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Fading Accuracy of Crisis, Policy Change and Recession Measures

Fading Accuracy of Crisis, Policy Change and Recession Measures

John Kicklighter,

Talking Points:

  • Markets change with circumstance and so do the most popular signals for economic and financial performance
  • Government bonds' ability to signal economic trouble, policy change or risk appetite has been severely distorted
  • Volatility measures, supply-and-demand assessments and certainly symbolic speculative appetite indexes are skewed

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

A recession, global financial crisis and deep rate cuts are impending. Well, that would be the assumption if we applied the standard interpretation on some of the most ubiquitous, macro fundamental and financial litmus tests to current conditions. While there are certainly risks of all three conditions, the signals being flashed by these measures are at least far off the mark and at worst completely disconnected. The same underlying pressures that have caused so much distortion in price and volume for the world's most liquid assets are altering the signals many investors and traders rely on to keep tabs on the entire system. What signals should be wary of and how does this impact our assessment of the environment?

The most liquid and credit worthy asset will inevitably play an important role in evaluating the economic and market landscape. Yet, government bonds (Treasuries) are arguably among the most distorted assets amid the rise of massive stimulus programs. Such debt has been the primary target of the programs for the same reasons that the open market covets them. Yet, the relentless buying, long-term holding and reduction in the accessible market means the utility of the asset's ability to signal economic health, monetary policy changes or investor sentiment is altered to be almost unusable for its normal purposes. Certainly, old-hand metrics like an inverted yield curve will be seriously warped. But Treasuries aren't the only pillar that has been deemed seismically unsound. Volatility measures, supply-and-demand balances and even basic measures like the S&P 500's signal of risk appetite have changed.

While these are not wrong, their timing and sensitivity to what they would be presumed to measure would make them liabilities. To use these measures in their popular but now-outmoded analysis method is to invite serious miscues into our evaluation of viable trades and general market approach. We discuss some of the most important macro measures and what to make of them for investing purposes in today's Strategy Video.

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