …

Remember, as we discussed last week, “the history of the past decade tells us … despite the fact that central banks are buying government bonds, bond prices go down (yields go UP).”  That’s what we’re getting.

And when yields go up, gold goes down.

Why does gold go down?  Because when people fear an indefinite trade war, if not a trade war leading to military war, they buy bonds and they buy gold.  When this fear is removed, they exit the fear trade.  That means yields go higher, gold goes lower. You can see this inverse relationship since Trump launched tariffs early last year. 

But gold will find it’s bid again.  When?  When inflation starts to move.  And within the scenario of economic boom, and very low inflation expectations, the move in inflation, when it finally takes hold, will probably be aggressive.

The first signal will likely come from broad commodity prices.  Keep an eye on this chart, which has broken a huge trendline …