Gold/Silver Ratio, SPX, Yield Curve And A Story To Tell

I most often use linear scale charts for stocks, markets, and indicators for their more absolute views. But in the case below we conjure up a long-term log scale chart showing the Gold/Silver Ratio (GSR) and the S&P 500 (SPX), as it works better in providing a percentage-based relationship between an indicator of market liquidity and inflation when declining and lack of liquidity, deflation or… it has to be said, Goldilocks, when rising.

Now, when viewing the most recent Goldilocks phase, where SPX has gone in positive correlation with the GSR we will have to suspend disbelief that this is anything normal or natural. It was created by will of man as first the Bernanke Fed conjured balls-out inflation out of 2008’s deflationary destruction and then as a crowning achievement, concocted Operation Twist in order to manipulate the bond market into flashing this signal… ‘Nope, no inflation here!’

It was a macro parlor trick to “sanitize” (the Fed’s own word used to describe the operation at the time) the inflation signals the Fed itself had created. The scam was to buy (manipulate) long-term Treasury bonds and sell (manipulate) short-term Treasury bonds. Those are debt instruments traditionally used by the mythical posse known as the Bond Vigilantes (back in a more innocent time) who would use the bond market for its inflation signals, and in turn, signal it to the world.

But this is a new Wonderland, where anything is now possible and you need a completely open mind in order to manage it because we have long-since abandoned normal. By the will of man, Op/Twist eventually kick-started the yield curve in a southerly direction and instigated an epic flattener that has run with the man-made (manipulated) boom in stocks to this very day. More on that below.

But first, when talking about and illustrating a thoroughly manipulated macro over years and decades it is tempting to try to throw the kitchen sink at any given article. There’s so much more to the picture. But here I want to try to avoid information overload (always hard for me) and just give you a picture to consider. It’s a picture of the post-1980 journey together taken by this macro indicator (GSR) and the world’s most visible stock market (SPX).

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