The charts are super interesting to look at. How quickly things turn, as if on a dime.

2018 featured a break above the Continuum’s limiter and folks, you and I were not the only ones who saw that and uttered “Ruh-roh!”; the Fed was well aware of the inflationary implication.

Here’s the flip side of the yield (the 30yr bond) for your viewing pleasure. Where is the inflation? Not on this chart after the false breakdown and recovery.

Many market players wondered aloud what on earth Jerome Powell was thinking as he maintained a hawkish stance despite the onset of Q4’s harsh stock market correction. But as noted at the time, it was simply the bond market giving its instructions.

The 2 year Treasury yield actually spiked and topped in November and hence, no lovey-dovey talk from the Fed.  Jerome “Dead Eye” Powell lagged the bond market, finally becoming Jerome “Dove Eye” Powell, revealing an overt dovish stance in March, again lagging the market (the Fed had actually started making dovish sounds in December and January as I recall).

The stock market cheered and the disconnect between the yield and the S&P 500 became a gross distortion (as is the Fed Funds rate in the lower panel, if the futures boyz at CME Group are right on in their bets for increasing probabilities of a rate cut in 2019), per the red shaded area.

We had asked a question per the chart below. Subsequent market activity says “no”. The stock market is getting in line now with the relentless decline in the 2-year yield, as it should (according to history, at least).

If things remain on the current dis-inflationary course this will eventually force the Fed to get in line as well. Our trusty inflation gauges, TIP/TLT & TIP/IEF continue to burrow south. See last week’s post Goldilocks Threatened.

The process seems to be one of getting as many people offsides as possible. Those who believe a rate cut will extend the booming party; those who believe the precious metals sector thrives on inflation; those who think the Fed actually controls much of anything… What it actually could be is another cleaning out of wrong-headed yet firm perceptions by casino patrons. If Goldilocks is kicked out of the house a lot of players will be without a chair when the music stops.

As we live a life of ease
Every one of us has all we need
Sky of blue and sea of green
In our yellow submarine

But maybe not for too much longer.