Mish's Global Economic Trend Analysis Message Board

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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: JMK1 who wrote (20705)	1/7/2005 4:57:54 PM
From: mishedlo	Read Replies (1) of 116555

Tom 2005-01-06: As for a big move up in gold, Heinz does not see it until the yield curve stops flattening. When is your best guess on when that might be? Mish 2005-01-06: There are several things that could steepen the yield curve 1) expectations of inflation and 10 yr treasuries sink. The problem with this idea is that gold tends to be positively correlated to treasuries not negatively. It is also not in line with my views of a weakening economy or Heinz's either. Some sort of US$ panic could cause it also. That probably would be positive for gold but I am not sure how permanently. Neither of us thinks a dollar panic is likely any time soon, but it could happen. 2) The FED pauses and the short end rallies while the long end stays more or less the same. Perhaps it starts to happen as soon as the market perceives the FED will pause. Note that strong jobs tomorrow will probably not be good for gold even though it would be good for "inflation alarmists". As I have said, rising treasury yields has tended to be quite bad for gold. 3) The FED actually starts cutting. I believe Heinz thinks this may happen this year(not sure when) and it is consistent with his and my view of deflation and what the FED will do to fight it. I have no timeframe for this and we did not discuss this either. IMO it would probably not happen till late this year unless things get really ugly in which we could see it by midsummer. Ignoring the yield curve for a moment, I think what gold really needs to see is some sort of US$ bottom vs the Euro, Pound and Yen. That might happen if the UK and Europe go on a cutting cycle. When the world sees there is currency to hide in, that's when gold really takes off. I have no idea how to time that. I will pass this post on to Heinz for comments. Heinz 2005-01-07: the timing is rather difficult, but i would say that if one considers the normal lag time between a sharp slowdown in money growth and the corresponding slowdown in economic activity, evidence of the infamous 'soft patch' turning into an even softer patch should continue to pile up in coming months. given that, the current idea (as expressed in the Dec. FOMC meeting) of further rate hikes being an unavoidable certainty will be dispelled sooner rather than later imo. i hasten to add that that's just a gut feeling, or rather, an educated guess. the slowdown has already begun, but it needs to become more pronounced before the bureaucrats realize that they've overestimated the recovery's staying power. so what i'm not really sure of is if i can gauge where the realization threshold of the bureaucracy is. recall that they kept hiking right into the initial Nasda collapse in 2000 - they didn't even realize at the time that the tech stock bubble had burst and what that meant. this disconnect may be even more pronounced in the case of the beginning demise of the housing bubble, since there'll be less timely information on its evolution.

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