Monday Markets: The Debaser
Monday, 10 May 2021
By Greg Canavan
[3 min read]
If you were in any doubt about what’s driving markets these days, look to Friday’s stock market action in the US…
US jobs data came in well below expectations. The consensus forecast was that the US economy had created one million new jobs in April. The reality? 266,000 jobs.
From the Financial Review:
‘US stocks rallied as a “massive” miss in April’s government jobs report bolstered the Federal Reserve’s position that while the economy is improving, there’s a lot more work to do.
‘In particular, the jobs miss set asides any near-term rethink on asset purchases by the Fed or whether the central bank’s policymakers should be moving forward their expectations for lifting interest rates.’
The miss was good news — obviously — as it means the US Federal Reserve will stay in the game for much longer, playing the role of chief monetary debaser.
The major US indices all rallied strongly. Who needs a recovering economy and growing employment to increase earnings and share prices when the central bank can simply erode the value of the denominator?
Not surprisingly then, the denominator (the US Dollar Index) fell sharply in Friday’s trade, as you can see in the chart below…
It looks like I got this one wrong.
A few weeks ago, I said to keep an eye on the US dollar. It looked like it was turning around after spending most of 2020 in a downtrend. But now that looks in doubt. The best you can say is that it is going nowhere.
The only thing that makes me not too concerned about a US dollar in free fall is because it’s measured in other fiat currencies. Is Europe or Japan in any better shape than the US?
Real assets measured in US dollars are another matter though.
On Friday, copper surged more than 3%. It broke through its all-time high from 2011. Copper’s price action since the 2020 low though has been downright scary. It’s up 140% in just over a year, as you can see in the chart below…
That’s a melt-up if I’ve ever seen one…
US bond yields didn’t know what to do with the jobs data. Fall in recognition of a weaker than expected economy? Or rise on the back of the expected coming inflation?
In the end, they did nothing. The US 10-year yield is trading at 1.57%. If stocks and ‘Dr Copper’ are all signaling monetary debasement, why are bond yields not moving higher?
There are a couple of reasons. Firstly, it appears as though the US recovery isn’t as strong as you would expect it to be. As Jeff Snider of Alhambra Partners writes:
‘The major economic sector most affected by the non-economics of pandemic politics has been the leisure and hospitality of the luxury service economy. With those establishments granted more operating windows in various states and locations, waiters and bartenders made up more than half (+187,000) of the overall April pickup. Another 127,000 at hotels, gaming places, amusements, and other recreation-style businesses.
‘Like a few months ago, just about all the job gains of the non-economic variety.
‘On the other side, in professional and business services, the tally of temporary workers dropped by a substantial 111,000 (as more typically happens during any recession rather than recovery phase) while business support services apparently shed 15,000. Add to those an 18,000 decrease in manufacturing workers (despite red hot goods) plus a 15,000 drop in retail trade employment and then no change in construction (all seasonally-adjusted monthly changes).
‘Non-economic: good not great; economic: wait a minute.’
So that’s something that the bond market is obviously watching. It’s why, despite all the talk about inflation, yields remain cautiously low.
The other important determinant on bond prices is the fact that there is a huge un-economic buyer in the market every day: the central bank. How much higher would yields be if the Fed weren’t absorbing a lot of supply?
So to get a better idea about what’s REALLY going on, we need to look at REAL rates. That is, nominal yields minus consumer price inflation.
On this front, real yields have been falling into negative territory again. Real long-term US treasury yields (long term meaning 10 years or more) hit a high of 0.07% on 12 March. It’s not much of a high, but it’s one of the few times real yields were actually in positive territory this year.
On 9 April, real long-term yields were 0.02%. But since then, they’ve moved firmly back into negative territory. On Friday, real yields stood at MINUS 0.16%.
Because the US and global economy is so highly indebted, it cannot handle positive real yields for any decent length of time. The playbook will be to engineer price inflation while holding nominal yields down. This is what creates negative real yields and reduces the real value of the outstanding debt.
It’s also known as financial repression or currency debasement. One asset that is beginning to stir from this policy is gold.
It’s looking as good as it has in a long time, as you can see in the chart below…
Gold found support in March around the US$1,680 level. This was also a period of support/resistance in 2020. If it can hold above the upper green support line around US$1,770 during the next correction, I think you’ll see new all-time highs in gold before the year is out.
Currency debasement is a party every asset is invited to!
Continue below for Murray Dawes’s ‘Week Ahead’ update. Today, Murray shows you the Goldman Sachs Commodities Index and explains why recent price action hints at much further upside to come.
[WATCH] Telstra Ready to Run
By Murray Dawes
The rally in commodities across the board appears to be kicking into overdrive with iron ore prices catapulting through $200 and many other commodities following close behind.
In today’s ‘Week Ahead’ update, I show you the Goldman Sachs Commodity Index over the last few decades and explain why the recent price action has increased my confidence that the rally is only just getting started.
I take you through a long list of commodities to explain how constructive the charts are for further upside.
I look at the US Dollar Index and show you why I think it could free fall below 88.
I finish by looking at the price of gold — which confirmed a monthly buy pivot last month — and give you a hot stock in the gold sector that looks ripe for further upside.
Editor, Pivot Trader