This page has been archived and commenting is disabled.
This Alarming Indicator Is Back At A Level Last Seen 10 Days Before The Bear Stearns Collapse
One of the most disturbing and recurring themes highlighted on this site over the past year has been the ever greater disconnect between the worlds of equity and fixed income, whether in terms of implied volatility, or actual underlying risk.
It turns out there is an even more acute, and far more concerning divergence, which was conveniently pointed out overnight by Bank of America's Yuriy Shchuchinov, one which again looks at the spread between credit and equity. Specifically, BofA notes that in just the past two weeks, credit spreads from our HG corporate bond index have widened another 9bps to 164bps while equity volatility is down another percentage point (although technically BofA uses the 3rd VIX futures as its measure of equity volatility rather than VIX itself to get a smoother series that is less affected by the daily noises and seasonalities).
This is how the resulting dramatic divergence looks like:
Why is this notable?
In BofA's own words: "this spread currently translates into 10.26 bps of credit spread per point of equity vol, the level reached on March 6, 2008 – ten days before Bear Stearns was forced to sell itself to JP Morgan for $2/sh. Recall that – unlike the credit market – the equity market well into 2008 was very complacent about the subprime crisis that led to a full blown financial crisis."
In other words: unprecedented equity complacency matched by a state of near bond market panic.
BofA is quick to note that it is "not predicting another financial crisis" but believes "it is important to keep highlighting to investors across asset classes that conditions in the high grade credit market are currently very unusual."
BofA's conclusion:
The key reason for this weakness is that our market has transitioned from “too much money chasing too few bonds” to “too many bonds chasing too little money”. That shift is motivated by the impending Fed rate hiking cycle as issuance, M&A and other shareholder friendly activity has been accelerated while at the same time demand has declined. Again, we are not trying to predict a crisis – only to point out that the upcoming rate hiking cycle appears to concern issuers and investors so much that they have been taking real actions that have repriced our market lower relative to equities to an extent that we have only seen during the financial crisis.
And, of course, there is the whole deflationary commodity collapse-slash-China crash/devaluation/bursting credit/housing/market bubble, which also is a screaming read flag, but which stocks have also decided to ignore because, well, "central banks got their back." Until they don't.
In the meantime, we can't wait to find if this is the first time in the history of capital markets when it is stocks that are right, and bonds wrong. Because if not, we are confident that nobody, certainly no equity traders, is positioned in a way that another Bear Stearns-type blow up will be merely chalked away to the ever growing list of things that one should simply ignore and focus on an S&P which remains just a few percentage points below its all time record high.
»
- 202387 reads
- Printer-friendly version
- Send to friend
- advertisements -
SO I'll take a rain check in 10 days time//
The sky is falling!!!
No wait. The sky is starting to fall!!!
No wait. The sky is gonna fall!!
Wolf! Wolf! Wolf!
No wait it's a German shepard!
No wait it's like a German shepard!
During the BS era, Bear Stearns that is, we didn't have the FED throwing trillions everywhere. Hard telling what will happen.
My Bill Cosby indicator shows problems ahead.....
Feeling woozy?
Are you looking to make it big in Hollywood?
Did he give you anything to drink?
The following say a crash is coming:
Bill Holter, before 10/31/15
Greg Hunter, before 10/31/15
Gerald Celente, before 12/31/15
David Stockman
Martin Armstrong, in September
Jeff Berwick, in September
David Morgan, in September
Andy Hoffman
Doug Casey
Bill Fleckenstein
Richard Russell
Larry Edelson, on 10/7/15
John Hussman
Marc Faber
Henry Blodget
Egon von Greyerz
7 million people starved, to death, in America, in the Great Depression. That was when we were a lawful farming society.
7 million people starved, to death, in America, in the Great Depression... nope.
How many? Alex Jones says 7 million. I've seen a 5 million figure, years ago. Doesn't matter whether it's 5 or 7 million or a much lower number. It will be much worse this time.
You should not believe 90% of what Alex Jones says.
The point is that many will starve, freeze & die and, according to my parents and grandparents, there was a lot of hardship and death in the 1930s. Some tried to help others and some didn't care. Hard times are coming and you need to prepare.
Just how far have the "collapse in a few days" goalposts been moved by now?
We've had 7 years of this "any day now" stuff.
shh.. means buy stuff. just back away from the keyboard and let 'em at it. *wink* *wink*
Soom Ding Vong.
Ho Li Fuk
The only difference between this era and the great depression is EBT/SNAP/WIC have taken the place of soup kitchens and bread lines. It's not a matter of if TS will HTF but when.
When it does, the "Great Recession" will look like a fricking Sunday picnic by comparison.
During the Great Depression people were willing to work to eat. Now the EBT/snap crowd never had. There is a paradigm shift coming that will be so huge that most will look on with stunned amazement . You think Ferguson was bad? Word of caution , never being a knife to a gunfight.
On another note I was on a sales call in a trailer park by accident. Actually what are called "modular homes". I saw a sign on one unit for sale that said Berkshire Hathaway. That is how deep the big finance has its claws into the people. Right down into the trailer parks of America. Get ready folks. Good weeken to all . Btw it is only a weekend I guess if you work right ?
As the megarich Matriarch asked, when told by her cook that the maid had the weekend off: "What's a weekend"?
A short, easy read or see the movie, "The Road" by Cormac McCarthy.
Slow news day, again?
There are so many indicators that indicate an imminent crash, or at least a 10%+ correction. The problem with almost all of them is that they have been rendered useless by central bank intervention, HFT, algorithms run amok and corporations that have gone "all in" on buybacks. I think we'll get a big correction only when TPTB are ready for us to have one. It happened in July 2011, and it could always happen again. http://pebblewriter.com/learn/analogs/
Two years ago, I forecast a serious plunge in EURUSD, USDJPY 10-yr note yields that, if history repeated, argued for an imminent correction. http://pebblewriter.com/eye-candy-for-bears/ EURUSD and yields played out almost exactly as predicted.
USDJPY, not so much. It was nearing some important Fibonacci levels and a 20+ year channel top. Fundamentally, it was even time for the yen to at least bounce a little from its 33% decline. The BoJ, however, decided they needed it to devalue another 20%. Instead of reversing, it broke out of that channel and poured fuel on fire of the yen carry trade, which had just revved up in late 2011. http://pebblewriter.com/the-yen-carry-trade-explained/
The much cheaper yen (increase in USDJPY) was enough to bust the relationship between stocks and the euro, interest rates and normally reliable technical stalwarts like breadth, divergence, volatility, etc. And, we're all aware of the growing divergence between macro fundamentals and stock prices.
Chart patterns still work fine, as long as they're bullish ones. Ditto for Fibonacci patterns. I can't tell you how many times a perfect bearish setup has been trashed by a sudden, unexplained spike in USDJPY. The algos are so finely attuned now, that even a penny or two change in USDJPY, a beatdown in VIX, or a tick higher in Nikkei futures can reverse ES/SPX on the spot.
Lately, oil has become instrumental in prompting the algos. If USDJPY is falling for some reason, it means the yen is strengthening, which means the dollar is weakening, which means CL is strengthening -- which ultimately drives ES/SPX higher. So, heads the bulls win and tails the bears lose.
We're talking small moves in CL where, say, purchase orders for 2,000 contracts over 5 minutes push prices 20 cents through a trend line on a 5-minute chart. At current prices, that's about $80MM notional, with an $8MM margin requirement. And, within seconds, $300BB in eminis and $15 trillion in actual stocks are reversing course and screaming higher. Same thing happens with certain stocks, treasury futures, etc.
It's ridiculous. But, it's just another form of manipulation that's designed to feed the yen carry trade. The only way the BoJ can continue to trash the yen is if oil (priced in USD) continues to fall. They're in so deep they can't back out, supporting their own markets in a way that China can only envy. http://pebblewriter.com/those-wacky-central-bankers/
Do charts and patterns matter anymore? Is a correction even possible? Every once in a while TPTB will let a bearish pattern play out. But, it's the exception. The tools they use to manipulate stocks higher are very, very good. So, more often than not, I'm focused on trying to figure out what manipulation is being carried out -- and which one is planned next. Head fakes are the rule, not the exception. Fundamentals rarely matter -- unless there's a plausible bullish spin.
Eventually the yen carry trade will fail. When BoJ can't issue bonds fast enough to pay the interest on the outstanding debt, I suppose. Even then, I imagine TPTB will just switch to a different vehicle -- say, the euro. And, there's always the possibility of another black swan. But, even then, could it outweigh the FOMC announcing a massive resumption of QE? I don't know. I suspect it'd have to be something really big -- a bigger 9/11, nuclear war, etc. What a thought -- a "market" that only a global tragedy could derail.
Excellent post Pebble
Rule #1 for financial articles: Smart Money is always the money in the other market.