Flummoxed | Seeking Alpha

We are in one of the strangest markets that we have been in for decades. Let’s first consider our benchmark Treasuries. The 30-year Treasury, as I write my commentary, now yields 3 basis points less than the 2-year Treasury. So much for the usual considerations of duration. Gone with the wind.

There are those who might conclude that some sort of recession is on the way because of this, however I am not in that camp. I think we are in a mixed-up economy full of inflation, with a Fed that will be raising interest rates aggressively because of it, which will only cause more confusion and much higher borrowing costs. We are in the Land of “Damned if you do and damned if you don’t.”

What is more confusing is that the Treasury 10-year yields just 2.90%, which is the lowest yield on the yield curve for notes and bonds. This is as the Fed is set to raise interest rates once again next week – and probably by 75 basis points – as “kill inflation” seems to be their only mantra. Well, the road they are taking will also raise borrowing costs substantially, and so, thwarting inflation will also thwart the economy, just in a different manner.

The Wizard of “Ah’s” says, “Through all the distractions in these crazy, mixed-up markets, invest as though your money is sacred and precious and meaningful and important in the whole scheme of things… because it is.”

If you look back at the last 12 months, you will note, according to Bloomberg data, that Treasuries are down -10.04% while IG Corporates are down -14.12%, and that U.S. High Yield was down -10.00%. There is a notable lesson here. Credit quality was being sacrificed for yield, and I am not expecting a change any day soon.

For the last year, in equities, Bloomberg also shows the DJIA down -7.93%, the S&P 500 down -8.25%, and the NASDAQ down -17.58%. Pay attention. Here is another lesson. Since the NASDAQ is composed of many more high-flyers – riskier stocks – than the other two indexes, we are seeing the effects of playing for the long ball. It is not working presently. Excessive risk is not a good tool at present. Make the wrong moves and these markets will hand your head to you, and on something less than a silver platter.

On top of all of this, we have the dollar heading towards parity with the euro, and a decent shot that it will go higher than that as the ECB makes its moves and as Europe heads into their own downturn, which may become a recession. The bells are ringing not only in the United States but globally as China joins the economic downturn as well. The markets are in the thick of it.

In fact, for investors, I would say that we are in one of the most complicated markets that I have witnessed in my 48 years on Wall Street. Few things seem to make sense, and what one would rationally expect has fled with the dormouse into the forest of disbelief. Make a mistake in this market and the echoes of Wonderland commence, “Off with their heads.”

“Caution” is now the word, and make no mistake about it.

Tread carefully.

Original Source: Author

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.