Treasuries, on the other hand, are directly linked to QE. Unless QE comes in some supertwisted form that involves the Fed selling Treasuries across the curve (bordering on the unimaginable but, given the desperate central bank monetary innovations of the past few years worldwide, I dare not rule out anything), at least some maturities will go down in yield. More important, inflation expectation has gone down since mid-March, and even broke down below the perennial 2% two weeks ago, as shown below in my favorite chart of 5Y CMT, TIPS and inflation expectation:
- New economic data strongly and consistently support the hypothesis of strong economic recovery, therefore driving the inflation expectation back up to 2.3% or higher. Given the decidedly mixed data so far, this is unlikely. But in this case the Fed may not do or say anything drastic. Mixed economic signals continue, inflation expectation stays below or fluctuates around 2%. This is likely, and the Fed would have to tighten the leash and stop the taper talk quickly. Some encouraging words, meaning a pessimistic outlook in today's world, may be said.
Considering the aforementioned recent market trends, and if you agree with my assessment of the probabilities of the two scenarios, it may be time to keep close watch of forthcoming economic data and buy the dip, gradually, in Treasuries and gold. Or, if you want to wait, at least keep close watch of forthcoming economic data and get ready. Buying the dip in stocks is more risky -- as mentioned earlier, Fed words and even action may no longer be sufficient to boost confidence in the economy at this point. International developments, perhaps now more than usual and especially from Japan and Europe, will also be crucial factors. Here's one bullish thing for Treasuries: new Chinese President, Xi Jinping, will visit the U.S. in June (exact date yet unknown but he's in Latin America now). Unless his meeting with President Obama turns out to be a disaster (highly unlikely), China will continue its recent increased pace of purchasing U.S. Treasuries. At the time of publication the author was long GLD and TLT. Follow @BoPengNY This article was written by an independent contributor, separate from TheStreet's regular news coverage.