Stocks Up, Dollar Down

With stocks up and T-Bonds down you might think this was a risk-off 

week. But what’s with the disconnect between the go-to safe havens, namely T-Bonds and gold? Could it be gold as well as silver giving us a whiff of inflationary winds?

My Inflation/Deflation chart above, which registered its fourth weekly new high this week at 171.23, and silver’s strong showing and gold’s upside move also suggest a whiff of inflation is in the air.

Sometimes a flow out of bonds into stocks accounts for a decline in T-Bonds and a rise in stocks in a typical risk-off trade. But let me suggest something else might be going on here. The top chart on your right is the dollar index over the past three months. The lower chart is the T-Bond chart over the past three months. It makes sense that as the dollar loses value foreign investors are going to require higher rates to offset the decline in the value of the dollar. So perhaps the decline in the T-Bond, meaning a rise in rates, is required to keep what’s left of foreign savings in T-Bonds. And of course, as noted above, with a rise in inflation that also means investors are going to require higher rates to park their savings in Treasures that are yielding negative real rates now.

But of course, the U.S. economy can’t take higher rates nor can the stock market unless it believes the Fed has its back and will continue to pump money into the economy when push comes to shove. Based on history, that is what we should expect. As Charles Hugh Smith noted in an article, he wrote this week, the Fed will keep the dollar in decline because that translates into higher stock prices and keeps the system seemingly solvent by way of excessive liquidity in the short term. But, as professional managers of money are quick to realize, owning tangibles like commodities and precious metals in addition to stocks is another way of siphoning off wealth from the poor and middle classes. There is really no reason not to expect this game of massive money printing to continue and in fact if the Senate goes Democrat and with a Janet Yellen as Treasury Secretary, we may expect a transition to a trashing of the dollar and hyperinflation to take place sooner rather than later. A Republican Senate would likely slow fiscal spending down a bit, though quite frankly, at this point in time there is no turning back from the destructive path we are on. Any attempt now to slow down the growth of money creation and monetization of debt will predictably lead to a sudden collapse of the lobal monetary system. Hence the dollar must continue to be debased, which means real asset prices will rise as measured in dollars. This is the case for gold and silver and many other tangible assets for the foreseeable future. 

About Jay Taylor