Forecasts of Gloom

Just like the clockwork of a rooster’s call at dawn.  On the first day of June each year, coastal Southern California becomes encapsulated by dense gloom.  You can guarantee it.

Out of state visitors mistake the gloom for smog.  But it’s something very different.  For the legendary Los Angeles smog disappeared in the early 1990s when the state enacted mandatory vehicle smog testing.

What a hassle and annoying expense.  But at least the San Gabriel Mountains are now visible from Long Beach most days of the year.  Plus school kids rarely now have recess called off for elevated ozone levels…unlike the good old days.

June gloom is a natural occurrence quite different than smog.  Warming temperatures in the inland region draw the dense grey marine layer several miles in each morning where it sits over the vast coastal plain.  Blue skies don’t appear until the sun burns the miasma off around 1 PM only to be covered up again by the following morning.

Some can’t stand it.  Others enjoy the brief – about 3 week – reprieve from the upcoming summer heat while it lasts.  Here at the Economic Prism we are ambivalent.  We know the June gloom will soon disappear.

Treasuries Stumble

In several weeks the Pacific Ocean will warm just enough so that the spread between warmer air and cooler water narrows and the marine layer ceases to form.  Beach weather will be near perfect until about Labor Day.  Then the season will turn once again.

Financial markets appear to be caught up in some less predictable gloom of their own at the moment.  The stock market continues to surf the razors edge between debt deflation and monetary inflation.  Something could slip.

Pulling from one side is a financial system that’s overloaded with debt.  Pushing from the other is the monetary gas of ultralow interest rates.  One of these forces will eventually win out.

Yet while the stock market jumps and stumbles…and stumbles and jumps…the Treasury market only stumbles.  Naturally, investors aren’t sure what to make of it.  After all, aren’t Treasuries supposed to be the safest investment in the world?

“Any investor who’s been complaining about what a boring, sideways grind the market’s been this year is clearly looking only at U.S. stocks,” remarked Yahoo Finance.  “The action and anxiety have all been in the bond and currency markets, where jumpy moves and surprising switchbacks have undermined these assets’ reputation for relative stability.”

Forecasts of Gloom

In fact, this year Treasuries have been everything but stable.  On February 2, for instance, the 10-Year Treasury note was yielding 1.67 percent.  On Wednesday, yields jumped to 2.36 percent.  This is a significant yield increase, and price decrease, when it comes to the U.S. government debt market.

Perhaps Treasury investors are anticipating an upcoming Fed rate hike.  They want to sell now before the Fed pushes yields up and prices down.  Some sellers may be a little early.  But it is better to get out early than be left holding a bag of paper that’s declining in value.

Of course, if yields increase too far and too fast a panic could set in.  Investors could sell Treasuries to get out ahead of further yield increases.  This, in turn, could cause a self-reinforcing feedback loop.  In reality, this may already be happening at the global level…

“The global bond market selloff has erased all of this year’s gains as historic market moves from Germany to the U.S. and Japan whipsaw traders,” reported Bloomberg on Wednesday.

“After being up as much as 2.3 percent as of mid-April, the Bank of America Merrill Lynch Global Broad Market Index of bonds with a total face value of $41 trillion is now down 0.4 percent for the year.

“Bond traders have been caught off guard by signs the worldwide economy is likely to avoid mass deflation and by improvement in the euro zone’s economy, leaving little incentive to own debt securities with yields that in some cases are below zero.”

Treasury yields are forecasting inflation.  Gold prices are forecasting deflation.  So which is it?  No one really knows, but when the gloom clears in a couple weeks government debt markets could be in full meltdown.


MN Gordon
for Economic Prism

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