One of the rules I live by is to be wary of people with ideologies that are firmly set in stone. With regard to the financial markets, I am very wary of them. That is because successful navigation of the markets – while avoiding or mitigating periodic blow ups – depends on the ability to reason as an individual and the understanding that the above noted forces of inflation and deflation are constantly in play against each other with each ideology hosting its proponents, backers and flat out cheerleaders at either pole.
Here on the blog, I and some commenters refer to i Boys and d Boys. But it actually pays to be an id Boy (ladies, I hope you will not mind being included under this label) because this implies a natural, almost unconscious awareness that the people who populate either ideology are due to be blown up on occasion as the long term T Bond inevitably approaches a hot zone beyond which interest rates must not be allowed to rise (or the bond to fall), or that very cold zone populated by deflationary destruction crowd. Again, here is our enduring picture of the 100 month EMA that has acted as a firm backstop to the deflation story, conveniently allowing the Federal Reserve to continue pretending it is in control of the financial system.
In the spring we had our latest bout of rising inflation concerns as the EMA 100 was approached, only to very unsurprisingly be repelled back amidst this noise: “flash crash!”, “double dip!” and various and persistent talk of a brutal market crash coming in late summer to fall (like now). This talk came from different angles and sounded to my ears almost as if a wide cross section of d Boys had been clued in from on high about the tragic oncoming events. What did we get instead? An epic rally in precious metals and some commodities, along with another lurch upward in the global realignment. Much of it at the expense of whatever herds now sit comfortably in T Bonds.
Getting back to the ideologists, it is obvious that many have staked out territory for which they are known and celebrated, whether it is as an inflation guru or a deflation one. Many live within their egos and are not able to adjust either due to a mental block or due to the financial incentive not to rock their respective herd’s boat. Their particular ideology will eventually come back into vogue after all. At least as long as the current system remains intact. And with the increasingly rapid cycles we now witness, one wonders how long that will be the case.
Ah but what about the id Boy? Whereas the ego, and super ego for that matter, have a vested interest in being right – in making the call – the id Boy lets instinct rise up from the unconscious and uses it along with various tools and a well calibrated b/s detector to play the swings experienced by the respective herds. This works, again, as long as the system remains intact. And by many measures it does, despite increasing dissatisfaction among conventional investors.
Please allow an expression of my own ego; why do you think this blog and my newsletter were early to the deflation case after inflation hysterics became intense into spring time? Why do you think I made repeated references to Karl Denninger’s increasingly strident tone and Robert Prechter’s increasingly frequent mainstream media appearances? Why? Because odds were increasing that it was time for a swing toward the opposite pole. Welcome to the opposite pole. It is all i Boy, all the time. Right at a time when the bears and deflationists just knew the crash was scheduled to hit.
In full disclosure, I could have been firmer on the current inflation case had my most important ‘forensic’ tool, the gold-silver ratio (GSR), not maintained its weekly bottoming stance so doggedly before ultimately tanking into the current party atmosphere. An upturning GSR would have signaled a draining of liquidity.
Without a long term compass or more accurately a barometer, we are just playing swings and blindly gaming the system. Well, here is the compass I have used since 2002 with an important supportive moving average of its own.
What this chart tells me is that we are in a secular inflationary age, with periodic bouts of fear and deflationary uproar. The most extreme example was the very brief drop below the EMA 18 in 2008. During this time, d Boys stuck their flag in the ground and declared victory. Egos were stroked for approximately a month, before the flag was uprooted and used to impale the deflation argument.
Meanwhile, the world is not going to end, but it is realigning. Capital is frightened because much of this capital knows that it has been created out of thin air by a system that depends on the implied confidence zone between the i and d poles to continue the great inflation (there’s my big picture view). Making things all the more intense is the fact that Mr. Bernanke outwardly admits that the Fed is manipulating the treasury bond market, in essence ginning up the safety zone and the perception that “there is no current inflation problem”, which the MSM dutifully eats up and feeds back to the herd. Get it?
Listen to your inner id Girl. She is trying to guide you through this mess. Is that not what the Id is for? Instinctual preservation which rises up from within to “avoid pain or unpleasure aroused by increases in instinctual tension.” Oh, and a few market indicator tools used to quiet the noise don’t hurt either.
Insert here the usual boilerplate about ‘try my newsletter Notes From the Rabbit Hole for weekly explorations from this different perspective’. It works well, we are in this for the long run and we will certainly be among the early arrivals to important trends while almost never feeling the need to crystal ball gaze and make predictions.