Thursday, May 8, 2014

Smooth Trends, and the TLT/IEF Indicator

I sent this chart showing the ratio of the biotech ETF to the 20+ year treasury ETF to a correspondent. He commented,

Notice how smoothly this chart trends, and how comfortable it would be just to ride such a trend. And because the two instruments have such radically different economic and market related drivers, when the trend breaks you know it is probably real with a very low probability of a whipsaw.

Cool, and the weird thing is that nobody seems to want to find pairs that trend smoothly and are non correlated in such a way as to minimize false breakdowns or breakouts. Note that while the pair reduces the gains from a naked IBB position, it reduces the risk while rendering a more reliable timing signal.
Doing some further research, I found a fascinating paper about "Using the Signaling Power of Treasuries".
"By tracking the relative performance of intermediate and longer duration Treasuries, we document a powerful way to outperform traditional asset allocation strategies on both an absolute and risk-adjusted return basis. Broadly speaking, when the total return of long duration Treasuries (30-year) outperforms that of intermediate duration Treasuries (10-year), volatility in equities for the following month tends to rise and bond momentum drift continues."
Here is what the chart of the 30y/10y treasury ratio looks like. The 30 year treasury has indeed been outperforming the 10 year.

1 comment:

theyenguy said...

Liberalism was the paradigm that established the age of credit. Trust in the Banker Regime’s monetary policies, specifically the US Fed’s purchases of 30 Year US Government Bonds, EDV, Ten Year Notes, TLT, and Mortgage Backed Bonds, MBB, as well as the ECB’s purchase of Eurozone Debt, EU, increased the supply of money needed to provide investment liquidity, and to produce economic growth; more so in the US than in the Eurozone. Peak Wealth has been achieved via the US Fed’s purchase of US Government Debt. Peak Wealth established an awesome moral hazard based prosperity. Now, the investor’s risk appetite has turned to risk aversion, as investors fear that the Fed’s monetary policies have crossed the rubicon on sound monetary policy, and have made money good investments, such as the Chinese Financials, CHIX, and the US Small Caps, IWM, bad.

It’s Global ZIRP no more. The bond vigilantes are in control of interest rates globally, and will be calling the Interest Rate on the US Ten Year Note, $TNX, higher from 2.6%, as well as steepening the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, seen in the Steepner ETF, STPP, steepening.

Since the first of the year, that is from January 2014 through early May 2014, the longer duration US Government Debt, EDV, has been outperforming the Ten Year Debt, TLT, as is seen the chart of the ratio of EDV:TLT.

This is going to change very soon, as the failure of credit seen in the Chinese Stocks, YAO, ECNS, CHIX, CQQQ, and TAO, as well as the US Small Stocks, IWM, carries forward to all Credit Investments and Equity Investments.

Liberalism featured the sovereignty of Banker Regime of democratic nation states, which provided policies of investment choice and schemes of credit in fiat money, producing seigniorage in Equity ETFs, and Credit ETFs, where the investor was the centerpiece of economic activity.

With the soon coming death of fiat money, defined as Aggregate Credit, AGG, and Major World Currencies, DBV, and Emerging Market Currencies, CEW, the new money, that being diktat money, defined as the mandates of regional leaders to establish regional security, stability, and sustainability, will serve as the wheels for the economy.

With the failure of credit, seen in China, YAO, ECNS, CHIX, Russia, RSX, ERUS, Emerging Europe, ESR, the US Small Caps, IWM, IWC, Credit Providers, MA, V, DFS, AXP, and Commodities, DBC, trading lower, authoritarianism is the new paradigm, which features the age of debt servitude, where the God ordained sovereignty of the Beast Regime of regional governance and totalitarian collectivism, seen in Revelation 13:1-4, which provides economic life experience in policies of diktat and schemes of debt servitude in diktat money, and which establish seigniorage in Regional Fascism, and which establishes the debt serf is the centerpiece of economic activity.