This article attempts to put clearer words and images to the many words I expended in my interview with Jordan on Monday discussing the macro (and the precious metals).
For virtually all of 2024 NFTRH has been on a plan that saw two things in the stock market.
Bullish and
High risk due to multiple indications of a coming top
Risk indicators have generally been of two kinds; signs of extreme complacency and confidence, and analogs of past conditions that extrapolate to a bearish outcome. Frankly, it has been a bit of a trick remaining bullish with the market’s trends and ongoing momentum, while being aware of the risk profile. But that is our job; to be on the right side of the markets, bias be damned. The right side in 2024 was the bullish side.
Let’s examine some indications supporting the bearish thesis for 2025, possibly in the coming weeks.
Confidence Game
Contrarian alarm bells are ringing in the form of intact mass speculation and structurally over-bullish sentiment, which was supported by the Biden administration’s strong efforts to keep the economy goosed through debt spending on favored economic areas.
Also, you’d have to believe that Treasury Secretary and former chief Yellen at least has the ear of the Fed, which went dovish at a key pre-election moment. The fact that the government itself was primary in 2024 hiring is unprecedented in my experience. Here is the proof from November report. The admin’s stimulative policies largely supported and sustained the confidence game currently in play.
Now, speaking of confidence comes the “America Great Again” portion of our show. The businessman president knows economics (thinks the public). He is going to cut taxes. He is going to lay out tariffs and make ’em pay in order to have access to US citizens as customers. Well, the seeds of a down economic cycle have already been planted and when Trump starts funding tax cuts from increasing the $35T debt pile it will be too late. Damage done.
Let’s look at a few pictures associated with the thoughts above, starting with Michael Pollaro’s picture of what had been rising liquidity into 2024, emanating out of the Fed’s various orifices, but which has turned back down.
It was back in line with the Fed’s balance sheet, which has been shrinking since 2022:
The Fed is a clear and present indicator of waning market liquidity, and recently the bond market has pressured it to start to ease away from dovish Fed Funds rate policy as well. This is likely due to the market’s reaction to the Tariff-minded and debt-spending Trump. Regardless of the rationale, it is a clear and present risk signal for markets, much like we noted earlier:
With respect to inflation, I think the bond market is reacting to what it thinks it sees ahead in the new administration. But when the economy starts to show more signs of weakness (not yet pervasively evident, thanks IMO to the efforts to hold onto the White House by the Biden administration through economic stimulus and some fudged payrolls reporting), the bond market may well change its mind.
Right now the bond market is doing to the Fed what it did in 2007; forcing it to stop and reevaluate its dovish stance. Of course, that was the precursor to a “hard down” in yields, inflation, economy and stock market back in ’07.
Gold-Silver, US Dollar Signal Trouble Ahead for Markets
Another danger is the duo of the and the Gold/Silver ratio (GSR); the 2 Horsemen of the Liquidity Apocalypse.
When outperforms , especially if both metals are declining in price and the US dollar is rising, the indication is anti-liquidity for the markets. Gold is a refuge (likely after USD and short-term Treasuries) during market liquidity crises and silver is not. USD, to the denial of “de-dollarization” dreamers, is still the world’s reserve currency and thus, logical anti-market to asset markets.
This can, for a while, support a Goldilocks theme as inflation signals get pushed down, but if the two riders become impulsive to the upside, you should have an abundance of caution. As yet they are bull-biased and bullish respectively. But with GSR in a pattern and USD just breaking out of a base, there is little that is impulsive about this to this point. But the charts are bull-biased and as such, caution should be taken against the possibility that the bias could play out in an impulse.
Bottom Line
Fed-manufactured liquidity is waning and the 2 Horsemen, GSR, USD are picking up on that. With the recent bump back up in market-based inflation signaling, the Fed is under pressure to back away from its purely dovish stance (as we heard from its own orifice on the most recent FOMC day). That potentially sets a trap for the Fed and the markets if the result of 2007 analog in the 2yr/T-bill (ref. the black & blue chart above) is extrapolated to today.