by Steven Jon Kaplan Updated @ 7:40 p.m. EDT, Tuesday, September 8, 1998.
investor1.com
DOES ANYONE REMEMBER STAGFLATION? (sorry, baby boomers, this has nothing to do with frat parties). Recently long-term U.S. interest rates appear to have bottomed, while short term rates continue to drop, and corporate yields are widening over similar-term U.S. Treasuries. These trends are typical of an economy which is experiencing a combination of increasing inflation (thus the rising long-term yields) and the early stages of recession (hence the widening spread for corporates, as the risk of bankruptcy increases). Such a combination is ideal for gold, particularly if the Federal Reserve decides that the risk of a severe recession is greater than the risk of inflation. Alan Greenspan's comments on Friday evening seem to support this scenario; when the head of the Fed proclaims publicly, if obliquely, that inflation is not a serious threat, this is giving the green light for a major commodities rally. Confirmation of the bottom in the 30-year Treasury yield can be found in the sentiment readings for Treasury bonds; as of the latest samplings, a 77% bullish reading from Market Vane and a 70% bullish reading from Consensus. Both numbers are at historic extremes.
COMMENTS OF THE DAY: Commodities rallied modestly on Tuesday, while the U.S. dollar was mixed and precious metals ended lower across the board. Gold dipped 90 cents, silver plunged 11.7 cents, platinum slumped $6.00, and palladium retreated $5.30. Bonds were sharply lower on the day as money exited fixed income securities for equities. The fact that the stock and bond markets are unable to rally together confirms that we are in a primary bear market for stocks, though the strongly improved breadth figures show that the current short-term rally is likely to continue at least briefly.
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