Blog

The Fed has finally come around to what we already know. Inflation signals have been decelerating all year, the battle against the last problem is over and the future problem, deflationary, will be battled later using quite different policy tools. In the middle gap exists Goldilocks and her henchmen like Jim Cramer and a growing media contingent calling for an economic “soft landing”.

We are 100% on plan, folks. If yesterday’s endorphin release leads an upside surge in markets it will be bullish now, in line with the positive seasonal and it will take already ridiculously over-bullish sentiment to another bull killer reading. The last one preceded the summer correction. Another one may kill the entire bull. But first, Goldilocks-driven bullishness washes over the land.

The way I have seen it and still do see it is that the precious metals would participate because on average they bottom and turn up in Q4 and continue that into early 2024. Because gold is leading commodities, indicating disinflation (but not leading headline stock market indexes, indicating a Goldilocks bubble party still in progress). As a side note, when I mention bubbles I mean the bubble in monetary policy that was birthed by Alan Greenspan and employed in ever more innovative measures by Fed chiefs since, right through Powell. Asset markets have just done what the bubble instigated them to do.

I think that commodities will also get relief as the Fed rolls over because while they are considered inflation instruments, they have been punished during the Fed’s fight against inflation. So why can’t they bounce/rally as the Fed abdicates the battle?

The main point, and something we will flesh out in detail going forward, is that the broad markets are entering a danger zone, amid wildly over-bullish sentiment and a bond market signal that preceded the last two major bear markets. My view all along is that it is not the monetary tightening cycle that stops the bull. It is when the Fed (orange T-bill yield proxy) finally backs off after a lengthy divergence by the 2 year Treasury bond yield that the bear will manifest.

Remember how the tardy Fed was late to inflation battle as it spewed the word “transitory” out its orifice well past the time to take up the battle. Well, it is poetic for that same tardy council of eggheads to have put on the breaks for too long. The damage is done, but it will not be revealed to the public until later, after said public finishes cheering the defeat of inflation (the last war).

• I am not trying to scare people before it’s time. But I will be damned if we are not going to be the most prepared people on the planet if the message of this chart plays out as expected in 2024.
• Yet speaking personally, I am playing it as bull, selecting favored sectors (currently Semi, BioPharma and various aspects of Tech, along with a slowly increasing group of commodity/resources related items and of course gold, silver and the miners).
• I will not short and have not shorted this pig other than in little pot shots at certain times. But with a forward blow off top possibly to come in the weeks or months ahead, here is my plan, assuming things stay on the track as indicated by the euphoric response to a sidelined Fed (now admitting to the 2024 rate cuts that CME Group traders had been predicting for some time):

Current Plan

The plan is the same as it has been. It’s just that it appears to be triggered now. Casino patrons are piling into stocks because “hip hip hooray, inflation is defeated… the Fed said so!” (in essence). I want to continue to nimbly play it as it spreads out to commodities/resources, small caps and other less amplified segments of the markets (as opposed to, you know, Nvidia, Microsoft or Apple).

I think that the precious metals will be a leader from here on, as the weakening Fed is right in gold’s wheel house and as the US dollar weakens.

Later, when it is time for the mess to liquidate, gold and the dollar would break their strict inverse correlation to a degree as gold will out-perform silver and most other assets the world over and USD would gain a big time liquidity bid. In that scenario gold would correct less than most other assets and we may see the first big correction in the gold miners if/as the broad stock markets decline per the ‘double top’ thesis of chart above.

Timing is at issue. I currently have a wide time frame of Half 1, 2024. That can be refined along the way as signals come in. But unless the animal spirits in the air today are not as strong or lasting as it appears they may be there should be a ramp here with which to make some solid gains with the understanding the when the party ends, it is likely to take everything down with with it, including the gold miners.

The bigger and more lasting “post-bubble” play would be to buy that future decline into a longer positive post-bubble macro benefiting the gold mining industry. It could take a couple or few years for that to all shake out. For now, the GDX target is 40+. No change there. HUI has a major initial target of 500, but would likely get stopped in the 300s at the top of its long downtrend channel (ref. recent monthly charts we’ve reviewed) if GDX 40 is all there is on this rally. But a target is not a stop sign. So I don’t want to over-define a potential stopping point.

So the bottom line is that it appears we have a bullish ramp out ahead and it would be tradable and well worthwhile to trade. At some future point of over-bullishness amid general market risk I see one more ‘sell’ in the gold mining sector prior to a long, grinding bull market. Meanwhile, it appears… “party on!”

In other words, nothing has changed. It’s just that I think the fun part of the plan has finally triggered. Now let’s see how it actually plays out and be ready to adjust if/as needed.