FADE IN: The Federal Reserve board room, with Ben Bernanke surrounded by other Fed officials. Bernanke clears his throat.
BEN: Well onto this speech I have to make on Monday. I've been using 'significant headwinds' for a while now guys. Can we come up with a new word instead of 'significant'?
PLOSSER: How about 'severe'?
BEN: Will you stop it Plosser? Why are you always undermining my authority? This is why you're not on the FOMC. Severe sounds like we're on life support and I'm not saying that. Anyone else with a better idea?
LACKER: How about 'significant'? It's important, yet vague.
BEN: Good one Lacker. It's official- the new word is significant.
All kidding aside, Bernanke found himself in yet another corner today. The surprising employment data from last week triggered momentum buy signals for those who track short term interest rates, begging the age-old question: does the Fed lead or follow? The deflation crowd tends to argue that the Fed follows, and points to a myriad of historic examples of how the Fed rarely cuts rates without the market telling it to, including last year. Indeed, the functional rates were already low before the Fed bothered to cut official rates in 2008.
So now we must assess the same issue from the opposite side of the equation, when rates are zero. This is a bit more complex, because credit has contracted to a degree rarely seen in modern markets. Short term yields may increase, signaling tightening, but the Fed is in a position to fight such a signal kicking and screaming. Imagine a newfound dollar bull waking up to see their position getting clobbered with an under-subscribed treasury auction. We live in calamitous times. It's easy to call the gold trade over- it's overbought, moved up significantly in the last two months, and by some analysts definition was termed parabolic. While it never met that definition in my opinion, it doesn't change the fact that it was termed as such.
Momentum signals are one thing, but becoming a died-in-the-wool dollar bull is quite another. That's probably the best question for those espousing a high in gold. If it's such a bad bet at this point, are you buying the buck? The answer is almost irrelevant, because this noise is all about the short term trade and nothing more. Long term trends are made up of a thousand broken records, a market observation we believe strongly in at CycleSpreads. Of course gold was overbought- severely so. Or is it significant? Where's a Fed president when you need one?