Hello all,
I have been working on an idea for a while and it seems to me the market is trying to confirm that idea - deflation is our primary concern, not inflation. This is such a concern for me, I thought I ought to bring it to the broader investment communities attention and am doing so through this TradingView platform.
The chart here is a comparison of the US Dollar index (DXY) the spread between the TLT/TIPS and one popular Inflation proxy of late (Bitcoins). One could use the price of gold or Bitcoins, they basically look the same.
So what are some of the messages we can draw from the market's price action?
1. The US Dollar has turned dramatically higher over the summer. Double bottoms within double bottoms suggested rally and that has what has happened.
2. The spread between the Inflation protected US government bonds and non-protected US government bonds has gone negative suggesting investors are not willing to pay a premium for inflation protection. A negative reading would go so far as to imply deflationary expectations as the inflation premium will actually cost you.
3. One inflation proxy (in this case Bitcoin) has a very solid market structure top working that coincides with the US Dollar Index's bottom.
So put it all together and I think we are getting one clear message. That message is a cautionary one - keep in mind, the US Dollar index is considered the market;s 'fear' proxy and from what I can see, investors do have a bit to be fearful of at the moment.
From an economic perspective, Europe has been and continues to languish. At the same time the prospects for more easy monetary policy (QE) from the US Federal Reserve Board appear to be diminishing. That is understandable considering the US stock market is at or near all time highs. The problem here is that these two economic drivers are dangerous when we look out into the future. If stocks are at all time highs and the Fed wants to take away the punch bowl, does that not imply a lot of risk?
From a Geo-political perspective, the world is a rather 'hot' place at the moment and only looks to be getting 'hotter' From the typical Middle east concerns to saber rattling in the South China Sea, to an all out civil war on Europe's doorstep in Ukraine, one could argue there is very good reason for the market to rather fearful at the moment. The problem too with current Geo-political situation is there appears to be no leadership coming from the West. Obama is basically a lame duck and the American electorate doesn't seem to have the appetite for direct US involvement. Lets hope it doesn't take another 9/11 to change their minds.
So with all this said please take this cautionary note when going forward. If you are heavily invested in stocks then maybe buying a Put option might be wise ( a little insurance never hurts). If you are new to the market consider waiting until we get on the other side of this typically tough time of year (September is historically the worst performing month on average) before considering purchases. If you just don't know what to do, maybe is a good time just to stay out...
Hope this analysis helps in your trading decisions and best of luck,
Brian
aka The Rational Investor
p.s. if you are serious about working on your trading skills and may actually consider trading for a living, please take a moment and visit our Bitcoin related trading site at www.therationalinvestor.co Along with regular blog posts and member videos, we run a school to teach aspiring traders the basic essentials to trading for profit over the long term. From risk management, to strategic planning to crafting a personalized trading plan, our 12 week program's aim is to give you the tools needed to survive and prosper over the long term.
I have been working on an idea for a while and it seems to me the market is trying to confirm that idea - deflation is our primary concern, not inflation. This is such a concern for me, I thought I ought to bring it to the broader investment communities attention and am doing so through this TradingView platform.
The chart here is a comparison of the US Dollar index (DXY) the spread between the TLT/TIPS and one popular Inflation proxy of late (Bitcoins). One could use the price of gold or Bitcoins, they basically look the same.
So what are some of the messages we can draw from the market's price action?
1. The US Dollar has turned dramatically higher over the summer. Double bottoms within double bottoms suggested rally and that has what has happened.
2. The spread between the Inflation protected US government bonds and non-protected US government bonds has gone negative suggesting investors are not willing to pay a premium for inflation protection. A negative reading would go so far as to imply deflationary expectations as the inflation premium will actually cost you.
3. One inflation proxy (in this case Bitcoin) has a very solid market structure top working that coincides with the US Dollar Index's bottom.
So put it all together and I think we are getting one clear message. That message is a cautionary one - keep in mind, the US Dollar index is considered the market;s 'fear' proxy and from what I can see, investors do have a bit to be fearful of at the moment.
From an economic perspective, Europe has been and continues to languish. At the same time the prospects for more easy monetary policy (QE) from the US Federal Reserve Board appear to be diminishing. That is understandable considering the US stock market is at or near all time highs. The problem here is that these two economic drivers are dangerous when we look out into the future. If stocks are at all time highs and the Fed wants to take away the punch bowl, does that not imply a lot of risk?
From a Geo-political perspective, the world is a rather 'hot' place at the moment and only looks to be getting 'hotter' From the typical Middle east concerns to saber rattling in the South China Sea, to an all out civil war on Europe's doorstep in Ukraine, one could argue there is very good reason for the market to rather fearful at the moment. The problem too with current Geo-political situation is there appears to be no leadership coming from the West. Obama is basically a lame duck and the American electorate doesn't seem to have the appetite for direct US involvement. Lets hope it doesn't take another 9/11 to change their minds.
So with all this said please take this cautionary note when going forward. If you are heavily invested in stocks then maybe buying a Put option might be wise ( a little insurance never hurts). If you are new to the market consider waiting until we get on the other side of this typically tough time of year (September is historically the worst performing month on average) before considering purchases. If you just don't know what to do, maybe is a good time just to stay out...
Hope this analysis helps in your trading decisions and best of luck,
Brian
aka The Rational Investor
p.s. if you are serious about working on your trading skills and may actually consider trading for a living, please take a moment and visit our Bitcoin related trading site at www.therationalinvestor.co Along with regular blog posts and member videos, we run a school to teach aspiring traders the basic essentials to trading for profit over the long term. From risk management, to strategic planning to crafting a personalized trading plan, our 12 week program's aim is to give you the tools needed to survive and prosper over the long term.