If China is struggling with the various facets of the interconnected nature of eurodollar function, then we don’t have to go far to see that in almost perfect clarity. By many accounts, funding and liquidity remain highly disturbed and becoming more uniformly so. From gold to francs to copper to junk debt, pricing reflects more so a combined economic and financial outlook.
As noted yesterday, if these disturbances were related to the normalization of rate regimes in the Fed’s exit from extraordinary “accommodation”, then we would expect nothing like what we see here. In junk bonds and commodities, a steeper money curve reflective of burgeoning economic circumstances would be quite favorable if not highly desirable. Instead, everything is collapsing more so like 2011 and even 2008 than 2010 or, as the Fed would have it, 2003. The Asian observations this morning look very much like the unstoppable skyrocket in LIBOR flowing elsewhere and everywhere.
Thus, asset markets more aligned with the raw economics of interest rates (not theory), as well as the actual liquidity contained within them, grow only further in comparison to some of the worst circumstances. Thus, it isn’t all that surprising that the economy has followed along more closely to that course rather than Janet Yellen’s preferred vision. In the context of inventory and the full weight of recession, once more the “dollar” sketches out future “demand” leaving little room for minor and more benign production adjustments.
At some point, the dam has to burst and it increasingly looks as if the Christmas season is that make or break point. What is left over into January in the holiday hangover may be the pivot upon which production turns next year, in perhaps the final blow to Yellen’s “transitory” hold on forecasting. In that respect, if the “dollar” and these attuned asset prices are similarly correct as they have been so far, that looks to be a further nasty turn.
