Wednesday, March 28, 2012

Strange day but problems brewing

Stocks were weaker today with the S&P500 down 0.49%  while the Dollar and Treasuries traded flat.  The market tone was set early by a Durable Goods report that came in lower than expected. 

The big story was the sell off across the board in commodities.  The continued weakness in the commodity complex is something I've been watching closely and have written about in the past.

The Shanghai Composite had its biggest one day drop in awhile (black circle):

(click on chart for larger view)
Momentum is horrible! (black arrows).  And the China slowdown is part of the weakness behind commodities but I don't believe it is all the story.

I've posted the chart below before but I'm posting it again because I believe it details a very important phenomenon that is occurring in the Global economy and one that should be a concern for all of us:

This is a ratio chart of the iShares Barclays TIPS Bond Fund divided by the iShares Barclays 7 to 10 Year Treasury Bond fund. It's designed to measure the inflationary or deflationary forces in the U.S. economy.

The concept behind the chart is that TIPs (Treasury Inflation Protection Securities) are bonds investors can buy which provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Dividing the TIPS bond fund with a bond fund that tracks the "belly" of the yield curve gives us a viable way to track whether inflation or deflation is gaining momentum in the economy.

I highlighted the Fed's liquidity programs (QE = quantitative easing) and the effect on the market. As you can see, each subsequent FED liquidity facility has resulted in diminishing effects.

Why do I post this again?   I've said many times that  gargantuan deflationary forces have been masked by the avalanche of fiat money printing by central banks.  I believe the commodity price action we are experiencing is proving the ultimate failure of the great Keynesian experiment.

The last three charts are the "proof in the pudding".

Here's the Goldman Sachs Agricultural Index:

Here's the Goldman Sachs Industrial Metals Index:

And here's West Texas Intermediate Crude:

Yes, even Crude is weakening.  More on this in future blog posts.