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US Equity-Credit Divergence: A Warning

Tyler Durden's picture




 

Authored by RCube Global Asset Management, orginally posted at Macronomics blog,

"One thorn of experience is worth a whole wilderness of warning." - James Russell Lowell, American poet.

Please find below a great guest post from our good friends at Rcube Global Asset Management. In this post our friends go through the growing divergence in the US between credit and equities:

Major equity / Credit divergences should always be taken very seriously.

They were among the best forward looking indicators at almost every major turning point for equities over the last 20 years.

To recap:

In 1998, equities were rallying hard, but US HY spreads failed to print new lows. Instead, they started widening in late 1997. Credit was telling us back then that Asia and Russia were severely slowing down while corporate balance sheet health was deteriorating. It preceded the 1998 crash.
In 1999/2000, the divergence was even more pronounced. The S&P500 not only recovered from the Asian crisis but rallied strongly during the Tech bubble. US HY spreads had bottomed 3 years earlier! Corporate balance sheet were at the time very stretched. As a result, banks were tightening lending standards. The equity market eventually crashed, tracking the signal sent by widening credit spreads.

During 2007/2008, credit spreads bottomed in May 2007 and started widening immediately after, while equities kept moving higher for another 5 months (October 2007). Spreads were telling us just like in 2000 that private sector leverage had reach such an elevated level that banks were starting to close the credit flows. Again, the divergence timed the bear market that followed.
 
 
In 2008/2009, spreads topped out in December while equities made new lows that were not confirmed by a new high on HY spreads. At that time, corporate balance sheet had started to adjust violently to the crisis. Capex had been cut to zero, the corporate sector was issuing equity (net positive liquidity impact) and cash flows had already bottomed and were starting to rise. Balance sheet health was improving, as evidenced by tightening credit spreads. The bullish divergence timed the end of the bear market.
 
 
In 2011, spreads bottomed in February while equities made a new high in April, as spreads widened further due to the European sovereign crisis. Equities reversed shortly after.
 
 
Today, the divergence is visible again. US High Yield spreads bottomed in June and have widened substantially since then. Equities are still printing new highs. Are US HY spreads telling us that global growth is weaker than expected, a message also sent by flattening yield curves, depressed bond yields, defensive massive outperformance relative to cyclicals. Is it Europe? Russia? Emerging Markets?
 
 
The fact that all this is happening while bullish sentiment in the US is at record highs is of particular worry. Everyone is expecting higher equities due to lower yields and depressed food and energy prices. But when everyone is thinking alike, no one is really thinking….
 
 
 
 
The expanding wedge pattern, has a target for US equities below the October low.
 
 
 
Investors should at least start hedging risk. The most aggressive can simply trade the downside. Volatility has crashed, especially on the very short expiries, as no one is expecting any hiccups before early 2015. This makes short dated puts quite attractive.
"History is a vast early warning system." - Norman Cousins, American author

 

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Tue, 11/18/2014 - 09:26 | 5460734 GetZeeGold
GetZeeGold's picture

 

 

Better drive home.....we're clearly to screwed up to walk.

Tue, 11/18/2014 - 09:36 | 5460761 OW My Balls
OW My Balls's picture

OT: Obama laments that he's not the 'Emperor of the Unites States"

 

http://www.nytimes.com/2014/11/18/us/by-using-executive-order-on-immigra...

Tue, 11/18/2014 - 09:54 | 5460767 GetZeeGold
GetZeeGold's picture

 

 

That was when he just the President......today.....he's the Emperor.

 

Word is he got a nice raise as well.

 

Live forever King Obama - US Chamber of Commerce....we've got your back but we can't actually come out and say that because the blacks would kill us.

Tue, 11/18/2014 - 11:13 | 5461135 duo
duo's picture

Caligula was an emperor.  Just sayin'.

He didn't like the Senate either.

Tue, 11/18/2014 - 11:21 | 5461165 winchester
winchester's picture

goal of an emperor is....to die, but....will it blend ?

Tue, 11/18/2014 - 09:44 | 5460781 TeamDepends
TeamDepends's picture

It appears they will wait until Saturday to release the Ferguson verdict. With l'il Barry telling the Alinsky rabble to "stay the course", will we have Martial Law by Thanksgiving? One thing is certain, these scumbags would love nothing more than destroying one of our most sacred holidays. Oh yeah, fuck you Valerie Jarret!!!!!

Tue, 11/18/2014 - 09:57 | 5460821 GetZeeGold
GetZeeGold's picture

 

 

Screw Ferguson......what do you suppose they're going to do when they find out illegal aliens have taken their jobs?

Tue, 11/18/2014 - 10:24 | 5460873 MalteseFalcon
MalteseFalcon's picture

The illegals won't be taking their EBT cards, etc., so there will be no reaction vis-a-vis the illegals.

Tue, 11/18/2014 - 11:22 | 5461175 winchester
winchester's picture

after all, they must find customers for their dope, yanowatamean ?

Tue, 11/18/2014 - 11:33 | 5461205 Jstanley011
Jstanley011's picture

"Job? Whazza job?"

Tue, 11/18/2014 - 10:22 | 5460868 Freddie
Freddie's picture

This is why Obamacare and The Fed Reserve Ac t were done on Christmas Eve or right around that time.

Obamacare is a major sop for the biggest health insurance companies.  Make the middle class and upper middle class pay a lot more for a lot less and use the extra money to cover the people who vote for you and will not pay for health insurance.

Tue, 11/18/2014 - 11:15 | 5461143 duo
duo's picture

Obamacare was designed to be so expensive and opaque that the 99% will beg for single-payer to get rid of it.

Tue, 11/18/2014 - 11:36 | 5461224 Jstanley011
Jstanley011's picture

Here's what they teach 'em in the Ivy League:

"The hardest part is getting the public's pants pulled down. Once that's accomplished, yeah. You can pretty much gang rape them for as long as you like."

Tue, 11/18/2014 - 09:59 | 5460828 McCormick No. 9
McCormick No. 9's picture

Just because you post more charts does not mean your premise is going to make more sense.

"High yields" are junk bonds. Of course there is going to be an inverse relationship between junk bonds and the stock market. After looking at the first three charts, I could see absolutely NO correlation between spreads timing and financial downturns.

Yes, we're fucked, but this has less to do with why than Kim Kardashian's ass.

Tue, 11/18/2014 - 10:21 | 5460866 NoLongerABagHolder
NoLongerABagHolder's picture

Why is ZH obsessed with constantly posting charts that "look similar" and thus means we will repeat the past? Showing two events from the past 20 years is actually not even close to being statistically significant. Doesn't anyone remember the constant chart overlays of today's market with 1987 earlier this year? They were certain it would happen again by constantly mocking "we are sure it is different this time" - well...... here we are months and sometimes years away from those charts they posted, and it sure looks like IT WAS different, at least this time. We were NOT 1987......

 

Ohhhh...... but doom sure does sell, does it not? Tis why guys who are usually wrong still make good money. AKA - Harry Dent.

Tue, 11/18/2014 - 11:35 | 5461220 silentplatform
silentplatform's picture

ZH is generally obssesed with prophetising Doomsday - one that just doesn't seem to happen. By all charts there should've been a crash long time ago yet SP 500 keeps climbing up. Why? Because charts don't matter, THEY decide when to drop the bomb, not the "market". Don't think about what happened in the past, think about what the cartel is thinking now and planning to do and how and when.

Tue, 11/18/2014 - 09:55 | 5460813 TideFighter
TideFighter's picture

So, Spoos lower than <666, then. lol

Tue, 11/18/2014 - 10:43 | 5460976 Burt Gummer
Burt Gummer's picture

No legs to walk home? Better crawl.

 

https://www.youtube.com/watch?v=DI7pPVJTeSY

Tue, 11/18/2014 - 09:24 | 5460735 Spitzer
Spitzer's picture

 

The biggest myth in economics today: http://freegoldobserver.blogspot.ca/

Tue, 11/18/2014 - 09:41 | 5460778 NYPoke
NYPoke's picture

"Economics, the biggest myth today."  Fixed it for ya.

Tue, 11/18/2014 - 09:56 | 5460819 bbq on whitehou...
bbq on whitehouse lawn's picture

"Supply-side economics" the biggest myth today. Fixed it for you.

Tue, 11/18/2014 - 11:24 | 5461182 winchester
winchester's picture

obama, the biggest scam today. time only can fix it for you. but do not screw up again !!!

Tue, 11/18/2014 - 09:24 | 5460736 Cognitive Dissonance
Cognitive Dissonance's picture

I see nothing, I see nothing. - Sgt. Schultz

Tue, 11/18/2014 - 09:25 | 5460739 the not so migh...
the not so mighty maximiza's picture

Depressed food prices,    huh..what

Tue, 11/18/2014 - 09:24 | 5460741 Martin T
Martin T's picture

Tyler, blog name is Macronomics

Thanks for the repost

Best,

 

Martin T

 

Tue, 11/18/2014 - 10:14 | 5460847 NoDebt
NoDebt's picture

I like 'Marconomics' better.   Not to worry.  Tylers will fix the article in 3... 2... 1...  

Huh.  Nothing.  Still the same.

Maybe you should consider changing the name of your blog. ;)

 

Tue, 11/18/2014 - 10:26 | 5460896 NoDebt
NoDebt's picture

Ah, there we go.

Tue, 11/18/2014 - 09:26 | 5460744 TeamDepends
TeamDepends's picture

Will future economic historians describe what's coming as No Thanksgiving?

Tue, 11/18/2014 - 10:27 | 5460898 NoDebt
NoDebt's picture

Historians are well known for their humor.

Tue, 11/18/2014 - 09:25 | 5460745 thatthingcanfly
thatthingcanfly's picture

Boy I'd like to insert my credit into HER equity divergence!

If ya know what I mean. He heh. Heh. Hmm.

Tue, 11/18/2014 - 09:33 | 5460757 pitchforksanonymous
pitchforksanonymous's picture

I think you've taken the chart porn a little too literally.

These charts might mean something if it wasn't different this time.

 

 

 

Tue, 11/18/2014 - 09:43 | 5460782 Colonel Walter ...
Colonel Walter E Kurtz's picture

Can somone please post historical charts showing how the markets work when CB's from all over the world are either directly, or indirectly pouring money into equities. Then I will be able to determine when it is time to start to worrying.

Oh wait, you say the CB's have never done anything like that in the past, well then I guess we are all good then. I trust my overlords know what is best for me, and are looking out for my best interest. 

 

 

Tue, 11/18/2014 - 11:03 | 5461091 toady
toady's picture

Maybe it is different this time...

Tue, 11/18/2014 - 09:57 | 5460817 SlowMoney
SlowMoney's picture

I agree pitch.

There is no real fear/greed.

There is no real supply/demand.

In free markets .... fundamentals and technical's matter ...... but not in a rigged market!

Like a dealer spinning a roulette wheel ... when the ball is spun into the wheel .... gravity and centrifugal force takes over.

But in a rigged roulette game ..... when the crooked dealer activates the petal on the floor ..... that is all that matters!

 

Tue, 11/18/2014 - 10:00 | 5460830 SlowMoney
SlowMoney's picture

Just like the HFT's ...... 

Reading your cards at the poker table....

Sure ... be the chump .... they will just take your money ...... and smile !

Tue, 11/18/2014 - 09:31 | 5460751 LawsofPhysics
LawsofPhysics's picture

Rational analysis in a completely "managed" economy/market.

is what it is until the next major war.

Tue, 11/18/2014 - 09:41 | 5460772 AdvancingTime
AdvancingTime's picture

For a long time much of the economic landscape has started to look like something out of  "Alice And The Looking Glass" A bizarre  and unrecognizable land, a land that is distorted and papered over by ream after ream of paper. This paper has been rolling off the printing presses of central banks all across the world in an attempt to mask reality.

Peter Schiff says, printing money is to the economy what taking drugs is to a drug addict. In the short term it makes the economy feel good, but in the long run it is much worse off. The article below delves how what was once the "long run" or "distant future" where this might end may be getting much closer.

http://brucewilds.blogspot.com/2013/01/what-happens-after-momentum-ends_6.html

Tue, 11/18/2014 - 09:45 | 5460786 spastic_colon
spastic_colon's picture

those charts are neat, except today will be a 1% up day no matter what the futures say.....europe up cuz germany made up some econ numbers....have fun

Tue, 11/18/2014 - 09:47 | 5460789 NoWayJose
NoWayJose's picture

Worthless - there are bigger exceptions shown on several of the charts - yet there was no change in the direction of the markets!

Tue, 11/18/2014 - 09:50 | 5460794 disabledvet
disabledvet's picture

So not to play Devil's advocate again but The PTB have a lot of ammo to monkey all us praying for the day when some spread product will finally start emerging here...let alone some economic growth or even jobs numbers worthy of the name. The amount of money these clowns are blowing on their ships and equipment is so ridiculous I don't think the folks blowing a billion here and a billion there could even care if they generate a single job let alone even "growthiness."

Tue, 11/18/2014 - 09:50 | 5460796 beegle
beegle's picture

BTFD !!!

Tue, 11/18/2014 - 09:53 | 5460808 kaiserhoff
kaiserhoff's picture

Extremely misleading charts for anyone who is not a bond expert.

Gimme some of them thar 20% bonds, Dude.

Tue, 11/18/2014 - 09:56 | 5460818 TideFighter
TideFighter's picture

Massive jaw snap coming. Go Gators.

Tue, 11/18/2014 - 10:03 | 5460834 Grumpy Old Man
Grumpy Old Man's picture

The veils wearing thin, Radio4 (UK) letting 'economists' talk about how nothing is fixed and that the CB's have no ammo this time around, bit too close to speaking the truth eh? Warming up the masses for the crash?

Tue, 11/18/2014 - 10:14 | 5460849 Seal
Seal's picture

Prediction is difficult especially of the future - Niels Bohr

Tue, 11/18/2014 - 12:25 | 5461381 kaiserhoff
kaiserhoff's picture

  and Mark Twain;)

Tue, 11/18/2014 - 10:15 | 5460853 gapcrap
gapcrap's picture

one of the by- products of the grab for yield, has been the ability of lower rated oil companies to raise capital in the debt markets. energy now accounts for nearly 16% of the junk bond market and is the 2nd largest component of the high yield market. a continued rout in oil prices might have an undesirable effect on indebted oil companies' ability to repay their debt.

Tue, 11/18/2014 - 10:21 | 5460867 max2205
max2205's picture

Mr Yellins chart is foot heavy on up

Tue, 11/18/2014 - 10:26 | 5460889 No Quarter
No Quarter's picture

Do the Tylers actually post anything anymore?

 

Kind of sick of these guest posts all regurgitating basically the same thing wrapped a little differently (to sell some crappy blog or financial plan). Yes, we know already. Something is going to hapen sometime ;) 

Tue, 11/18/2014 - 10:39 | 5460953 Mi Naem
Mi Naem's picture

"Do the Tylers actually post anything anymore?"

Yup.  Stuff from Ferguson, and pro-Russia stuff. 

Tue, 11/18/2014 - 10:51 | 5461023 ncdirtdigger
ncdirtdigger's picture

Do the Tylers actually post anything anymore?

Not since the site was sold to ABC.

See bottom of the page

Tue, 11/18/2014 - 13:02 | 5461526 Mi Naem
Mi Naem's picture

"sold to ABC"

Don't confuse that with the global media conglomerate. 

The "ABC" that owns Zero Hedge is a tiny London based media company.  You'd need to look past the bottom of the page to see that. 

Tue, 11/18/2014 - 10:35 | 5460935 papaswamp
papaswamp's picture

Oil just did a pop slam....

Tue, 11/18/2014 - 10:36 | 5460941 q99x2
q99x2's picture

Nah. You have to talk to the FEDs software development team if you care to know what the market is going to do. Most of the shares are now owned by the same owner. The market is a graph of a portion of how much that owner has claim to.

Tue, 11/18/2014 - 10:40 | 5460966 hibou-Owl
hibou-Owl's picture

Coincides with the investment clock, rising rates = Gold, Market drops.

Thanks for a very interesting article, well done!

I would be interested to see what happened in the ''87 crash. II recall rates took off and it took the market a long time to bounce back.

Tue, 11/18/2014 - 10:43 | 5460972 LawsofPhysics
LawsofPhysics's picture

Remind us, what did the national debt and unfunded liabilities look like in 87?

Tue, 11/18/2014 - 10:50 | 5461017 Rainman
Rainman's picture

1987 10y Treasury @ 9 %  !!!!!!

Tue, 11/18/2014 - 10:57 | 5461057 hibou-Owl
hibou-Owl's picture

May I ask when was the low in rates before oct '87.

Sorry don't have data going back that far.

Tue, 11/18/2014 - 11:19 | 5461153 venturen
venturen's picture

It will NEVER go down...has Venezuela? Has Zimbabwe? To a Million and beyond!

Tue, 11/18/2014 - 11:22 | 5461166 anachronism
anachronism's picture

Good analysis; but wrong conclusion. We have never had QE like this before.

For several years the FED has absorbed bad loans from the banking industry and bought about 60% of all new issues of Treasury debt. This meant low interest rates and a flow of new money into stock markets. Purportedly, the FED has stopped doing this.

But as the FED stopped BOJ picked up the slack. New money flows into the stock markets and interest rates remain low.

Rinse and repeat. This is the new normal, until it isn't.

Until QE stops and reverses, all prognostications contrary to this new normal are wrong. It is all in the hands of the central banks now.

Tue, 11/18/2014 - 11:48 | 5461268 nostromo17
nostromo17's picture

QE only inflated stock market prices. Low rates also played a part in the distortion to the extent there is no relevant risk pricing in interest rates.

It all comes down to when buy backs of stocks by corporations no longer provide profit window dressing.

And, when lack of buyers (consumers) leads to decrease in product production.

Then deflation begins.

To the extent that people interpret stock prices that are artificially high as a "good economy" and faked statistics on inflation as real

we may be in deflation already (perhaps since 2001). Seems like the rest of the world is getting there.

Its a testament to the U.S. and global economy its taken so long to kill it.

Abe in Japan; actually printing money coupons for the masses is the first real good idea since Bernanke entered the scene (talked helicopters and then only stocked

bank balance sheets instead) since it increases consumption which increases production and stimulated velocity of money in an actual economy. It would be the first

step that is not completely delusional as was QE and all the lies and propaganda that ensued. In the end QE was irrelevant. It won't cause inflation because it never

affected anything but bank balance sheets. It was all paper bookkeeping window dressing. It made the banks have reserves after they lost around %40 of the assets

through delusional inflation of the mortgage market.

Too bad Abe is too late though.

Tue, 11/18/2014 - 15:58 | 5462168 MeelionDollerBogus
MeelionDollerBogus's picture

Mishun Uccomplished!

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