Interim Plan: Disinflation or Liquidity Scare?
In 2023 we began planning for a disinflationary phase, and slowly but surely it arrived in the form of a volatile inflation off/inflation on situation with Trump’s tariffs getting in the mix in 2025, distorting natural disinflationary signals.
The volatility has been seen in longer-term Treasury yields. But lately, with tariff noise diminished and the economy tepidly intact, the bond market seems to be settling into the view of gentle disinflationary Goldilocks, if not something more deflationary virulent. If we are right to anticipate a cool down in inflation signaling, understanding which of those two conditions is in play will be important.
Goldilocks vs. Deflation Scare, Later Stagflation
Goldilocks loves her porridge “just right”. Not too cold and not too hot. In this zone we have moderate inflation and/or moderate cooling of inflation. We are in that zone now. An important signaler of continued moderation or something more excessive will be the 10yr-2yr yield curve (YC).
- The economic recovery produced by the inflationary efforts of the Fed and Trump 1.0 government in 2020 created an inflation-fueled economic recovery and curve flattener.
- Next, angst about the effects of that inflationary operation gathered among the public in 2021-2022.
- Then the inversion extremes of 2023 came about. At that time we noted that it is not the inversion that would bring a recession (as touted loudly in the media), but the subsequent curve steepener, when it un-inverts (goes above zero).
- YC un-inverted in 2024 and still no recession. That is because, referring to the gentle downtrends in the nominal yields (lower panels) the curve has been steepening under disinflationary pressure. Sort of a relief valve. The fiscal inflationary effects of the reelection seeking Biden admin in 2024 kept the economy afloat and the steepener tame.
- Today Trump 2.0 readies its version of debt spending and economic stimulus. This is being promoted against the “interim” disinflationary phase…
…not the Continuum’s major trend, which is now inflationary. For more on that please see yesterday’s public article: A Disinflationary Path to the Next Inflation Problem.
The upshot is that Trump 2.0 is operating to a heavily inflationary agenda, with a dovish Fed on rates and internal bond market operations (monetary), and debt spending, deregulation and tax policy, etc. (fiscal).
It actually fits perfectly with the view of easing yields, gentle disinflationary Goldilocks(ish), and later a whopper of an inflation problem. Perhaps after the 30yr yield taps the limiters (green moving averages) for the first time from the upside rather than its previous decades of doing so from the downside. Let’s use 4% as a general target.
This process could last months before the inflationary macro reasserts the main trend. Now coincidentally, I for one gold bug, am anticipating a multi-month correction in the precious metals complex. What are the main macro enemies of gold and especially gold mining?
- Inflation that is working to support the economy (e.g. late 2020-2024) and…
- Goldilocks, where all seems “just right” on the macro front (e.g. 2012-2019, including a long YC flattening).
It should also be noted that if the YC surges upward under increasing deflationary pressure (i.e. monetary and fiscal inflation policy fail to produce desired economic results), the gold miners would probably get croaked into a massive buying opportunity. Here let’s recall that a deflation scare is the best time to buy the gold mining sector (ref. Q4, 2008, Q1, 2020).
Gold mining fundamentals would scream higher if the whole macro were to fold up its tent and tank. In that case, gold would decline, but much less than cyclical markets. Again, the 2008 & 2020 game plan.
Bottom Line
The slight creep up into the red on the YC chart above hints of a possibility that disinflationary Goldilocks could morph to a deflation scare. That could trigger an unexpected severe correction in many markets.
However, a continued gentle disinflation and YC going sideways or slightly upward or downward could provide a setting where Trump 2.0 oversees a tepid and calmly bullish Goldilocks(ish) environment into the mid-terms (as Bessent is surely trying to engineer).
Scenario #2 would be bullish for stocks and bonds, bearish for gold and silver.
Scenario #1 would be, according to the chicken man…
Stock Market
I am short this pig at the moment. But only insofar as a partial and theoretical hedge. SPX looks like it wants to fail, is being guided that way by an RSI divergence, and…
…has a divergence of another kind working against it on the fly. The VIX has been a reliable signal if you accept its wide timing tolerance.
I am also a bit short NDX. Frankly, the short-term situation looks so obviously bearish it makes me suspicious. Again, it’s more a hedge than anything at this point. The objective is a normal correction to the rising SMA 200. A more severe correction could bring it to around 22000 and the pattern top.
Semi has been the star, the leader. However, might that have been a small double top? We’ll know soon. Maybe a healthy tap of the 50 day average? As yet, it’s purely trending up with minor negative divergence.
The aggregate global stock market is still channel busting upward as the American reserve currency continues to be drubbed by the Trump administration.
It’s pretty ironic, wouldn’t you say? Yet Bessent and the big, beautiful bailout package are preparing to put lipstick on the pig. The world ain’t buyin’ it.
Sentiment
In addition to the negative implication of the VIX above, other signals show a nervous market. That is fertile ground for an eventual sentiment recovery out of this thus far moderate pullback (can’t really call it a correction yet). But in the short-term, sentiment is pointing downward. A deeper correction and more fearful sentiment could come with a stock market ‘buy’.
Junk bond spreads are widening off of very depressed (over-bullish) levels. It signals that investor fear is starting to crop up.
Similarly, Put/Call ratios are rising lately. That is another sign of defensive investor behavior.
Yet market breadth is doing fine. This is a phenomenon that tends to happen when the big, over-owned, over-loved stocks and sexy sectors start to decline while the average stock goes its own way. Think about Microsoft, Meta, Amazon, the AI-spooked software industry, and some of the other more widely known stocks/areas that took hard corrections. This “healthy” reading is a product of those headline stocks/sectors moving downward, not the average stock.
The MVSI tells a similar story to the above. The market pullback is thus far due to the sexy stuff getting unloaded, not the average stuff.
Ma & Pa’s optimism rose into this would-be market top(ish). Now it is falling off a cliff, in a bullish contrarian sign. AAII can pull its sentiment back further before a market rally ensues. But as it stands, this is weighted to contrary bullish.
NAAIM are in a similar boat as investment managers continue to creep bearish, now down to 80% bulls. As with AAII, they can slide further before the pullback/correction ends.
Precious Metals
It’s a correction. We anticipated it. We are prepared for it.
Now, let’s deal with it. It was a great run in 2025. The bull market is not over, but I think this phase of it is over. Again, per the analysis above one of two scenarios could extend the correction:
- A Goldilocks style economic backdrop that persists into the all important mid-term elections.
- An utter deflationary failure of the economy, despite best inflationary/reflationary stimulative efforts.
Thing 1 would be a grind on the precious metals and many commodities as well. It would probably see the Gold/Silver ratio rising gently and USD firm for a phase within its bear market.
Thing 2 would compress time frames, tank most markets and create a significant buying opportunity in gold, gold miners and later silver, perhaps sooner than expected.
With the big macro picture being inflationary, and in my opinion economically corrosive STAGflationary, the setup would be in play for the next phase of the bull market. But this may be months out on the horizon, in my opinion. Potentially to year-end or early 2027.
Strategy
I plan to hold a core, pending incoming information, but also hedge freely (sometimes to ill effect and sometimes to net positive effect). I would also like to trade the intermediate moves. As an example, if silver were to boom upward in a test of the highs, I’d considering buying puts again. You know, casino stuff.
With the lessons of 2012-2019 firmly in mind, I would also realize that gold bug sloganeering and frankly, pumping, may need to be tuned out for a much shorter phase than that 7 year exercise in futility. There are still a lot of considerations and questions to be answered, so right now I am throwing spaghetti at the wall to see what sticks. Firmer conclusions will be the product of incoming information/data.
In the very short-term, let’s recall that the heart of earnings season is here and gold miner quarterlies are likely to be very good. Any rally from that situation could be an “as good as it gets” moment for a while.
Daily Charts
Gold appears to be in a bear flag (and GLD’s volume profile is not particularly bullish). The flag allows the price to take a shot upward to around 5200. But if it’s the bear flag I think it is, the gold price probably would not much exceed that level. Ultimately, if it is an extended correction, let’s keep an eye on the rising 200 day moving average and its future meeting with the 4000 round number.
Silver did great corrective work by tanking to the 62% Fib retrace level around 65. In my opinion, all other things being equal, in the near-term the silver price could just as easily ram higher within its new bear phase as tank again. Right now it is clinging to support, but below its 50 day moving average. I want little to do with trading silver at the moment.
GDX appears to be mimicking the bear flag of its daddy, gold. As with gold, there could be a shot higher within the context of the bear flag. If so, 108 looks reasonable.
There was some decent volume on Friday, but generally down day volume has far exceeded up day volume. If the flag fails we’d be looking for the 50% blue Fib and the 38% orange Fib in the 82s. That area also holds clear visual lateral support. Longer-term, let’s keep an eye on the 200 day moving average (orange) rising toward the 62% blue Fib and 50% orange Fib in the low/mid 70s. Sound like a plan?
Commodities & TSX-V
The Commodity ETF (monthly chart) made its breakout from the consolidation of its initial ramp job out of the 2020 inflation operations. It is hard to see DBC dropping much below 22.50 in any coming market disturbances. Commodities are economically cyclical, unlike gold. A wild card that could support the broad complex is the global geopolitical and trade situation, which is rancorous at best. Also, crude oil, a primary driver of the complex, has not even gotten the rally other items have had. It is the ultimate geopolitical commodity.
Similarly, TSX-V may have limited downside as well. Aside from gold explorers and juniors, many of these little fellers are digging around for copper, nickel, uranium, PGMs and REE, not to mention oil, gas and coal.
TSX-V (monthly) stopped right at the resistance level it ‘should’ have at least hesitated at (1168). It is testing initial support at 968. If that gives way, there is clear and firm support at 840. It became quite overbought when it hit 1168, but look at that volume profile. That is $$$ pouring into this long forsaken market, including all those hole diggers digging their holes.
Strategy: I want to be careful about unloading some of these lottery tickets. One great hole and macro be damned, some of these items will not return to earth. Of course, many others will never leave the ground.
I am viewing the mineral exploration sector with much respect on the big picture macro because new resources have got to come from somewhere. Eh?
However, in the near-term the TSX-V/TSX ratio should hold the noted support to the base breakout, which I believe it will do, given the new inflationary macro.
Gold/Silver Ratio & USD (DXY)
The GSR appears to be on another leg up out of its second bull flag. We are targeting the downtrending 200 day moving average and associated resistance (78-81).
This would pressure the precious metals, and potentially commodities and many global markets if USD also tags along. Thus far Uncle Buck is stuck in the mud.
It should also be noted that both the DXY and more recently GSR are in major daily chart downtrends (SMA 200 sloping down). So in the (relatively) new inflationary macro any upward moves would be counter-trend, which would make sense. Silver is more inflation sensitive than gold.
Portfolios
Gold is long-term risk management & monetary value/stability in a balanced portfolio.
Taxable “Savings” Account
A lot of cash (Treasury MM), Treasury bond funds and a direct T-bond. Along with that some stock holdings and associated hedges (for now).
The taxable account carries high cash levels as long as cash and equivalents are paying out. This is considered a savings account of sorts, rather than a speculation or even investment vehicle. The goal is to speculate around the periphery. In another market phase (e.g. post-correction/bear/crash), the account may get more in the game.
Roth IRA (non-taxable, no contributions)
Men and goat are staring hard at the slippage below the trend line and even harder at lateral support. I will not allow this chart to break down materially. Not unless I have a clear vision of the near-term plan for markets. As it stands, the plan is “buying opportunity” in stocks and possibly certain commodities. The leaders of the 2025 bull, the precious metals, are in correction and gold bug though I am, that will be respected and managed.
Cash is 35.5%, short-term Treasury bonds 39.5% and equity (long & short) 25%. I feel pretty well defensive now, but the plan leans toward buying opportunity. Possibly for a long hold in broader stocks and trades in the precious metals within what I am preparing for to be a multi-month correction.
Cash & income-generating Treasury bonds are at levels that are right for me and my real-world situation. Your situation is different. Cash will be adjusted as needed.
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