A Baker's Dozen of "Deflationary Bias" Charts

Fri, Oct 3, 2014 - 2:42am

We've asked a few times now, "what happened on September 1st"? It's time to revisit that question again today.

If you missed the previous two posts, you can find them here:



The basic premise is this:

Beginning in late August, the collective "market" finally began to anticipate to complete removal of overt Fed QE. (By the way, this was confirmed with the October POMO schedule, which shows QE3(∞) "ending" on October 28.) To understand how the "market" looks at this, think back to The Great Financial Crisis of 2008.

Back then, deflation was the big scare/risk. Asset prices were crashing globally and a global economy built upon debt and fractional reserve banking simply cannot survive in a hyper-deflation environment. Thus, QE1, QE2 and QE3(∞). Over the course of those money-printing programs, The Fed created nearly $3T in fresh cash, ostensibly to "help the economy".

Well that spigot will again be temporarily turned off in 26 days and the collective "market" finally began to anticipate just that back in late August. Without the constant dump of fresh greenback into the global banking system, we are right back to where we were in 2008. Namely, deflation.

If I'm right about this, what should we be seeing across the global financial markets? Mainly three, simple trends:

  • The U.S. dollar should be rallying as a prospective future of less dollar supply makes the supply of today's dollars more valuable.
  • The U.S. bond market should rally as a forecast for deflation makes even 30-year bonds at 3% look pretty attractive.
  • Every dollar-based "commodity", from the metals to crude to stocks should be falling as demand wains, liquidity reigns and the economy strains under deflationary pressure.
  • And what do we see? Let's start with the dollar. If we go back to mid-late August, what do we find?

    The US dollar as measured by the POSX:

    The euro and yen:

    OK, those charts seem to verify bullet point #1.

    How about the U.S. bond market? Are bond prices rallying, too? Well not at first and, while they were falling, they were the "missing link" in this equation. Ahhh, but look what happened two weeks ago! Bond prices suddenly reversed and prices began to rally...sharply. In fact, yields on the 10-year note and the 30-year Long Bond are now back to within a few basis points of the 2014 lows seen on August 28.

    So, whaddayaknow? The change in trend and rally from mid-September seems to be verifying bullet point #2!

    I guess that means we should now consider bullet point #3. Is nearly everything else falling? See for yourself:

    U.S. stocks as measured by the S&P 500 and Russell 2000:

    The most important "commodity" in the world at present, crude oil:

    And all five metals:

    Hmmm. Well those charts certainly seem to confirm bullet point #3.

    So, here's the point:

    IF I'M RIGHT ABOUT THIS, things are going to get even worse before they get better. Why? Because hardly anyone else is talking about it! By the time the world outside of Turdville finally figures out what's going on, the stock market will be crashing, crude will be near and the metals will be even lower, particularly silver.

    The point is this:

    As things begin to unravel in October and November, The Fed will be forced to act. Remember, their primary stated mission is prompt employment and inflation. Deflation is their number one enemy and they will do anything (and this includes QE4) to avoid it! After or slightly before this deflationary bias finally runs its course, all of the "dollar-based commodities" listed above will bounce, turn and rally back higher. Until then, however, we must expect continued pressure, even on gold. And if 80 gold gets taken out, there will even be spike downward as sell-stops get run below the current range, similar to the events of April 2013, though not quite as dramatic.

    In the end, this means you must be mentally prepared for what lies ahead. The next few weeks are going to be increasingly volatile and panic-filled, not just in the metals but across the board. Recognize it for what it is and realize that your stack of physical will be just as shiny and valuable with each passing day, regardless of the changing paper price. As I've been stating for weeks, at The End of The Great Keynesian Experiment, the paper price shenanigans/machinations of September 2014 will be long forgotten. You should continue to use this time wisely and prepare accordingly.


    About the Author

    turd [at] tfmetalsreport [dot] com ()


    Oct 2, 2014 - 2:46pm

    Great post Turd, this is important

    I always enjoy your daily commentary but today's post stands above most of the rest.

    Your words reflect my own thoughts and these are the inflection points where people make money.

    For those who are down because they bought gold or silver at higher prices, this will be your chance to dollar cost average down.

    For those who stayed out of the stock market, like myself, this may soon be a chance to enter. Why would someone do that? Because the stock market, though not backed by fundamentals, may continue up for years on never ending QE, and THAT is an inflation hedge, though a different type than PM's. I missed out on stocks because I never believed the Fed would go this far. But here we are 6 years later and trillions printed, and the farce continues.

    Both Zimbabwe and Argentina show that hyperinflation also leads to higher stock prices. I've concluded having both gold and stocks is a good thing (though I'm still biased towards gold & silver).

    Texas Sandman
    Oct 2, 2014 - 2:47pm


    Even oscillators gotta oscillate.

    What that means is you can have a perverse situation where oscillators correct while price stays flat or declines slowly only to have the trap door open yet again...

    Sometimes oversold markets crash. Something not generally appreciated is that the markets of 1929 and 1987 (stocks) were already oversold and had been declining for some time when they crashed.

    Sorry, guys, but like everyone else here, I'm alternately feeling like running to the toilet and puking versus pulling the lever on another silver buy here... Very morose.

    Oct 2, 2014 - 2:54pm

    Wow, what a turnaround in crude today!

    Now over $3 off its lows!

    Oct 2, 2014 - 2:56pm


    Could it be that the derivatives market is an ever expanding behemoth that demands collateral and all that is available is UST? That would explain the strength in the dollar as the big 5 banks need ever more collateral and the free crap from the Fed (QE) has been cut back.

    Oct 2, 2014 - 2:57pm

    @ Texas Sandman: Silver miners

    My understanding is that one response to falling prices is to selectively mine the higher grade stuff, get more output per tonne of rock, produce more oz of silver and try to survive.

    The downside is the mine gets played out faster, especially if it never becomes economic to go after the lower grade stuff that was by passed.

    Paradoxically if price recovers substantially then silver production (from primary producers) will fall as more rock is processed per oz of silver.

    Oct 2, 2014 - 3:00pm


    Sure the stock market went higher, but was it just because of currency devaluation?

    Gamble Texas Sandman
    Oct 2, 2014 - 3:02pm

    Your absolutely correct

    In a normal non manipulative market .

    Any ways there is a trade there , I'm not married to any position except my phys.

    Oct 2, 2014 - 3:11pm

    Quote:Could it be that the

    Could it be that the derivatives market is an ever expanding behemoth that demands collateral and all that is available is UST? That would explain the strength in the dollar as the big 5 banks need ever more collateral and the free crap from the Fed (QE) has been cut back.

    Very true in sense that UST are deficit, not silver or gold now. Just look at charts which Turd publishes of gold UST price divergence. Not enough UST is the cause for deflation since it equals monetary tightening. That is why FED needs to stop QE -taking that collateral away. But even then, there will not be enough. Its called Triffin's dilemma a reserve currency country inevitably faces.

    But interesting how fast the selling line here has turned from hyperinflation to deflation(!) first and then hyperinflation again.

    Not really consistent, is it?

    Before reserve currency will hyper inflate bankers will shoot each other so there is none left. I mean personally shoot each other out of desperation over such stupid idea as hyperinflation of the reserve currency, killing all debt- not via war in Europe - which is an option with much higher probability and will save bankers for some time.

    Oct 2, 2014 - 3:24pm
    SamSchlepps Dr. P. Metals
    Oct 2, 2014 - 3:47pm

    Perspective - Numbing - and easy to Miss

    I think thats a great comment as we sift through detail - as it comes out we react, ignore, and miss. My read of things FWIW

    It certainly seems the Ebola event serves to distract us and paralyze us - certainly keeps people indoors if something happens.

    I was looking at Jesse's site last night and in the Matières à Réflexion, gold and china popped up a lot - something not likely put together by the MSM, but relevant to us PM aficionados.

    Together with the Greenspan piece and the Turd noticed beatdown of everything except the USD - I think we can assume the derivative price grid has been altered. That Rob Kirby description goes well with his comment "...they would have problems getting through this fall..." and David Morgan's comment that the USD should show strength because we're going down Exeter's Pyramid to gold and we're at that 2nd last area (USD).

    Combine that with the folks getting out of town - Dimon with cancer, Gross leaving PIMCO, folks like Chilton and Genzler already gone - these are only the ones we notice.

    I think the SFZ opening gold trading up early was a sign that the Chinese are going to protect how low this last push is and the articles confirming the Chinese should have 8500 tonnes means they probably have more.

    Greenspan's attempt to rewrite history and once again confirm - "we see nothing", is just icing on the cake and we know misdirection. It is kind of interesting in that it does give a forewarning to buy in advance of more / initial Chinese buying. I'd be interested in is that a first time the fed has given a pre-warning or has that happened before amidst all the misdirection?

    If in any way, shape, or form - the US and FEd start printing - doesn't that mean the USD has to go down and make the Chinese owned T'bills worth a whole lot less - wouldn't they know it too and be ready to spend now on gold. It's always somebody's else's fault they take advantage of the poor old USA - freeing the world from terrorism, fighting Ebola, and those pesky Russians

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