EC The Markets Are Sending Confounding Messages

On December 11, 1990, at about 9:10 am on a stretch of Interstate 75 between Chattanooga and Knoxville, Tennessee, a fog so thick “you could move it with your hand” settled over Calhoun, Tennessee.

Just north of the Exit 36 Bridge, Deputy Bill Dyer arrived on the scene. Getting out of his cruiser to help a bloody car crash victim, in the distance he immediately heard tires screeching and metal crunching.

In that horrific incident, 12 people died, 42 were injured, and 99 cars and trucks were mangled.

The Calhoun pileup occurred for three reasons.

  1. Drivers were practically blinded when a thick fog descended.
  2. Drivers began to reduce their speed at various increments leading to the initial collision and the ones following.
  3. The fog was dramatically intensified by emissions from a nearby paper processing plant.

The stories and footage of the event are harrowing. While cars and lives are not at risk, a thick man-made fog is descending over markets. This metaphorical fog, induced by central banks, is sending confounding and conflicting messages.

The Fog of Markets

Unknowingly, most investors are managing their wealth amid a dense fog manufactured by central banks.

The confounding signals and lack of visibility emanating from equities, bonds, the dollar, precious metals, and other markets are baffling. In many cases, they are contradictory. Most troubling, they threaten our financial well-being.

To make things tougher, many of these markets sit near critical technical levels. Breakouts through or bounces off of those levels may pose significant implications for the economy and markets.

In this piece, we shine our fog lights on markets to expose these faulty signals and hidden risks.

Bond Yields

The graph below charts benchmark U.S. Treasury yields. The four lines have similar patterns.  Currently, yields are flat lining, and reside near the lowest levels in U.S history. These records go back to the signing of the Declaration of Independence.

(Click on image to enlarge)

confounding markets messages, The Markets Are Sending Confounding Messages

The U.S. Treasury may likely run a $4 trillion deficit this year, more than twice that seen in the 2008 recession. Treasury debt as a percentage of GDP is approximately 125-130%, up from 64% in March 2008. The world is awash in Treasury debt.

As supply increases rapidly, the second largest holders of Treasury debt, foreign investors, are not materially growing their holdings. Many have even been divesting of bonds backed by Uncle Sam.

As attestable by record low yields, the frightening supply/demand dynamic conjures no fear in the market.  Since February, Treasury purchases by the Fed have skyrocketed as shown below. Those purchases more than absorb the new supply stemming from growing fiscal deficits.

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William K. 2 weeks ago Member's comment

Unfortunately the author is correct. The news is bad and my thinking is that the motivations are also BAD, not just poor judgement. I see the fed working to protect friends at the expense of everybody else. Possibly that is a bit cynical, but is it off by much? I don't think so.

Of course those in charge are going to spout off with what they think is the good new that we want to hear. I would prefer truth, and the freedom to use it. But I anticipate neither.

And when the claim is that "we can see the light at the end of the tunnel", I tend to point out that actually, it is a fast freight headed our war. So we must duck way down.

How are we going to deal with this virus plague? The test being launched, with 150,000 people, will not help that half that get the fake medicine. The "double blind: test means that all that half of the folks get is a LIE, with no medical properties at all. I see that as horribly cruel.

Closing business may reduce the spread, but if the jiobs are gone and the businesses fail and folks go broke, then what? And with all the money injected, when inflation steals the value of my wealth away, then what?? And what will happen when that hits those folks who are not nearly so patient as I am? I will quickly step out of their way, that much is certain.

Moon Kil Woong 2 weeks ago Contributor's comment

Indeed the Federal Reserve and the government should know that providing funds to individuals and not companies is the best way to stimulate the market and affects the free market in the least adverse way as opposed to any other stimulus. the reason being it still requires companies to produce things of use to people and individuals still need to make economic decisions.

Take this as opposed to the horrendous messes of government stimulus this time and last time.

Moon Kil Woong 2 weeks ago Contributor's comment

In this case to deal with the pandemic, I think the market and people in general agree to try to ease fears and prevent panic. I can't disagree. However, as a general statement, the long term trend doesn't look good if this becomes a regular issue. The point is, we need to deal with Covid. The longer we dither around without dealing with it on a national level the more it will spread and grow in the States with the worst records in dealing with it keeping the infections going.

William K. 2 weeks ago Member's comment

I do not like being lied to in an attempt to make me "feel better", and I am usually aware of when the message that I am being given does not match reality.

THAT STUPID SORT OF ACTIONS is exactly why this plague had a chance to spread so much in China. The idiots in the local government did not wish to cause any upset, so they kept it quiet. The result is the present ongoing disaster with thousands dead and the economies all over the world disrupted.

The only way to reduce the stimulus towards fear is to correctly deal with the problems and tell the truth. I never trust any official caught in a lie ever again, and neither should other trust them

Kurt Benson 2 weeks ago Member's comment

It's okay to ease fears. Example, I remember when the hysteria around the initial AIDS epidemic there were many campaigns to educate and ease fears by explaining how easy it was to avoid infection. We should ease people's fears - explain they can stay safe.

But being lied to? Absolutely not. I am a #Trump supporter but he causes more harm than good with some of his ridiculous statements regarding #COVID-19. He's become increasingly unstable and it's making me second guess my support before the upcoming election.

William K. 1 week ago Member's comment

CORRECT explanations are reasonable, but incorrect or nonsensical statements are the wrong course completely. And those attempts at obfuscation seem to be rather obvious, and really insulting, as it seems that only a dummy could believe them.