We have used the 'continuum' (monthly chart of the 30 year yield) for years now to define tops in inflation expectations (red arrows at or around the EMA 100) and tops in deflationary fears (green arrows).
30 yr yield & 30 yr - 2 yr spread
With the help of a MACD cross over (not shown here) we were able to get on top of what turned out to be a significant upturn in long-term yields. So significant that TYX formed a bottom pattern that targets 4.5% on the bond's yield.
Yet this time there is none of the inflationary hysteria attending the proceedings that there was when the 2011 red arrow was inserted. Here we again recall the media goat that was then Ben Bernanke in spring of 2011. The featured item was Bill Gross, the king of bonds, putting a big and highly publicized bond short position (inflation long position) right in Bernanke's face.
As it turned out that was simply a top call to the first inflationary hysteria of the post-2008 era and the Fed chief has since been bestowed hero's status.
Sen. Charles Schumer (D., N.Y.) told Mr. Bernanke that 2014 and 2015 "will be stronger economically than our present time, and that will be in large part because of the building blocks that you put into place, even if you're no longer chairman of the Fed."
"Building blocks" Chuck? How do you build on debt? Well, I know how you build on debt because we are doing it right now. But you talk about this as if something organic and productive has been planted for future harvest. Just remember Chuck, for every credit there is always a debit... maybe even to come due right around 2014 or 2015.
Back to the chart above, things have spun 180 degrees, turning my perfectly good T bond Continuum into at least temporarily a 'has been' indicator because the long bond's yield has been rising, yet since the hysterical 2011 inflation expectations blow off, short-term yields have risen faster. That is not an inflationary mix. Presenting one Hero, providing the "building blocks" for a brighter future.
So what does a geek do when one of his geeky tools goes on the fritz? Why, juxtapose it against another tool trying to find a message. So Thing 1 in the top panel shows interest rates rising toward a point that should indicate inflation is gaining momentum and yet Thing 2 in the lower panel remains well below the 2011 inflation blow off level.
Hence, we should watch Thing 2 because its impulsive spikes usually coincide with upward spikes in inflationary fears as people come to fear the destructive aspects of the very policy behind which they are almost uniformly in line today.
Thing 2 has been hammered as the inflation bulls have been punished and the Fed Chief has been raised to heroic status. Thing 2 remains in a post-2008 uptrend. I am by no means an inflation bull but I sure will be if this ratio breaks upward and other signs of gathering inflationary pressure (like the TIP-TLT ratio) start to trigger. Similarly, if the 30-2 fails, a deflationary phase could be indicated. Say what you want about Prechter but he did nail - and I mean absolutely nail - the top in T bonds (last item).
Prechter is of course a deflationist and yet he is bearish the asset that has heretofore been thought of as the number one vehicle for a deflationary environment. My view is that with the hyper aggressive policy making now routinely employed by the Hero and his friends distortions have been hard wired into the system and those of us twittling our indicators need to be constantly vigilant to make sure we are not b/s'ing ourselves by setting and forgetting our various ideologies.
The system has been transformed and the winners going forward are going to be nimble, hard working and most of all willing to realize they do not have the answers. The only real answer is to remain open to criticism (self or otherwise) and revision while keeping the patience of an elephant.
The market will come back to normal. A new normal for sure, but at some point it will shake off the man made stuff and reset.