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MACRO ANALYTICS - MARCH
PREDICTING GOLD PRICING (IN US DOLLARS).

In our previous newsletter we outlined the tenets of the correlation that has been in place since the 2008 Financial Crisis regarding the pricing of Gold. The chart directly below shows you the most recent pricing action in gold down to an hourly basis as further evidence of that correlation.

However, there is more to it than knowing that gold pricing is correlated with the 10Y UST Real Rate. The question then is, what controls the 10Y UST Real Rate? We previously illustrated that to be predominately for the last 10 years, the Chinese Credit Impulse. The question is - is that all we need to know? The answer is it is not quite that simple!
GOLD VERSUS 10Y UST REAL RATES
THE CHINESE CREDIT IMPULSE
The Chinese Credit Impulse has consistently lead the 10Y UST Real Rate by 12 months for over a decade (chart to the right)!

This correlation will give you a fairly good indication of what to expect regarding real 10Y UST rates.

It holds equally well for the longer dated 30Y UST Real Yield (shown to the right)
INFLATION BREAK-EVENS

Presently Inflation Break-evens are rapidly and alarmingly driving up the Nominal Value of the 10Y UST Yield to levels many consider potentially de-stabilizing to the highly leveraged financial markets.

Inflation is definitely a near term concern, however there is yet little evidence that this a secular concern. Deflationary pressures are more a concern in the intermediate to longer term. (View this month's Macro Analytic video at bottom of this mailing)
US TREASURY REAL RATE
The US Treasury 10Y real rate has evolved to be accepted in the financial community to be equivalent to the US TIPS (Treasury Inflation Protected Securities) rate.

We have serious issues with it be represented as such because the TIPS is based on the flawed "CPI" Index. We lay out the issues of the flawed nature of the CPI associated with substitutions, hedonics and imputation in our 2017 Thesis paper "The Illusion of Debt".

However, it is not a major impediment to this predictive tool discussion because we are using it as a short term relative benchmark. We will discuss the longer term ramifications further in the month's upcoming LONGWave video.
The current Real Rate as represented by the 10Year Treasury Inflation Indexed Security Rate approximates 0.66%
FISHER'S EQUATION

Nominal Interest rate = Expected Inflation + Real Interest rate

KEY MIS-UNDERSTANDINGS IN THIS SIMPLE FORMULA:

  • BREAK-EVENS as a measure of domestic inflation moves the nominal rate. The Inflation Rate of the country does not move the real rate
  • REAL RATES are impacted by a shift in:
  • The relative value of the currency,
  • Global inflation pressures and
  • Credit worthiness.
  • INTRINSIC VALUE: Falling Real Rates reflect a reduced intrinsic value of a Bond. Fisher's Equation says this will result in a reduced Nominal Rate as the interest revenue stream is perceived to be of less value.
  • MONETIZATION: Rising domestic inflation, due tof the monetization of debt, will inevitably impact the domestic currency which then reduces the real rate, making nominal rates and their interest revenue stream worth less.
EXPECTATIONS

Our current expectations are for:

Break-Evens :  Approaches 2.85%
Real Rates: Will approximate 1.0% to reflect the Chinese Credit Impulse
Correlation
Nominal Rates: Will peak at approximately 1.85%
NOMINAL RATES

Our 10Y UST Yield (TNX) Analysis chart which we have shown in previous newsletters continues to reflect our 1.85% target. A potentially weakening equity market and resulting flight to safety may result in a near term TNX consolidation (Wave"D") before heading higher.
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“The differential is a sign of the market’s collective thinking that the $1.9-trillion fiscal relief ready for endorsement by the House will stoke price pressures over the medium term without necessarily impinging on the evolution of inflation over the longer term. In other words, secular inflation may still be elusive, which is another reason why the Fed may decide to look past price pressures in the here and now (and witness how prescient last year’s virtual Jackson Hole conference seems in hindsight in the context of average inflation targeting, though I would call it serendipity). The surge in non-farm payrolls for February and the progress on vaccination show a strong economic rebound may be on the cards. As if on cue, Brent crude prices are hovering around $70 a barrel. All these mean that the breakeven spread is likely to stay elevated for now."
NEWSLETTER NOTE

In the about to be released March LONGWave we will tie the last two newsletters together with a clearer understanding of:

  • DOLLAR - YUAN - GOLD RELATIONSHIP (Right)

  • BOUNDARY CONDITIONS: For the 10Y UST:
  • Inflation Break-evens,
  • Real Rates and
  • Nominal Rates

  • The US "TIPS" as a measure of the US Real Rate is flawed and as such this has consequences.
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VIDEO ADDENDUM RESEARCH
MY VIDEO COLLABORATOR, CHARLES HIGH SMITH POSTED THE FOLLOWING WITH OUR VIDEO

Too Busy Front Running Inflation, Nobody Sees the Deflationary Tsunami

Those looking up from their "free fish!" frolicking will see the tsunami too late to save themselves.
It's an amazing sight to see the water recede from the bay, and watch the crowd frolic in the shallows, scooping up the flopping fish. In this case, the crowd doing the "so easy to catch, why not grab as much as we can?" scooping is front running inflation, the universally expected result of the Great Reflation Trade.

You know the Great Reflation Trade: the world has saved up trillions, governments are spending trillions, it's going to be the greatest boom since the stone masons partied at the Great Pyramid in Giza. It's so obvious that everyone has jumped in the water to scoop up all the free fish (i.e. stock market gains). Only an idiot would hesitate to front run the Great Reflation's guaranteed inflation.

Unless, of course, what we really have is a tale of reflation, told by an idiot, full of sound and fury, signifying nothing. Everyone frolicking in the shallows scooping up the obvious, easy, guaranteed gains is so busy frontrunning inflation that nobody sees the tsunami rushing in to extinguish the short-sighted frolickers. (When Does This Travesty of a Mockery of a Sham Finally Implode? 3/3/21)

Gordon Long and I discuss The Deflationary Tsunami racing toward the frolickers in a new video program. It's not that there aren't inflationary dynamics in play; there are. The issue is that not all the dynamics in play are inflationary, and the deflationary dynamics have been building for the past two decades..

MATASII'S STRATEGIC INVESTMENT INSIGHTS
2020 VIDEOS OUTLINING THE COMING RISE IN INFLATION & COMMODITY PRICES
Supporting Newsletter -#1 - https://conta.cc/31jo7QU
Supporting Newsletter -#2 - https://conta.cc/3jmiwiB
Supporting Newsletter -#1 - https://conta.cc/3kXkKGu
Supporting Newsletter -#2 - https://conta.cc/2G7pE5e
Supporting Newsletter -#1 - https://conta.cc/2XQpe8H
Supporting Newsletter -#2 - https://conta.cc/3gXZ8bo
MACRO ANALYTICS Video - MARCH 2021
RECORDED - 03-04-21

VIDEO: 53 Minutes with 37 supporting slides.

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