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Gavekal Warns Of "Clear And Present Danger" For Stocks

Tyler Durden's picture




 

Via Gavekal's Capital blog,

There are four developments in the fixed income markets that represent a clear and present danger for stocks.  

First,  high yield spreads continue to widen, diverging from the upward movement in stocks prices.  In the chart below we plot high yield spreads against the S&P 500 over the last ten years. Until today the equity market seemed unfazed by the widening in spreads.

image

Second, inflation expectations derived by comparing 10-tear nominal US Treasuries against the 10-year TIPS show a recent big drop.  This is likely due to the recent strength in the USD, but regardless of the reason, the drop in inflation expectations is undoing much of the reflationary work the Fed has tried to achieve.  Should inflation expectations fall below 2%, the danger signal would intensify.

image

Third, 10-year bonds around the global are taking another leg down.

image

Fourth, the spread between 30-year and 10-year US Treausry bonds is narrowing tonew five year lows.  The last time the long end of the yield curve was this flat was in the first few months of 2009.

image

 

*  *   *

Trade accordingly.

 

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Thu, 09/25/2014 - 16:55 | 5257343 knukles
knukles's picture

And and and and ....

Stawks by any reasonable measure are a tidge overvalued.
With a chance of rain or Geo-political surprises on the horizon.

Got gas?

Thu, 09/25/2014 - 16:58 | 5257356 X.inf.capt
X.inf.capt's picture

got phyiscal?

today was bad in the markets..

tomorrow? real bad!

remember the death cross...

BLACK FRIDAY...

BITCHEZ!

Thu, 09/25/2014 - 17:06 | 5257392 Bell's 2 hearted
Bell's 2 hearted's picture

which is worth more?

 

an ounce of gold?

 

or 

 

an ounce of benjamins?

Thu, 09/25/2014 - 19:30 | 5257887 max2205
max2205's picture

Fucking Ben sure did DISTORT THE MARKETS....

FUCK YOU BEN...ROT IN HELLS HELL

Thu, 09/25/2014 - 19:39 | 5257923 TheReplacement
TheReplacement's picture

The point is that at some time in our lives the benjamins won't be worth anything but gold will be.  Granted this is not much of a concern if you have stage four cancer or something like that.  Everyone else, they should be concerned.  It isn't going to wait for twenty years anymore.

Thu, 09/25/2014 - 16:56 | 5257353 Bell's 2 hearted
Bell's 2 hearted's picture

"high yield spreads continue to widen, diverging from the upward movement in stocks prices."

been watching this closely ... may well be the final straw ...

Thu, 09/25/2014 - 17:01 | 5257371 Bell's 2 hearted
Bell's 2 hearted's picture

Second, inflation expectations derived by comparing 10-tear nominal US Treasuries against the 10-year TIPS show a recent big drop. 

 

the "D" word coming ...

Thu, 09/25/2014 - 17:06 | 5257394 knukles
knukles's picture

Not arguin at all, but be aware that if things start really goin' south, then Janet'll start Yellen about MOAR Ease in order to boost inflationary expectations.

And the jawboning is all's left.
They've done fuck all else.  I mean adding more funds to an already Trapped Liquidity Trap'll do naught.
Negative rates will do naught for the same reason....  People'll just hold cash
Oy!

What we have is a failure to communicate.
The economy is stuck in the mud for non-monetary and non-fiscal expenditure reasons.
Structural.

See any changes on the horizon whether ti be dems or establishment repubs?
Didn't think so
Be ready for 2% 30 year treasuries, Kiddies.

Thu, 09/25/2014 - 17:10 | 5257401 Bell's 2 hearted
Bell's 2 hearted's picture

ZIRP/QE

 

IS the disease ... not the cure

Thu, 09/25/2014 - 17:29 | 5257461 numapepi
numapepi's picture

I, for one, would love to see some deflation! I just go tback from the grocery store. Lobster was cheaper than beef! Seriously! If I could stand eating an ocean bug...

While I don't buy an Iphone or a house every day I eat every day and use energy every day. 

Bring it on!

Thu, 09/25/2014 - 17:04 | 5257383 Fuku Ben
Fuku Ben's picture

My October puts have promise

Thu, 09/25/2014 - 17:13 | 5257413 Cognitive Dissonance
Cognitive Dissonance's picture

Until I see more than a 6% downdraft in the stock indexes it is all just scaremongering. That given, it all works just fine until it doesn't.

Thu, 09/25/2014 - 17:19 | 5257433 Dig Deeper1
Dig Deeper1's picture

@ 09/26/2014 close...Up 300 DOW, 100 NAS, 50 S&P.

Confirmation of failure will not be allowed under any circumstances.

Thu, 09/25/2014 - 19:41 | 5257930 Winston Churchill
Winston Churchill's picture

The real carnage in 87 started on the Monday/Tuesday after the first crack.

Friday the indeses rose slightly if I remember correctly.I may not, as I was dealling

with downed trees after the hurricane hit  the UK on Thursday night.

I had watched Michael Fish(great name for a weather forecaster) tell me, and millions of others.

definitively they no hurricane was possible just hours before it struck.

Shit happens as they say.

Thu, 09/25/2014 - 17:25 | 5257452 buzzsaw99
buzzsaw99's picture

S&P 500 yield = 1.90%

30y ust rate = 3.22%

no brainer really

Thu, 09/25/2014 - 17:31 | 5257471 q99x2
q99x2's picture

BTFD

BTFD bitchez.

Thu, 09/25/2014 - 17:56 | 5257562 MrTouchdown
MrTouchdown's picture

Don't worry kids. When the banks are done with this profit taking adventure, the Fed will embark on some new form of QE and things will get back to the new normal.

Thu, 09/25/2014 - 18:19 | 5257638 Four chan
Four chan's picture

Create the bubble with easy money. Collapse the bubble with successive int rate increases, all the borrowers go under water enslaving them to you, many default allowing you to capture those assets people have worked their lives for, for nothing more than paper. the tentacles of the fed, their franchises, the banks, get swamped with all these assets, the owner (the fed) creates an equivalent amount of money to the bubble it created in the first place and "buys" all the "bad" mbs its tentacles have now acquired, both devaluing their debt slave's savings by that amount and capturing all those yummy house assets for the feds true owners/creators. the system called federal is working perfectly for its owners, and i know none dare call it treason but someone really should. on a side note, if the fed is a private corporation, and it is, why doesn't it pay taxes? Must be a religion like apple.

 

Ps the tentacles (the tbtf) has used all the new money to buy the market with zero risk zirp funds, which is clearly the only thing driving the market.

Thu, 09/25/2014 - 18:42 | 5257714 Carpenter1
Carpenter1's picture

I'm pretty sure that comment could be translated to:

"It's different this time."

Thu, 09/25/2014 - 21:09 | 5258187 trulz4lulz
trulz4lulz's picture

Im not super bright when it comes to the financial side of certain things and correct me if im wrong, but isnt that like trying to inflate a flate tire with an increasing in size hole in it? And if so what happens to the air that escapes as you keep using the pump to fill the hole?

Thu, 09/25/2014 - 18:12 | 5257624 Spungo
Spungo's picture

I'm really excited about the next New Normal. I'll go all in on SPY and QQQ when it happens! Riding credit bubbles is kinda fun.

Thu, 09/25/2014 - 18:45 | 5257724 Carpenter1
Carpenter1's picture

Yes, and I'm certain this will continue indefinitely, because one look at history shows us these things always gone on indefinitely without consequences.

But, like the other 50,000,000 people believe, I'm sure you'll be the first one out the door before the others.

Thu, 09/25/2014 - 18:47 | 5257732 GooseShtepping Moron
GooseShtepping Moron's picture

That yawning gulf between long-end Treasury spreads and the S&P is a sight to behold. In the past these discrepancies look to have been resolved by changes in rate spreads catching back to the S&P (i.e., it was interest rates which moved to resolve the aberration, not stocks), albeit the difference was inverted back then. If the same pattern continues, we can expect the yield curve to fatten up considerably with interest rates in general exploding higher. The other possibilities are, of course, a massive correction in the stock market or some combination of the two.

I would love to see higher interest rates, but I think the powers that be will be even more concerned to keep rates low than to keep stocks high. By this logic we should expect to see a stock market crash combined with a busted credit channel, as there will be plenty of liquidity available to banks but no borrowers. It would seem that at that point something finally has to give: either we raise rates or we blow the mother of all subprime bubbles by stuffing the pockets of the un-creditworthy with nonperforming loans. The latter course just cannot go much further than it already has. Thus rising rates, even though currently unthinkable, must be in the offing.

Thu, 09/25/2014 - 20:36 | 5258085 Mad Muppet
Mad Muppet's picture

Second, inflation expectations derived by comparing 10-tear nominal US Treasuries against the 10-year TIPS show a recent big drop.  This is likely due to the recent strength in the USD, but regardless of the reason, the drop in inflation expectations is undoing much of the reflationary work the Fed has tried to achieve.  Should inflation expectations fall below 2%, the danger signal would intensify.

Right...that minus 2% inflation is really killing us. Someone over at   Gavekals is drinking the Koolaid. We're about 7% away from that number.               

Thu, 09/25/2014 - 22:38 | 5258420 OhNo
OhNo's picture

I'm starting to think Zeroshit is part of the Problem-Reaction-Solution with a whole lot of Intellectual bullshit.Its easy-all Lizards and there Allies need to be exterminated of the face of this planet once and for all,Or humanity will never have peace.

Thu, 09/25/2014 - 23:21 | 5258530 Ghostdog
Ghostdog's picture

Print moar gold

Fri, 09/26/2014 - 00:25 | 5258687 rsnoble
rsnoble's picture

Tommorow's friday.  I wouldn't touch this market with 'your' money.

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