A Lender Carry Trade; An Old Theme Revisited

Excerpted from this week’s premium report, NFTRH 282:

Last June when tidbits about a would-be future ‘taper’ of T bond purchases (QE) were popping up in the media NFTRH 241 (June 2, 2013) put forward a theory that a tapering of bond monetization could begin to act as a delivery mechanism for inflation, with banks and lenders the key:

A ‘Carry Trade’ Returns?  (6.3.13)

QE ‘Taper’ to T Bond Carry Trade – More Thoughts  (6.11.13)

‘Taper to Carry’ is Still Loaded  (6.19.13)

‘Taper to Carry’… a Logical Chain  (7.8.13)

Gold: “Taper This”  (9.17.13)

Characteristics of the ‘carry’:

• An incentive for the banks to finally start lending funds out into the economy due to the ‘carry’ spread (a profit mark up for lenders) between rising long-term yields and the officially held ZIRP on the Fed Funds.

•  It could be a positive for gold and commodities as ‘price’ signals in the economy finally start to gain traction (ex. Last 2 ISM ‘prices’ data were quite elevated) as a long-bemoaned lack of ‘velocity of money’* (i.e. deflationary drag) transforms, at least temporarily into a phase where inflation drives up costs.

It’s an inflationary fix and is part of the reason we have followed the bank sector’s leadership.  They would benefit.  Precious metals and commodities could benefit as people chase price signals and think “uh oh, INFLATION!” [although is should be noted that a period of ‘cost chasing’ and inflationary hysterics is not the preferred long-term fundamental underpinning for gold; ongoing economic contraction is]

In short it all plays into the current theme that while things may remain positive for the economy and the stock market for a while yet, it is no longer a Goldilocks style bullishness with US stocks sucking up all of the [inflationary] benefit.