Monthly Macro Monitor: Market Indicators Review

The markets we use to monitor the economy (and those that influence it, which amounts to the same thing) have been tracking an economic slowdown since the 4th quarter of last year. That’s when interest rates, real and nominal, long term and short term, started to decline, credit spreads started to widen and the copper to gold ratio started to fall. Those are all classic market signals of an economic slowdown. Some of those have moderated since the beginning of the year though and today we seem to be standing at a crossroad. If the economy continues to slow, it won’t be long before recession becomes inevitable. As I said in the update earlier this week though, we aren’t quite there yet.

We first started to notice problems in markets over a year ago. Jeff Snider noticed disruptions in money markets (not money market funds but things like Eurodollars) early last summer. Still, it wasn’t until the late fall that these disruptions started to impact the economy and broader market psychology. Wall Street and its narrators offered a traditional explanation for the slowdown – it was the Fed going too far with rate hikes or the ongoing trade war with China (and other places) that slowed the global and then the US economy. Jeff’s explanation of distress in funding markets is at once more direct and more opaque. Direct because it offered an early warning but opaque because the causes are hard, maybe impossible, to discern. They call it the shadow market for a reason.

Jeff and I have discussed – debated – whether what he sees in money markets is cause or effect. He leans much more toward the former while I lean more toward the latter. The truth, as it so often is, likely lies in the middle. We have both wondered – because we can’t know for sure – if the troubles at Deutsche Bank are the source of the problems in global dollar markets. I think there is some truth to that but if anyone knows what is actually on DB’s balance sheet, they haven’t shared it with the rest of the world. Whatever the cause, there is no doubt that dollar funding outside the US is constrained and that is having an effect on the global economy. Whether a lack of dollar funding is the cause of distress or whether it is an effect of other problems is hard to say.

Of the traditional explanations, the Fed narrative is thin at best, at least from a physical standpoint. Unlike some I know, I won’t call the Fed irrelevant but their impact on money today is limited mainly to psychology. Which is important and powerful but ultimately limited by a reality central bankers can ignore for only so long. US GDP totals $20 trillion annually and I find it highly unlikely that the difference between growth and contraction is a 25 basis point change in the Fed Funds rate. If the US economy is contracting there is a lot more going on than a small change in interest rates. And the Fed isn’t going to reverse it with a similarly small change in the other direction. That is, frankly, absurd.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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