Beware the 4th Horseman

Stocks got whacked by the peak in bond yields...

IN TRUTH it was not hard to project Friday's solid payrolls with a cost-push 'inflation effects' hint to it, writes Gary Tanashian in his Notes from the Rabbit Hole.

Because Amigo #2, the 2-headed one (10-year & 30-year bond yields) has had us on this track all along.

Of specific concern now is its 10-year head. Friday I put my money where my mouth is and bought IEF, the iShares Treasury fund that best corresponds to the 10-year Treasury Note, which is more or less the inverse of this yield surge upward.

Here is the daily view of the yield. Once we hit 2018, with all of 2017's inflationary inputs, this thing just took off toward our target, which is in essence now in the books.

As noted in a subscriber update on Friday:

"TNX has gotten awfully close to the long standing target of 2.9%. So close in fact that it has got me a bit on tenterhooks. I droned on and on about the 10-year to 2.9% and now it is just about here and I think the 'inflation trade' could be blowing off."

The play had been that the yields would rise to their 'limiters' (moving averages that have halted every damn rise in long-term yields for decades) and the risk 'on' markets would rise with them. Well Friday saw the 10-year get to target (in essence) and the Dow dropped 665 points.

Here again are the 2 heads of Amigo #2, from the compelling long-term perspective. While it is possible a further rise can take place to the channel top, the yield hit 2.854% Friday vs. the EMA 140's 2.872%. That's pretty close, people.

While on the long-term views, lets check the 30-year as well.

The long bond has been back boned by the 100 month EMA limiter (red dashed line) for decades now.

If things get really hysterical, I suppose that limit can be registered. But again, the Dow just shaved off 665 points and Treasury bonds are becoming more attractive vs. the S&P 500's dividend yield...right at a time when EVERYBODY hates bonds.

After all, Bill Gross and Ray Dalio told them to and who is the average person to argue with wealthy experts? Yes, my tongue is so far in my cheek it might pop right through.

In a post on January 25 we looked at our two bond experts as well as the likelihood of USD becoming the 4th Rider (alongside the S&P stock index measured in gold prices) as the happy Amigos one day morph into something much more obviously foreboding.

Meantime, why isn't gold reacting the way it is supposed to? Because it has been caught up in the 'inflation trade', with all the seedy risk 'on' players that entails.

Very simply, gold and the gold sector always were going to wait for a real risk 'off', counter cyclical phase before the real opportunity comes about. As we have noted since catching the December low in the precious metals, this rally was a seasonal and sentiment thing, and insofar as it rode with the risk 'on' and inflation trades (and with the happy Amigos), the sector was not quite ready for prime time.

The good news for gold bugs in waiting is that the inflationist bugs are getting exterminated and finally we may be able to manage a real opportunity amid disgust, loathing and genuine fear in the risk 'on' casino. The gold sector is after all, counter-cyclical in its best investment case.