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Stealth YCC

05-14-2021

The market was higher through midday, led by the Nasdaq, which added 2% while the S&P and the Dow lagged behind. In the afternoon, the Nasdaq continued to lead the market higher, as it gained over 2.5% as of 30 minutes to go, when I had to leave.

Away from stocks, green paper was weaker and fixed income was higher while silver added 1%, compared to 0.75% for gold.

Swing Your Partner As I have noted, the bond market has been calling the tune for the precious metals market, as absurd as that is, given that it is always ascribed to rising real rates when anyone with an ounce of brains and a little intellectual honesty can see that inflation is running at far higher than short- to medium-term interest rates. But for the time being, the metals market is able to be pushed around by the algos that play that game.

However, rising interest rates appear to have forced the Fed's hand (thanks to Fred Hickey for catching yesterday's announcement from the New York Fed). I'm going to share three bullet points, because what it amounts to is stealth yield curve control.

"The Open Market Trading Desk (the Desk)…is making technical adjustments to its purchases of Treasury securities conducted on behalf of the Federal Open Market Committee (FOMC)."

"The Desk is updating the maturity ranges for its purchase sectors and the associated sector weights."

Test Flight And here's the punchline:

"As a result of these changes, the allocation across the 7- to 30-year nominal coupon maturity range will increase by 3 percentage points."

In other words, the Fed has decided to start to buy more longer-dated maturities, thus, it's stealth yield curve control. For this to actually matter, it has to become a trend and it has to become bigger in scope, although it seems highly unlikely that they would stop doing this, given the fact that they're probably doing it because rates have risen. Nevertheless, it will take more people focused on it and understanding the logical consequences for this step to matter. But as the Chinese say, a thousand-mile journey begins with one step.

Use 'Em Or Lose 'Em On a related subject, that being the gold market, the price action this week and what it did to sentiment I think might be useful for people to see how even during a period of rising prices people can become less bullish. Yesterday, the gold market closed about 1% higher than where it had been last Friday.

Meanwhile, sentiment as measured by the DSI dropped from 49 to 47. That's primarily because of the nasty decline we got on the CPI report really upset people, and the only way that can happen is because there just aren't enough people in the Western world who understand that the Fed is totally trapped and instead believe the talk about transitory inflation and that the Fed has the tools to deal with it should it not be transitory.

While the Fed may have all the mechanical tools it needs, it is short of the most important thing, that being the nerve (conviction) to actually use said tools.