Last week as we noted the yield curve flattening in reaction to the hawkish tone of the Fed, and with the US dollar firm, we opened the prospect of Goldilocks. That would be the pleasant way to have a phase where inflation expectations get tamped down. Inflation is the #1 hot button issue, economically, leading into the mid-term elections.
That was favored. But this morning sees a selloff across asset markets, and that is a situation that would croak inflation fears much more decisively. It is also the “liquidity problem” option that would see USD and the Gold/Silver ratio ramp upward.
The GSR is ticking a new high and USD (DXY) is firming its base breakout, looking upward at a potential ‘C’ destination.
From the Bad Chicken Seinfeld episode: If this continues, “that’s not gonna be good for anybody” (or most everybody).
The precious metals are breaking down nominally, as anticipated, and with the GSR rising, that is the most bearish scenario for not only the precious metals but commodities and many stock markets.
In an operation aimed at reducing inflation fears, Treasury bonds MUST be supported. Goldilocks would have been supportive, with its disinflationary aspects. But I must admit I was probably wrong giving that condition as much weight as I did. A market correction would summarily get rid of inflation fears – for now.
That would support Treasury bonds (I added 0-3mo & 0-1yr bills yesterday, and will likely look further out on the curve if this disinflation starts to turn ugly) as we almost as if by magic watch the inflation hysteria fade in the coming weeks/months.
Here is the 10-2yr yield curve still in flattening mode, but still above inversion. We’ll keep a close watch on it. If it continues to flatten (downward), it would – in my opinion – keep Goldilocks alive. But if it starts to steepen again, here we should remember that it can steepen under inflationary or deflationary pressure. Neither of which are likely to be positive.
Strategy
I am already extremely light on precious metals and commodity positions after doing more profit taking yesterday (as DUST was sold). I will probably get lighter or eliminate it all, because I am DUST-free (dog gone it).
On broad stocks, insofar as I hold positions, I’ll favor defensives like Healthcare (I hold a few Biopharmas) and while I gave up on NOW yesterday, will take it hour by hour, day by day on the Software items still held (DDOG, MDB, DT). I still have a funny feeling about SaaS/Cloud. A feeling that the machines know they’ve been cycled out for so long now.
I will also consider shorting precious metals, commodity and/or broader stocks just for sport. Trader style, on opportunity. The Semiconductor sector is getting whacked this morning, but that pig is just begging to be shorted.
We’ll see. Cash is paying out and Treasury bonds could rally – and pay out. Cash is a nice safe place to be and if Treasury bonds do rally, so too they.
I think we may have some opportunities, folks. First to be protected, and later to capitalize. It’s what we do the markets for, I guess.
Frankly, I prefer this option to Goldilocks. I only wish it had not been my less favored option. Let’s see if the Goldilocks view does indeed prove wrong, as appears to be the case today in pre-market. Let’s see if the market follows through on its pre-market intensions.
