A pause in the beatings...

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A Pause In The Beatings

The market mayhem is taking a breather today, as Treasury yields fall and other markets normalize...at least for now.
 

But as another day passes, so does the day of reckoning draw closer.

“The beatings will continue until morale improves!”

That’s the once-funny, now-trite expression that you’ve seen on countless t-shirts and ball caps (I think I have one myself somewhere!)...and which seems a perfect description of recent markets.

Even as Fed members continue to talk tough, the surge in bond yields has been doing their dirty work for them, tightening credit conditions and deflating asset markets (notably including gold).

Yesterday, for example, the monthly JOLTS report (which was a major upside surprise with a reading of 9.61 million job openings in August against expectations of just 8.82 million) sent markets reeling. The U.S. equity market took a nose dive, the Dollar Index leaped higher and the 10-year Treasury yield jumped to 4.81%.
 

Interestingly, gold only slipped about $5.
 

Today, morale must have improved...because the beatings have paused. Gold is down a few dollars, the Dollar Index is lower, stocks are up and yields have cooled.
 

As our friend Peter Boockvar noted in an email update this morning:

“Treasury yields have backed off in response and is back to where it was at around 10:30am est yesterday as it was rising in response to the JOLTS data. The JOLTS data is somewhat old and the slowdown in hiring has been clear, highlighted again today. The dollar is weaker too.
 

“With respect to the long end of the yield curve, we now have a clear tug of war: a slowing labor market adding to the recession talk on one hand and the unwind of the great sovereign bond bubble on the other, exaggerated by the BoJ finally tightening, global QT, higher rates for longer and the poor financial condition of the US government that just maybe finally matters because of all the Treasuries needing to be sold to finance an 8% budget deficit as a % of GDP in the 12 months thru July at the same time the market has lost its most crucial buyers, the Fed, banks and foreigners.
 

“And that deficit will only grow and debts will only rise the slower the economy gets as tax receipts falter, thus adding more Treasury supply and…a dangerous loop.”

Peter absolutely nails it, as he always does. The soaring federal deficits and debt, and the costs of servicing those debts (along with the massive corporate debts that are also resetting), are like a locomotive barreling toward the brick wall of Fed policy.

In short, the two are absolutely incompatible. And it’s getting worse as the Treasury is forced to float a huge amount of paper in the weeks just ahead.
 

It doesn’t take a genius to realize that a day of reckoning is coming. What we need to figure out is when...and what to do about it.

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All the best,

Brien Lundin
Publisher, Gold Newsletter
CEO, the New Orleans Investment Conference

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