[Warning: confusing post alert!]
The BKX/SPX ratio (Banks vs. the broad stock market) used to be a consistent traveling companion to the inverse of the gold price. In other words, when Bank leadership was rising gold was falling and when Bank leadership was falling gold was rising.
It’s logical because in a thoroughly debt-stoked and financialized economy – dependent upon the Pigs for gainful lending – the BKX/SPX ratio would be a signal of the health of the whole racket. But ever since Bernanke really began messing with the macro (with Operation Twist’s stated goal of “sanitizing” inflation signals) many tried and true market indicators were rendered semi or completely dysfunctional.
So at that time BKX/SPX and Inverse Gold (IG) went their separate ways with IG sky rocketing (gold tanking) and BKX/SPX simply wallowing. The darker blue box shows 2018’s extreme dysfunction as IG has risen (gold dropped) despite BKX/SPX’s weakness.
As we’ve been noting lately, this is curious because with rising long-term interest rates BKX/SPX is supposed to be leading. They are making loans and the ginned up economy is vibrant. But there is a distortion or a slack in the rope in here somewhere. Something is not functioning as it had.
Anyway, gold bugs want to see Inverse Gold tank right along with BKX/SPX. Maybe that will happen when a very bullish and ‘at risk’ market phase prepares to conclude. We have SPX 3000+ loaded and we have Amigos 1 & 3 becoming extreme on the big picture.
SPX/Gold ratio carries the risk trades ever higher…
…and the Yield Curve flattens ever lower. This last one, Amigo #3 is probably part of the reason for the Banks’ lack of performance as it theoretically pressures the ‘borrow short, lend long’ trades for many banks. It probably also disincentivizes the Pigs to a degree as well.
Operation Twist did after all kick start the Yield Curve to a flattening condition by manipulating the bond market’s natural signals (selling short-term Treasury bonds and buying long-term Treasuries). So it appears that Bernanke not only compelled gold and inflation expectations downward, but also the margins of certain banking operations.
The more I think back on all of this the more I think… “the nerve of that guy!”. The great and powerful Oz.
But in the end, the Wizard was just some charlatan stuck in a weird situation who made due as best he could. That’s what Bernanke did. But like Oz, it’s not real. It was macro manip of the highest order. Who knows how the dominoes will one day fall?
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