There's no shortage of money - will the authorities use it effectively?

Abraham George Macro View

Apr 01, 2021

Gold is supposed to be an inflation trade. The historical relationship to gold has been whenever there is a fear of inflation, gold shoots up - that is participants find safety in gold. Has that relationship broken down? I am not sure. But as I have stated many times before, gold is the most technically traded instrument. Maybe it has to do with the dual role of being a currency and a commodity. My short-term calls have been right to the point. If you have any doubts, you may want to check my past reports. Markets are stuck with a lot of short-term volatility now. This is mainly due to month-end and quarter-end flows.

The US Dollar Index has traded sharply higher against all of the major currencies. The latest gains have taken the greenback to fresh one-year highs against the Yen and four-month highs against the euro. However, our long term view with the possibility of rampant inflation hitting the markets, we should see a weaker dollar down the road. Currently, the rise in treasury yields which rose above 1.7% on a ten-year basis to its highest level since January of this year is supportive to the dollar.

Yesterday, President Biden made his case for a massive infrastructure spending spree. Actually, this was a done deal on Jan 5th, when the Georgia elections flipped in favor of the Democrats. While it’s packaged as ‘infrastructure’, it is all about the Green New Deal/Clean Energy economic transformation.

If the money is allocated properly and if it significantly boosts productivity (the amount of economic output produced per hour of work), it will be great. The US will get a reset higher in economic output (GDP). That should ultimately neutralize some of the debt burden and hyper-inflationary concerns.

From the past 13 years of productivity growth data, it has been very sluggish despite roughly over $5 trillion of fiscal stimulus over this period. If this money is allocated poorly, and does not increase productivity, the US will be left with a hyper-inflationary scenario and a massive debt burden that will ultimately be penalized as foreign investors will vote with their money, departing the US financial markets and the USD.

Think the markets have already priced in the optimistic scenario as can be seen from the price of Untied States Steel Corporation. This historic American steel maker’s price has tripled since the Election Day.

Equities

We have pointed out many relationships highlighting the market’s waning momentum. The S&P 500 closed within 0.1% of a record high on Monday, less than 35% of the securities on the NYSE closed above the prior day’s close. It was the weakest up issues ratio since at least 1960 for a day when the Index was so near a high.

Talk about change in the wind. The first quarter of 2021 was the worst quarter for US treasuries in 41 years. Since 1980, according to the return on the Bloomberg Barclays indexes, Gold’s 11.5% decline to start the year is the worst start since 1982. The USD has had the best performing quarter in almost one and a half year. Trends are not linear, so many may be due for a reprieve.

Once Dow declines below 32,070 (Mar 25), the odds should increase that the five wave move up from Jan 29 is complete. Yesterday’s move up to 3994 in S&P satisfies the minimum expectations for the fifth wave. So current price actions need utmost scrutiny.

Bonds

Bond prices declined to 153^29 an intraday extreme on Mar 30th. If this low is not broken, we could see a correction that could take prices higher to at least 158^30 to 161. Should prices fall below 153^29, prices can drop to new lows before pulling back again.

Euro

As long as prices remain capped under 1.1840, we should see a move to the 1.1600 handle.

Gold

Gold bounced off the 1678 level to post 1715. A more assured close below 1677 should break below a nearly two year trend line taking prices below 1600.

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