Like economic accounts, corroboration is imperative in “market” signals as well. That is true not just because some of these indications are self-referential but because broad agreement across various segments precludes idiosyncratic explanations and factors. If everything, or nearly so, is moving in the same direction at the same time to the same magnitude you simply cannot ignore it.
In terms of the brightest warning lights flashing at the moment, crude prices and the US treasury yield curve are highly synced. The inclusion of breakevens in that may seem, again, self-referential, as clearly hedging for inflation takes cues from oil, but that does not disqualify any additional informational content from the obviously different motivations of participants in each market.
There can be no doubt about the “dollar’s” role in harmonizing this bearishness. While uninitiated commentary misses the key points about the eurodollar standard, the fact of financial reality under such conditions is that global finance has “tightened” significantly via the global dollar short. I have stated on more than a few occasions as to the significance here, but it largely rests upon November 20 last year and the as-yet untold mortgage market/derivatives wreckage which unquestionably changed credit market sentiment – there was not going to be an “exit” from QE and ZIRP without large-scale disruption. That started first in finance alone (yield curves and eurodollars continually flattening) but spread to economic expectations once the ECB essentially threw in the towel in early June.
The dramatic and related decline in oil prices, a function of leverage as well as economic expectations (not supply), in this recent “tightening” is equivalent only to recessionary episodes, surpassing even the 2012 slowdown (elongated peak point).
With oil prices at a 5-year low last week, that matches indications in credit markets.
The treasury curve in the “money part”, or where most trading and information lies, is as flat now as it has been since 2009. The bearish behavior here matches quite clearly with oil prices in each of the four relevant “cycle” points: elongated peak at the housing bubble burst in 2006; the crash in 2008 and Great Recession; the elongated cycle peak in 2012; and the current warning about what might be coming.
To corroborate that caution, the rest of the yield curve is in total agreement.
The degree to which there has been flattening has been unseen since the 2005 curve inversion. There is little to make a direct comparison to 2008 because of the total degree of monetary interference starting with September 2007’s “emergency” rate cuts, but the pace and steadiness of the curve’s flattening now has been associated with nothing but crisis or other “emergency” policy action.
In fact, even nominal yields have surrendered anything like the idea of a “normalizing” environment, passing below the “threshold” whereby past QE iterations were initiated.
If the trend keeps going, and there is no reason to believe it won’t given that it has endured already almost a year, nominal yields will be back to where they were during the 2011-12 slowdown when renewed bank panic and “dollar” fragmentation were far more prevalent than thoughts of aggressive economic recovery.
This is why the Fed has gone out of its way to emphasize and re-emphasize that they are fully confident in the US economy. However, it is far more revealing in that they don’t even acknowledge much about these growing and contrary revelations. As I noted yesterday, they can’t say much about it because there is no way to maintain the recovery idea and explain these powerful warnings at the same time. Rather than admit that there are drastic and dire implications, the only course under rational expectations theory is to ignore them entirely.
The National Retail Federation expected some 140 million people to shop during the Black Friday weekend, but only 133 million did so and weekend sales fell 11.2% from 2013’s awful pace (and Cyber Monday has likewise underperformed). To which the response of the mainstream orthodoxy is to proclaim that the economy must be far better than even more recent expectations. Like the election results, such self-delusion may pass as convention inside the bubble of the economics “discipline”, but less shopping is far more consistent with oil prices falling precipitously and the yield curve screaming that all is not well in the US. The more the economy falls off, the more convoluted nonsense is needed to maintain the alleged consistency of the “recovery narrative.” Bubbles are, after all, nothing but rationalizations.