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Guest Post: Trouble Brewing In Credit Markets

Tyler Durden's picture


Submitted by Tony Pallotta of

Trouble Brewing In Credit Markets

Credit markets continue to signal either a weakening economy or outright recession yet equities refuse to pay attention. With daily market volume dominated by intraday traders with no concern about macro data this comes as no surprise. The danger becomes that equity markets have no ability at forecasting any longer. The Great Recession saw equities peak just two months before contraction began. We may in fact be watching the same horrific forecasting ability play out if the credit markets are accurate.

Below are three charts signaling trouble ahead for both the economy and the equity market. Equities have diverged from almost any correlation that existed for years. With a divergence you never know who is wrong. When countless relationships breakdown though and equities are always involved it becomes easier to say truly that "it's not you it's me."

5 Year Interest Rate Swap Spread

Corporate Bonds

Bank Of America

And of course the real elephant in the room is BAC precarious close to completely breaking down. Below is a chart of March through May 2009.  Yes you need to go that far back to find support levels and there are few remaining.  Once 9.50 is breached the next stop is $8. At what point do the credit markets shut them out of any capital raises. At what point does contagion in the US banking sector bring this charade call the US Equity market down. If history is a guide we are in fact a lot closer than group think suspects.



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Sat, 07/23/2011 - 15:51 | 1485358 Mongo
Mongo's picture

Equity markets?... what market?

Sat, 07/23/2011 - 16:05 | 1485401 Bleeping Fed
Bleeping Fed's picture

That would be the algo tennis match called the SPX...

Sat, 07/23/2011 - 16:08 | 1485410 max2205
max2205's picture

GEEZ. BTFD, what's wrong with you people?!

Sat, 07/23/2011 - 16:33 | 1485466 WestVillageIdiot
WestVillageIdiot's picture

I know that Buy the Fucking Dip is a good running joke around here.  It is amazing how in the past 2 years it has not been a joke at all.  To watch some of the momo stocks is just amazing.  LULU now has a market cap that is getting close to Macy's.  Chipotle missed on their earnings and has just continued to skyrocket.  A silver stake through the heart can't even stop these darlings. 

Yesterday I checked out the CMG chart against AAPL.  It is amazing.  They have moved in complete lockstep for the past 12 months.  There literally has been no variation.  One is a yuppy burrito joint with a PE of 60.  The other is the most popular eletronics company on the planet with a PE of 18 or so.  For all intents and purposes the market is treating them like they are Siamese twins (or is that conjoined?). 

I remember pulling our 401k accounts out of the stock market in early 2007.  By about September I was looking like the boy that cried wolf.  This was after being openly mocked for saying that the housing market would crash and bring down the economy.  By the end of 2008 I was looking great on the stock market.  That housing call looks even better, today. 

Patience is a virtue.  If the market looks too good to be true it is.  People are making fortunes now.  They will lose them during the crash.  LULU will break hearts and trading accounts.  So will PCLN and CMG.  It is better to miss the boom than to be a part of the bust.  Don't feel bad if you look a little foolish now.  The shills will look a lot foolish later as sure as condos in Florida in 2005 were ridiculously overpriced. 

Sat, 07/23/2011 - 17:01 | 1485503 max2205
max2205's picture

Well you fucked that swing trade up didn't you?....

Sat, 07/23/2011 - 18:34 | 1485640 chunkylover42
chunkylover42's picture

You have to admit - they are pretty good burritos.

Sat, 07/23/2011 - 18:45 | 1485655 WestVillageIdiot
WestVillageIdiot's picture

The last two times I went at lunch the quality seemed to be way down.  I will not go there once the lunch rush begins.  I also hate that they don't take much care to make sure the ingredients get proportioned properly.  One bite is all rice.  Another bite is all sour cream.  I don't dislike Chipotle but there is nothing special about them. 

Sat, 07/23/2011 - 15:51 | 1485359 rajat_bhatia
rajat_bhatia's picture

I'm loving my gold and silver short positions, Both are gonna fall Big Time!

Sat, 07/23/2011 - 15:55 | 1485369 slow_roast
slow_roast's picture

What is the point of posting the same blase junk on every article which has nothing to do with the actual post?   

Sat, 07/23/2011 - 16:08 | 1485412 r101958
r101958's picture

true believer in 'hope and change'.

Sat, 07/23/2011 - 17:45 | 1485569 Doyle Hargraves
Doyle Hargraves's picture

Use what's left of my change to get some hopium bitchez!

Sat, 07/23/2011 - 19:34 | 1485744 takinthehighway
takinthehighway's picture

Smokin' that "YES WE CAN"nabis...

Sun, 07/24/2011 - 10:55 | 1487090 Doyle Hargraves
Doyle Hargraves's picture


Sat, 07/23/2011 - 17:46 | 1485571 mayhem_korner
mayhem_korner's picture

Trolling for reaction, data, sentiment, etc.  Remember ZH is being watched by Big Brother here at all times.

Sat, 07/23/2011 - 19:54 | 1485777 Pegasus Muse
Pegasus Muse's picture

You're probably right.  .... and here I was thinking Rat's Ass was just being a dumbass. 

Sat, 07/23/2011 - 23:27 | 1486109 westboundnup
westboundnup's picture

I'm back baby!

Sat, 07/23/2011 - 16:08 | 1485411 papaswamp
papaswamp's picture

Define big time....2%?...that ain't big. Even if a debt deal is reached it won't be enough and everyone knows it. All it does is give people a bit longer to stock up. Notice the EU deal gold dropped back to almost the place in 3 days. The US with substantially more debt any deal $3 Tril or less maybe will last a day or 2. I'll get in my last silver buy spree and then say good night. It would take $10 Trillion in cuts/new revenue over the next 10 yrs just to break even...and that doesn't address the debt. The interest rates climb even a half a's all over. The interest alone on $14+ trillion will eat the US alive.

Sat, 07/23/2011 - 16:22 | 1485441 JW n FL
JW n FL's picture

when the markets crash so will the paper gold and silver markets.. thusly giving the illusion that gold and silver cost some insane cheap amount for physical.


the numbers he speaks of are the same numbers that trade every day.. not the numbers that put shit in your hand.

Sat, 07/23/2011 - 16:25 | 1485447 papaswamp
papaswamp's picture

oh...I could care less about the paper shit. Have at it then...what ever the prediction on the paper....heck if I care.

Sat, 07/23/2011 - 16:31 | 1485463 Miss Expectations
Miss Expectations's picture


Sat, 07/23/2011 - 16:13 | 1485421 Madcow
Madcow's picture

you think that - now that the only hope of control over a never-ending and parabolic increase in the "debt ceiling" is off the table - that the price of PMs will fall ?

Good luck out there my friend :)


Sat, 07/23/2011 - 17:34 | 1485532 snowball777
snowball777's picture

Congratulations, you have been selected as the hands-down winner of the most-boring-troll-ever award!

Sat, 07/23/2011 - 17:34 | 1485550 firefighter302
firefighter302's picture



Sun, 07/24/2011 - 01:21 | 1486403 RichardP
RichardP's picture

Please quote the entire line.  Reagan said, in this particular instance, government is the problem.

Sat, 07/23/2011 - 17:58 | 1485586 rajat_bhatia
rajat_bhatia's picture

Awww... thank you so much, i know i didnt try that hard :))

Sat, 07/23/2011 - 18:31 | 1485636 snowball777
snowball777's picture

Good to know you come by your stupidity naturally. I'd hate to think you were using 'performance enhancing' substances.


Sat, 07/23/2011 - 15:53 | 1485362 jkruffin
jkruffin's picture

How do you make the rich equal to the poor?  Cripple their risk on leverage and crash this ponzi scheme once and for all. It doesn't get any plainer or simpler than that...these crooks have to be shut down now and it starts with sending their precious little stocks into the toilet for good.

Sat, 07/23/2011 - 15:58 | 1485377 dwdollar
dwdollar's picture

Is that bullish RobotTrader?

Sat, 07/23/2011 - 15:58 | 1485378 gwar5
gwar5's picture

BAC is not a founding member of the 1913 Money Trust bankster club. Flush.

Sat, 07/23/2011 - 16:19 | 1485439 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

BAC was founded by Italian immigrants as an outsider organization. None of the MS banks would give loans to Italians at this time. Times have changed. They are now the most insolvent big gun out there.

Sat, 07/23/2011 - 16:39 | 1485476 Tejano
Tejano's picture

True, but this beast is "Bank of America" in name only. BofA was acquired lock, stock and catchy name by by NationsBank (read NBNC) in '98. But it's still a long way from Charlotte to NYNY.

Sat, 07/23/2011 - 16:41 | 1485480 WestVillageIdiot
WestVillageIdiot's picture

They are Bank of America in name only.  If I recall correctly Hugh McColl was at Nations Bank and bought Bank of America.  They kept the name but it really was Nations Bank.  It is the same way everybody that buys AT&T keeps the name even though AT&T is long gone. 

Bank of America is headquartered in Charlotte, NC.  The rest can all be found within a stone's throw of Fraunces Tavern.  That is a big difference.  There is a club and Bank of America isn't in it.

I predict BofA will be chopped up and JPM and the rest will get all of the best pieces. 

Sat, 07/23/2011 - 17:25 | 1485528 butchee
butchee's picture

I have been wondering who would be the next zombie to be cannabalized.....BTW, what are the best bits for JPM, and how do they quarantin/isolate the toxins and debride the putrescent from the healthy?

Sat, 07/23/2011 - 17:28 | 1485538 WestVillageIdiot
WestVillageIdiot's picture

The thing strangling BofA is the Countrywide acquisition.  The best part of BofA is their consumer banking division, from what I understand.  The Countrywide piece will get busted off and eaten by the feds.  The consumer banking will be thrown to the strongest hyena.

Angelo Mozillo will laugh all the way to the grave. 

Sat, 07/23/2011 - 18:55 | 1485674 chunkylover42
chunkylover42's picture

Merrill is no picnic either.  Most of the shit that Countrywide created was bought by Merrill and a fair amount ended up on their balance sheet.  At least with ML you've got an army of brokers and the IB business.

Sat, 07/23/2011 - 17:31 | 1485542 gmrpeabody
gmrpeabody's picture

And WE will get the scraps.

Sat, 07/23/2011 - 18:33 | 1485639 snowball777
snowball777's picture

Awwww... <tiny violin just for you>

Sat, 07/23/2011 - 16:01 | 1485387 Atomizer
Atomizer's picture


Thanks again for everything you do. This entire flea circus on the debt ceiling debate is exposed within this document. Have a look. Not a short read, but worth it.

It really is the end of the road for a select few. Can't wait for them to rear their ugly heads in front of J6P eyes.

Sat, 07/23/2011 - 16:14 | 1485426 Atomizer
Atomizer's picture

The real question to ask.. Where is the money being siphoned to?

Three Shell Game - Mats Kjellstrom

Sat, 07/23/2011 - 16:16 | 1485432 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

This whole charade will last as long as we have sheeples investing and banksters profiting. Since 2008 when has the reality of insolvent markets stopped their ever higher march?

Sat, 07/23/2011 - 16:18 | 1485436 Tejano
Tejano's picture

So what? BAC aside, equities can perform well in a currency collapse whereas bonds -corporate or otherwise - are poison. Weimar and Mexico in the 1990s come to mind.

Sat, 07/23/2011 - 16:21 | 1485440 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Only if the company is profitable. Most of the companies on the NYSE are deep in debt depending on deeply indebted people to buy their products. The ponzi lives on.

Sat, 07/23/2011 - 16:46 | 1485487 WestVillageIdiot
WestVillageIdiot's picture

It astounds me how people are so quickly forgetting 2008.  By early 2009 in NYC there were businesses closed everywhere.  I believe the country lost 600,000 jobs in January of 2009.  These were companies that said they were making money prior to that.  Of course profits get siphoned into the pockets of the top executives.  The debts don't.

The speed with which things were falling in 2009 was breathtaking.  I went from hearing how Manhattan was untouchable to having my rent decrease by 15% almost overnight.  The hubris of the management company disappeared like a fart in a hurricane. 

It was only massive monetary voodoo that arrested this downward spiral. 

It will happen again.  We all now it.  They know it.  The sheep don't know it but that is what sheep do best. 

Sat, 07/23/2011 - 17:05 | 1485507 Tejano
Tejano's picture

Perhaps you should get out while/if you can. Hudson River?

Sat, 07/23/2011 - 17:17 | 1485518 WestVillageIdiot
WestVillageIdiot's picture

My wife and I have had our first very serious discussions about the permanent exit strategy.  Thank you for the concern.  It is a little scary. 

Sat, 07/23/2011 - 20:34 | 1485881 HungrySeagull
HungrySeagull's picture

It would be best to get out of Urban areas.

Living in quiet rural area out west or in the south will be a bit... cultural shock but you will be able to adapt and eventually enjoy the slower life. Take it from us, we know.

Wife and I are having discussions ourselves because we would hate to find ourselves having to kill and stack people on our porch simply because the neighbors are hungry and cannot eat.

Sat, 07/23/2011 - 20:56 | 1485929 HungrySeagull
HungrySeagull's picture

Hmm... I say Sheep, all of them.

However... I recall what happened to Bonsia as well. That is why I retain my statement cities are not that safe.

Sat, 07/23/2011 - 17:10 | 1485510 infinity8
infinity8's picture

any minute now. this (2011) is a real deja vu of '08 - and people STILL think I'm crazy (read your earlier post and you're not alone)

Sat, 07/23/2011 - 16:57 | 1485496 Tejano
Tejano's picture

The debt evaporates as the currency melts down.

Sat, 07/23/2011 - 17:28 | 1485535 snowball777
snowball777's picture

equities can perform well in a currency collapse


Hahahaha....good one!

Relative to other currencies or gold?

Oh, hmm.

Sat, 07/23/2011 - 19:04 | 1485642 Tejano
Tejano's picture

My bad. What I should have said is, "Equities often perform well during a currency collapse."

See, 'When Money Dies: The Nightmare of Deficit Spending, Depreciation and Hyperinflation in Weimar Germany', by Adam Fergusson, or any of a number of historical accounts of South American and European experiences.

If you don't read (and I suspect you don't) you can watch Marc Faber here (at 57:41)

Now, (full disclosure) I no longer hold many equities, other than major oil companies, and I might have a coin or two tucked away. But it's something to consider - well, maybe not for you since timing is important.

Explain it however you want, but don't deny it - even today, equities have done well post '09  despite (because of?) the ongoing destruction of the fiat dollar.

Sat, 07/23/2011 - 20:42 | 1485888 Global Hunter
Global Hunter's picture

100% Tejano.  The Zimbabwe Industrial Index at the beginning of 2005 was 2,191 and at the end of 2007 it was 4,000,796. Below story from October 2008

"JOHANNESBURG, South Africa - While markets across the world swoon, the Zimbabwe Stock Exchange has being seeing record gains as citizens turn to equities in a desperate attempt to protect their money from the country's stratospheric hyperinflation.The benchmark Industrial Index soared 257 percent on Tuesday up from a previous one day record of 241 percent on Monday with some companies seeing share prices increase by up to 3,500 percent." 

Sat, 07/23/2011 - 16:22 | 1485442 flyr1710
flyr1710's picture

the 'how the market prices in a recession' chart comparing 2007 to 2011 is still right on track - both in spy and tlt.

Sat, 07/23/2011 - 16:27 | 1485449 papaswamp
papaswamp's picture

man it is going to be ugly when they slap together...2 giant thighs

Sat, 07/23/2011 - 16:30 | 1485461 Arch Duke Ferdinand
Arch Duke Ferdinand's picture

Bailing and Disengage from the U.S. Government.....

OT: Hilarious 2 minute Video.....

Sat, 07/23/2011 - 16:41 | 1485479 slewie the pi-rat
slewie the pi-rat's picture

plus, goin back to these times for BAC also shows the technical "gap to be filled" @ $4.-$3.80 or so    LOL

Sat, 07/23/2011 - 17:00 | 1485500 Atomizer
Sat, 07/23/2011 - 17:01 | 1485502 Tim Knight from...
Tim Knight from Slope of Hope's picture

I am so pleased to see ProphetCharts on ZH!

Sat, 07/23/2011 - 17:04 | 1485506 lolmao500
lolmao500's picture

I would hope so... look at the BS deal they are setting up...

On the discretionary spending front, both sides had "identical offers," said one of the officials. There would be $1.2 trillion in cuts over the course of ten years; $1 trillion in savings that would come from the draw-down of the wars in Afghanistan and Iraq; and $250 billion in savings in Medicare over the course of 10 years. Both sides had also agreed to attach a second piece of legislation, to be decided via the reconciliation budget process, that would have changed the retirement age for Medicare and changed the premium structure for Medicare Part B and D, while eliminating certain kinds of supplemental insurance. That bill would also contain changes to the way Social Security benefits were paid starting in 2015, with buffers put in to protect the lowest-income beneficiaries.

That means 145 billion in cuts/year... MAYBE.... LOL prepare for a downgrade.

Sat, 07/23/2011 - 17:18 | 1485519 WestVillageIdiot
WestVillageIdiot's picture

This is like my wife and I saying we are going to cut our entertainment budget by 75 cents.  But not until 2017. 

Sat, 07/23/2011 - 17:32 | 1485547 snowball777
snowball777's picture

Only if your original entertainment budget was $9.38

Sat, 07/23/2011 - 17:59 | 1485590 Atomizer
Atomizer's picture

I'm sure that went over many ZH heads. Priceless comment.

going to cut our entertainment budget by 75 cents. But not until 2017.

Sat, 07/23/2011 - 17:26 | 1485533 AmCockerSpaniel
AmCockerSpaniel's picture

This is July...... Wait till the big boys come back.

Sat, 07/23/2011 - 17:33 | 1485549 snowball777
snowball777's picture

They don't have fucking phones?

Sat, 07/23/2011 - 18:24 | 1485627 Ponzi Unit
Ponzi Unit's picture

The balloon went up on Aug 15, 1982, FWIW.

Sat, 07/23/2011 - 17:38 | 1485557 lolmao500
lolmao500's picture

Latest from the puppet show :

News Alert: Boehner tells GOP he plans to unveil new debt strategy within 24 hours

House Speaker John A. Boehner (R-Ohio) told his troops Saturday that he hopes to roll out a two-step strategy within the next 24 hours for raising the federal debt limit and restraining the national debt to avoid roiling Asian financial markets when they open Sunday, according to a participant in the conference call.

In the call with his House GOP colleagues, Boehner said he still hopes to slice as much as $4 trillion out of the federal budget over the next decade, despite the collapse of talks with President Obama on Friday over a bipartisan “grand bargain” to reduce the government’s spiraling debt.

Sat, 07/23/2011 - 17:55 | 1485581 RiverRoad
RiverRoad's picture

If equity markets fall and no one is there to hear it, does it make a sound?

Sat, 07/23/2011 - 17:59 | 1485591 Seasmoke
Seasmoke's picture

thats why i keep all my credit up to their limits, dont want them to take away my credit (as they did in 2008)......./sarc

Sat, 07/23/2011 - 18:00 | 1485594 Mariposa de Oro
Mariposa de Oro's picture

Ah, the  reconciliation budget process.  This is where the 401ks and IRAs get forced into Treasuries, I think.....

Never let a crisis go to waste, (even if you have to create it yourself) because then you can do things you wouldn't be able to do otherwise........

Look for many other wealth and power grabs to be inserted ala "we have to pass it to know what's in it".

Sat, 07/23/2011 - 18:18 | 1485619 Ponzi Unit
Ponzi Unit's picture

I'd take the advice and BTFD but I am all in with physical silver, CEF and PSLV.

Sat, 07/23/2011 - 18:30 | 1485634 snowball777
snowball777's picture

Fuck paper.

Sat, 07/23/2011 - 19:17 | 1485711 Ponzi Unit
Ponzi Unit's picture

If allocated and redeemable, per CEF and PSLV, is it still paper, or are you referring to hypothecated inventories at Comex and slv?

Sat, 07/23/2011 - 19:32 | 1485738 Zing
Zing's picture

Physical Silver?  I cannot understand the silver trolling on this board.  I prefer gold specifically because it only carries an investment premium.  I expect physical gold to perform well in any conceivable environment, and silver tanking in a recession.

Sat, 07/23/2011 - 18:39 | 1485650 machineh
machineh's picture

The second chart labeled 'corporate bonds' doesn't make much sense. Low bond yields can be good for stocks, particularly if credit spreads are low also.

The same chart for say, 1987, would show AAA yields and the SPX rising together into August 1987. Then stocks crashed, partly because of yield pressure.

Bottom line, that chart proves nothing.

Sat, 07/23/2011 - 21:03 | 1485941 MacroStory
MacroStory's picture

Low rates means the demand for credit and or economic growth is slowing all of which are BAD for stocks so YES it does make sense. 

Sat, 07/23/2011 - 20:16 | 1485833 oogs66
oogs66's picture

Credit markets are only leading indicators on CNBC when they predict stocks will go up, or after a 10% down move in stocks and then CNBC can say, "as we reported, credit was weaker and was a clear sign to reduce equity exposures" even though no one can ever find evidence that they said that.

Sat, 07/23/2011 - 20:36 | 1485885 HungrySeagull
HungrySeagull's picture

Someone educate me why should I care about equities? It seems to me it's a vast pool of money that just sits there like a lake waiting to be cashed out someday.

If the sun shines bright and hot enough there may not be a lake anymore.

Sat, 07/23/2011 - 23:31 | 1486122 RockyRacoon
RockyRacoon's picture

You should care about equities because... um, wait, I'll think of something.

Oh, never mind.    I haven't held a stock since 1998 anyhow.

Let's see how that strike-thru works....  Yea!

Booo!  It shows up in the original but does not end up in the final....  Rats.

Sun, 07/24/2011 - 01:51 | 1486464 Libertarian777
Libertarian777's picture

What I hate though is even though you can be right, as a 'small timer' the market can definitely be wrong much longer than I can be solvent.

Fkn theta decay on put options destroy any value in them, and option spreads limit the profit to the point the damn transaction costs kill the bet.

Unfortunately trading is not my day job. I'm just trying to protect my portfolio (no margin account for me, hence no level 3 options trading)

Sun, 07/24/2011 - 01:53 | 1486466 sbenard
sbenard's picture

Why is it that only Wall St can't see these crises coming? It seems they are having one non-stop Pollyanna Party!

Sun, 07/24/2011 - 03:11 | 1486556 VegasBob
VegasBob's picture

Actually, the bond market has a much better track record of predicting economic distress than the stock market.

A junk bond I own has dropped 15% in value since late May - that tells me something nasty is happening in America's Potemkin economy.

Sun, 07/24/2011 - 08:54 | 1486864 innsbrooklad
innsbrooklad's picture

Does it not scare the crap out of anyone that Boehner wants a deal before the Asian markets open up???

Communism fell because it could not be funded. You are seeing Europe undewrstanding socialism can't be funded. What do we have here??? Obama???

The May Flash Crash is going to occur again but the curcuit breakers will trirp. THe market is a mile wide and 1/4 inch think...

Sun, 07/24/2011 - 09:48 | 1486951 Chief KnocAHoma
Chief KnocAHoma's picture

As a Realtor in the rural south I can tell you business stopped from 2006 until 2010. Very few transactions except for irrigated ag land.

Then I began packaging small retreat farms. 20 to 40 acres and advertised in urban areas.

Business is booming!

I am The Chief


Sun, 07/24/2011 - 11:40 | 1487228 JPM Hater001
JPM Hater001's picture

At the end of QE 2 there was a great article on ZH about the Fed dumping 70 or 80 Billion into the equities market.  This pumped the market about 600 points and it has persisted on and off since.

I dont think the problem is the stock market...I think its the Fed.  But of course that's not new news.

Do NOT follow this link or you will be banned from the site!