Minyan Mailbag: Conflicting Market Signals and the Fed

Mr. Practical,

As Toddo noted in his morning missive, the dollar has cracked long-term support. Any thoughts as to where it goes next?

Any and all opinions would be most appreciated.

Kind Regards,
Minyan Alex


Mr. Practical,

Maybe you can make sense of this because I sure can't.

Deflationary:

• Collapsing treasury yields
• Narrowing TIPS spreads
• August employment number
• Housing market
• ABCP and other pressure points in credit markets.

Inflationary:

• Crude at all-time highs
• Gold near multi-decade highs
• Wheat and other commodities surging
• Dollar near all-time lows
• The Fed and government ready to act
• China

Somewhere in between: stocks.

I am not sure what it means, but I don't think all these markets can be right.

-Minyan C


Minyans Alex and C,

It seems to me we are at the inflection point.

As central banks try to control the damage of what they helped create (control it by creating more), it is game time for the Fed. Of course it is an incrementalist and will try to lull the markets into believing it's business as usual, but these times are anything but usual.

As the various pockets of debt one by one implode, the Fed must decide whether to let the real doctor, the markets, cure these ills. The medicine will be like chemo-therapy: it will almost kill the patient. If it decides to do this, it will not lower Fed Funds. This will clearly signal to the markets that years and years of artificial debt creation is finally over, that there is too much debt, and it is up to the markets to get rid of it. The dollar will rally or at least stop going down.

Of course everyone doubts it will do this. That is why the dollar is cracking, gold and oil are rallying, and stocks are confused.