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Posted 5/10/2004
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The Fed has lost the bond markets confidence
Evidence is mounting that people are starting to believe the inflation they see, not what Alan Greenspan tells them.
By Bill Fleckenstein
On May 4, the very day that the Fed's communiqu described inflation as "low," the CEO of Dean Foods (DF, news, msgs) put it another way altogether: "Inflationary pressures began to impact our business in the first quarter. However, the brunt of record-high commodity costs will affect us in the second quarter, adding to the inflationary environment we are already experiencing across our various lines of business."
That day, the fixed-income market also saw things differently from the Pollyanna Fed, which deems food and energy to be moot measures of inflation. Never mind the gist of the Fed's communiqu -- ignore all those inflationary pressures, pretend they don't exist and trust us to do the right thing. After sucking in for the Fed's nonsense for all of about two seconds, the long bond turned a half-point pop to the upside into about a half-point smack to the downside.
Based on this week's clubbing of the fixed-income market, it appears to me that the Fed has lost the confidence of the fixed-income market. Going forward, if this market begins to act like a vigilante instead of a liquidity hog and the dollar continues to go south while precious metals firm, it would be the clearest statement that the markets have at last concluded the Fed has blown it.
Of course, the Fed blew it a long time ago. The only question has been when the masses would come to that conclusion.
Wisdom lies to the east, Mr. Greenspan
I can't help but chuckle every time I think about the irony of China's central bank's attempting -- for the good of the economy -- to apply the brakes to what it regards as an overheating economy. Consider that in light of Easy Al and all the geniuses at the Fed, who never saw the stock-market bubble, don't see the real-estate bubble, and would go out of their way to rationalize both. That is, the stock-market bubble wasn't one, thanks to "new-era" productivity, and the real-estate bubble isn't one because it's not homogeneous.
Maybe if Greenspan learned to speak Chinese, he might be able to spot a bubble in advance and would not exacerbate the problems unleashed by the first one he created by creating a more dangerous one in housing. I continue to say what I have said repeatedly since 1996: Alan Greenspan is the most irresponsible and incompetent Fed chairman in history.
Gold jilted in jig time
Turning to my antidote to Al, I was astounded to learn how lopsided sentiment has become toward gold. This, by way of the following e-mail from a friend (who I believe was paraphrasing the service he takes): "The 10-day daily sentiment index (DSI) has quickly gone from an excess of bulls to a new record low in the same. At 10.5%, the 10-day DSI has not been lower in its 17-year history."
I think that is a very powerful statement. Not only do people who hate gold hate gold, but it looks like a lot of the people who used to love gold now hate gold. I strongly believe that the lows have been seen for the metals and have positioned myself accordingly.
Differing with a yellow-dog analyst
Speaking of gold, the following comment by John Doody in the current Gold Stock Analyst strikes me as the perfect bullish contrary indicator: "This gold bull market has at least paused and probably ended. . . . The good news is that we don't foresee the lengthy gold-price erosion that dominated the five years after the last bull market. . . . We see a trading range bounded by $350 and $425."
I certainly don't want to make fun of John. As regular readers of my daily column know, I am a subscriber to his service and very fond of his bottom-up gold-stock analysis. (You can visit Gold Stock Analyst on the web at www.goldstockanalyst.com.) It's just that I have seen this so many times early in a bull market after a nasty correction: Folks get off the scent for one reason or another, and rarely get back on board. John's logic should be read. Who knows? He might be right.
However, I wanted to reaffirm my views -- and to note that I have backed them up with recent purchases of gold and silver bullion. For what it's worth, I love the position of being contrary and yet with "the trend."
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