The FOMC's November 1st Meeting Conundrum

The yield curve is of particular note since it is presently almost completely ignoring the Fed and has been steadily flattening. This is problematic, especially for the Fed!

We can see that the 2-10 US Treasury spread is below the dotted red line which has always preceded a major market correction, as well as a US recession.

What I learned was that there is always a shock or surprise (shown in Blue) which comes out of "nowhere".

What that surprise is, doesn't really matter except it occurs because of hidden underlying market dislocations. Extreme valuations, low volatility, market speculation, excess leverage, etc., etc., all contribute but are not in themselves the direct cause. Together they all contribute.

The only thing you can be certain of is that market fragility will abruptly fracture. The Fed is acutely aware of this and knows it must be fully prepared!

The irony is that QT will likely contribute to this fragility and shock. Therein lies the FOMC's Conundrum!

We can see the yield curve comparison prior to the 2000, 2007 tops along with today's level. Though the yield curve is not flat or inverted (yet) it is setup for exactly that to occur.

The black line shows that a couple of minor Fed rate hikes on the short end, and a shock which precipitates the normal "Flight to Safety" into the security of longer dates US Treasuries and the yield curve would be flat-to-inverted in a "New York Minute"!

 

Conclusions

In a recent SA article "Euphoria And Greed: The Final 5% Is Always The Most Expensive" I pointed out how the Consumer Comfort sentiment indicator is historically an important institutional tool in assisting with timing. Since posting that article "US Consumer Comfort Plunged the most in 13 months as 'Personal Finance Fears Mounted".

What may be a conundrum for the FOMC next week, need not be a conundrum for you!

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Disclaimer: Information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any ...

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