Judas Goat Still Has Work to Do

Michael Oliver has referred to the U.S. T-Bond market as a “Judas goat.” One of the things I like about Michael is that he uses very colorful language in expressing what may otherwise be somewhat boring technical analysis. Of course, what I like most about Michael has been his accuracy in signaling major trends in many different markets.

When Michael called the U.S. T-Bond a “Judas Goat” I had to do a bit of research to find out where that term came from. This is what I found out from Wikipedia: “A Judas goat is a trained goat used in general animal herding. The Judas goat is trained to associate with sheep or cattle, leading them to a specific destination. In stockyards, a Judas goat will lead sheep to slaughter, while its own life is spared. Judas goats are also used to lead other animals to specific pens and onto trucks. They have fallen out of use in recent times, but can still be found in various smaller slaughterhouses in some parts of the world, as well as conservation projects. Cattle herders may use a Judas steer to serve the same purpose as a Judas goat. The technique, and the term, originated from cattle drives in the United States in the 1800s. The term is a reference to the biblical character Judas Iscariot.

So how does Michael equate the T-Bond to a Judas goat?

Rising T-Bond rates lead investors into feeling confident in buying stocks because Wall Street propaganda has investors (sheep) believing rising rates are a sure sign of a strong economy. A strong economy results in demand for capital put to good use to generate higher earnings, which in turn justifies still higher stock prices. Rates are rising for all the right reasons. The T-Bond (Judas Goat) is conning investors (sheep) into believing buying stocks is a sure way to become wealthy and there is no danger (longer term at least) in doing so. Of course, one thing that is missing from that argument, at least in the current case, is the fact that demand for capital is rising not so much from a healthy productive private sector but from hugely wasteful government spending on war and socialism.

So, actually everything is not okay. While there may be some growth in demand growth is derived from marginal improvements in the economy within the current cycle, rates are also rising much more from the following factors: (1) they were pushed to the lowest artificial levels within a business cycle ever by QE; (2) the Fed has now stopped QE thus reducing funding of the Treasury; (3) various foreign buyers are backing away from buying Treasuries, most notably China and Japan with Japan being the most recent example; and (4) Trump’s budget deficits are skyrocketing with no end in sight. With not even Tea Party Republicans any longer caring to fight for fiscal rectitude, the bond vigilantes are starting to return simply because central bankers are finally realizing they are not omniscient and omnipotent. In fact, they have proven they are clueless to the fact that the markets, not themselves, are ultimately in charge.

So, rates are rising, not because the economy is all that good but rather because there is a shortage of savings to fund government spending, which also serves to bid capital away from productive sectors of our economy thus reducing supply and postponing a return to prosperity. 

Because the market has not yet been taught the truth about the reason rates are rising, the Judas goat still has more work to do. What remains for it to do is to continue sucking more people into the market (a counter-trend rally) until it crashes, thus teaching a lesson to market participants and arrogant central bankers that they are not in charge.

The chart on your left is from Michael Oliver’s February 18 Weekend Report. Following also is his commentary regarding the T-Bond and its role to be played as “Judas Goat.” 

“MSA is major negative on U.S. T-Bonds and German Bunds, based on annual-momentum trend violations. We expect the current (second) leg of momentum and price decline will see prices in the upper 120s (or yield around 4.25%). 

“However, we do expect a counter-trend rally effort between here and there. Some very short-term factors suggest it could be now, but when we look at monthly momentum it suggests the rally probably won’t occur until price reaches at least 141 or the upper 138s. 

“There’s a price technical feature so obvious that it almost makes us chuckle. We’ve shown annual momentum charts in many recent reports, so we won’t belabor that issue again here. Frankly, they’ve been blown to smithereens, first back in Oct. 2016 and again with last month’s close. But what we see on this monthly price chart is a trend line that anyone with a crayon could draw. It’s been used five times, current low included, as support. And we suspect that before any meaningful rally (i.e. of five or more points) can get underway, this market will demonstrate even to price chart watchers that it’s over! Take out that trend line by several points and then maybe we can talk about a counter-trend rally.

“A relationship to notice 

“So in the larger picture while Bonds have dropped sharply recently, so have stocks. And as we’ve shown before, over the past decade at least, the movement of bond prices on the chart above—from lower left to upper right—has been replicated by the monthly price chart trend of the S&P500. 

“But in the very short term—the day-to-day—we’ve noticed lately that Bonds, the Judas goat they are, will lead stocks down, but that when stocks begin to shed price quickly and emotionally, Bonds produce a sharp, short-lived rally, as they did between the February 5th low and the February 6th high (while the S&P500 dropped two hundred points). So in the very short term they’re inverse. Consequently, when stocks began their rebound six days ago, bonds once again rolled over and produced new lows, obviously sensing that their role as Judas goat hadn’t been fulfilled. We suspect that before Bonds can produce a counter-trend rally of five points or more, and which lasts several weeks, they will first have succeeded in leading stocks into yet another sharp round of selling.” 

So here is the logic behind Michael’s equating the T-Bond market to a Judas Goat. As the T-Bond falls in price, interest rates rise. The mainstream, whose propaganda mantra is always positive, suggests that rates are rising because the economy is getting stronger so investors (sheep) continue to follow the T-Bond (Judas goat) to the slaughter.

However, because rates are rising not because of a strong economy but because of a massive shortage of savings to fund wasteful government spending and service surging debt loads, rates have to rise to much higher levels, but without the benefit of real earnings to fund massive growth in debt servicing requirements.

At some point as rates rise, it tips the stock market into a massive decline. In the short term and as long as the market doesn’t detect that the Judas goat is leading it to the slaughter, with every slight market correction money flows back into T-Bonds sending rates temporarily lower. But ultimately, when the market finally understands that the real reason for rising rates is because of a shortage of capital and that rates must rise dramatically higher without incomes to service debts, one of two outcomes become clear:  Either central banks engage in another round of QE, a magnitude or two greater than that of 2008-09, or the country bites the bullet, allows a massive depression and bankruptcies, and starts anew with a return to free markets. Obviously, the latter outcome is far superior to the first, which the next time is likely to result in hyperinflation and/or the complete destruction of the existing social and political order. We can hope and pray for another few years of a more moderate outcome. But in my view, with bail-ins as opposed to bail-outs already being planned and a move toward getting rid of all physical currency, it seems clear to me that the deep state is already planning for dictatorial solutions. 

Rising Rates, the Dollar & Gold

Current conventional wisdom holds that if interest rates rise, the price of gold must decline and vice versa. But actually from 1971 when Nixon detached gold from the dollar, for more than 10 years rising interest rates were closely correlated with a rising gold price, as the chart above on your left shows. It wasn’t until around 2006 that the correlation between rising interest rates and a rising gold price broke down, as displayed in the chart above right. (Note: left axis is inverted in chart above right.)

Dan Oliver of Myrmikan Research suggests the reason for this more recent anomaly is that in a world in which there are around US$4 trillion of base money demanded by the interest needed to service the $90 trillion of U.S. dollar denominated debt, increases in rates intensify the short squeeze on the dollar by forcing borrowers to hold larger cash buffers against these interest payments, causing the dollar to rise and gold to decline in value. And if the dollar is gaining strength, why do you need gold that pays no interest?

Dan goes on to note that there are only two scenarios that can break this dollar short-squeeze that sends dollars to artificially high values.

  • Decrease the need for dollars by allowing the markets to correct through a deflationary depression leading to massive bankruptcies in which debt is written off the books across the entire economy.
  • Massive creation of new dollars hitting the markets through massive fiscal stimulus, which Trump is apparently in the process of seeking to do.

The first alternative would be the best for the longer term because it would allow the economy a fresh new start with the sins of the past being atoned for and a renewed respect for the power of markets and the possibility of a return to honest asset-based money like gold or silver. There might also be a chance of putting to rest the big lie that central bankers are more omniscient than a free market economy.

But in either case, when markets break down, investors will come to once again regain an understanding that their grandparents have held for some time. They will come to understand that the dollar, unlike gold, is not an asset but instead is a unit of liability. After Judas Goat leads investors over the equity market cliff, they will learn the hard way that they better own an asset-based money rather than a fraudulent claim to wealth in the form of debt based money like we use now. That reality will become clear when debts can no longer be paid and the system implodes. We hope and pray that day never comes. But within the four dimensions of time and space, the natural laws of economics have never been repealed even by the boys and girls from Harvard, Princeton, and Yale who have PhD’s behind their names.

On your left are some market dynamics I speculate will be played out over the next year or so. These dynamics are very complicated so any attempt to foretell how events will unfold is hit or miss. The immediate issue is whether, when the next crash occurs, the Fed and other central banks will live through another credit cycle or whether confidence in central banking is finally and justifiably lost. The other question is whether it will be a hyper­inflationary depression or a defla­tionary depression that finally destroys confidence in central banks. As noted above, which way it goes will depend on the following turn of events:

  • Decrease the need for dollars by allowing the markets to correct through a deflationary depression leading to massive bankruptcies in which debt is written off the books across the entire economy.
  • Massive creation of new dollars hitting the markets through massive fiscal stimulus, which Trump is apparently in the process of seeking to do.

With the 2008-09 financial crisis, the average monthly price of gold fell from $964 in March of 2008 to $758.04 in November. From that point, a major gold bull market was born as the Fed pumped in massive amounts of new money to avoid a complete meltdown of the system. From November of 2008 the average monthly price of gold rose to an average of $1,771.38 in September of 2011, before a five-year bear market sent junior gold stocks into a deep sleep.

As Daniel Oliver explained, a dollar short position resulted from the need to hold more dollars to fund rising interest expense and back up huge increases in debt. From the middle of 2014 the dollar shorts began to cover as the Fed led the way to unwinding QE and the dollar index shot up from 76.28 on 6/30/14 to 98.61 on 12/31/16.  In the early days of 2016, gold began to rally and by the end of the year the dollar peaked and gold gained even more strength.

Right now, the markets are trying to decide which way the new Fed chairman will lean. If perceived to be more hawkish, we may expect short-term weakness in the price of gold. As Alasdair Macleod suggested on my radio show, the Fed is likely now to lean in a hawkish direction because as money is finally lent out into the markets, there are some rising inflationary concerns and the Fed wants to have higher rates so it can ease next time the system collapses. Alasdair also quite rightly noted that the Fed won’t act until it finds itself in a crisis situation.

Judas Goat is trying his best to lead as many investors (sheep) as possible toward death, but the time for fooling the masses may be nearing an end. Rising volatility suggests that a growing number of investors are starting to doubt Judas Goat so we may be nearing the end of one of the longest stock bull markets in history. Each of these cycles has gotten bigger than the last one. The past cycle saw the average gold price rise from $758 to $1,771.38. Is there any doubt that the next cycle, which has been distorted to an even greater degree by trillions of dollars created out of thin air by central banks, won’t be even more severe? The only question in my mind is whether the “central bank PhD standard” can survive another cycle.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.