My call is that the Fed will turn outright dovish in March (with or without an accompanying rate hike), and U.S. yields will get smoked, adding kerosene to our already bullish fire for Treasuries, gold and gold miners, writes Landon Whaley Friday.

If you’ve ever been deep sea scuba diving, you know that once you breach 75 feet, it’s easy to get disoriented and confused as to which direction is up. The solution to this disorientation is to watch the direction of the bubbles because they always rise toward the surface. In a similar way, we know it’s easy to get disoriented and confused in our 24-7-365 news and social media cycle world with stock market tipsters at every cocktail party.

We liken our research to the “bubbles” telling you which way is up and safely guiding you back to the surface. Each week in Gravitational Edge, we distill the most critical economic and financial market developments and then provide you with clearly articulated game plan for the week ahead, we call this section “The Playbook.”

What Had Happened Was..

The Gravitational 15 booked an additional +25 basis points in the abbreviated Thanksgiving week, bringing our year-to-date return to +13.1% and our trailing 12-month return to +17.4%. But that was then, and the game is always played in front of us, not behind.

In order to understand the future, let’s look backwards because in the lyrics of Johnny Mathis, “it’s beginning to look a lot like Christmas” 2015.

Three years ago, almost to the day, I wrote a pair of commentaries (which weren’t posted until late January) discussing what I believed to be the two biggest market opportunities as we entered 2016: being long long-dated Treasuries, gold and the VanEck Vectors Gold Miners ETF (GDX).

As we enter the last month of the year, the two most important variables driving asset prices are painting the same 2015 picture all over again.

Economic conditions say what?

In December 2015, the U.S. had been toggling between a Fundamental Gravity #3/4 environment in which growth had been slowing for nine months and counting. Fast forward to today and we are in the initial innings of a similar growth-slowing regime, which I expect to last well into next year.

Simply put, there is no better environment for long-dated Treasuries or gold than an FG3/4. In these growth-slowing regimes, Treasuries average a +3.8% quarterly gain and post positive three-month returns 74% of the time. Gold is similarly attractive, with an average quarterly gain of +3.5% and positive returns 72% of the time. And finally, Gold Miners (GDX), which are just a leveraged play on the price of gold, gain an average of +4.6% and are positive in 76% of all growth-slowing calendar quarters.

Both financial market data and the early Q4 data are confirming this growth-slowing environment. That said, we haven’t seen much upside from these three asset classes yet because all three are heavily sensitive to U.S. yields, which have been elevated. The 10-year yields have been making a series of lower highs since peaking on November 8, and 30-year yields have been in their own one-month downtrend since peaking on November 2. We don’t rely on a single indicator, but a break below 3.03% on 10-year bonds and the 3.30% level on 30-year bonds would provide a nice upside catalyst for these markets.

Central bank response says what?

In December 2015, the Fed conducted its first rate hike in over a decade. At the time, I pointed out that every single time a central bank had tightened conditions while in a Fundamental Gravity #3/4 environment, it caused a recession. Despite this history lesson, the Fed moved forward with its initial rate hike even though the U.S. had been mired in an FG3/4 environment for nine months.

And while the service side of the economy saved the broader economy from a recession (bottoming at a +1.2% GDP growth rate in June 2016 before accelerating higher), the manufacturing and industrial side of the economy experienced an H1 2016 recession.

Fast forward three years and we are staring down the exact same Fed-to-Fundamental Gravity situation. The only difference this time around is that the U.S. has experienced slowing growth for only two-and-a-half months, not nine. Make no mistake, next month’s rate hike will cause Q1 2019 to slow dramatically, which will leave the newly data-dependent Fed with no choice but to quit raising rates.

The markets are currently in agreement with Wall Street in anticipating four rate hikes during 2019. As my boy Lee Corso says, “Not so fast, my friend!”

My call is that the Fed will turn outright dovish in March (with or without an accompanying rate hike), and U.S. yields will get smoked, adding kerosene to our already bullish fire for Treasuries, gold and gold miners.

The Bottom Line

Three years ago, I nailed this call: Long-dated Treasuries gained +15.5% in the first six months of 2016, gold gained +22.9%, and Gold Miners (GDX) shot to the moon, gaining an average of +96.7%.
I have no way of knowing if these asset classes will put up these types of numbers in the first six months of next year, but what I can say is that my Gravitational Framework is indicating that after two-and-a-half years of being unloved, the Fundamental Gravity is extremely bullish for these markets and there is minimal drawdown risk from here.

I traverse the globe looking for opportunities with limited downside if I’m wrong and massive upside if I’m right, coupled with outright bearish positioning by the broader investment community. We are already long Treasuries (which we will add to opportunistically) and you can expect an alert to get long gold, gold miners ETFs, or both, any day now.

Please click here and sign up if you’d like to receive the latest edition our research reports as well as to participate in a four-week free trial of our research offering, which consists of three weekly reports: Gravitational Edge, The 358 and The Weekender.

Watch Landon Whaley’s 3 Ideas for Investing and the meaning of coddiwomple in a short video here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:42.

Watch Landon Whaley discuss When Markets Cycle  in a short video here.
Landon Whaley: We have a generation of investors and asset managers who know only one market. The reality is markets and economies cycle and catch people off guard.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:51.

Landon Whaley interviews Adrian Manz: How I approach stocks here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 7:48.

Landon Whaley interviews trader Jackie Ann Patterson: How I got started trading and how I approach it with my Truth about ETF Rotation here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:14.

Landon Whaley interviews John Carter: How I started trading here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:37.