These Are Still The Most Disturbing Charts For The Stock Market

Tyler Durden's picture

Back before everyone became a junk bond expert, we repeatedly showed what in our opinion was the scariest chart for not only the US, but global stock markets: the unprecedented divergence between the stocks and junk bonds, suggesting that if the recent past is prologue, then the S&P 500 is in for a world of pain as it tracks HY credit far lower.

 

Since then, these fears have been realized and the market tumbled, unleashing even more central bank jawboning and intervention.

That, however, has done nothing to fill what amount to a staggering gap, and as JPM notes today, the "credit backdrop has deteriorated; the gap with equities remains stark"

Here is what else JPM says as it lays out what were the three scariest charts for stocks in the summer of 2015 and which remains the scariest charts for stocks as we enter February 2016:

  • One of the big supports for equities for a long time was the strength in credit.
  • The rollover in HY credit is thus not a healthy sign for equity performance. The two don’t tend to diverge for too long

 

Where things get worse is that as JPM notes, "the increase in HY credit spreads is not just because of Energy, all 21 subsectors have seen widening; US lending standards are tightening again" and in fact "HY spreads have doubled over the past year, with broad participation."

 

JPM leaves off with two final concerns: "the signal from HY credit is a concern for the stage of the cycle we are in…"

  • The best leading indicators for recession were: credit spreads, shape of the yield curve and profit margins.
  • HY credit spreads are pointing to an increasing risk of a downturn.
  • The current move in HY spreads is approaching the average of the last three slowdowns.

 

And just as troubling, HY contagion has spread to Investment Grade, that all important source of debt-funded buybacks.

  • The move up in high-grade spreads paint a very similar picture.
  • HG spreads have widened by 100 bp since their trough in June’14. Spreads typically have troughed six months prior to the start of a recession.

But once again the focal point will be energy where despite record low interest rates, the powder key is set to explode any moment for one simple reason: every incremental dollar of cash flows goes to satisfy bond holders, cash flows which decline with every passing day.

 

And the punchline, or the biggest irony in all of this, is that it is the Fed's own policies and the pursuit of the strong dollar, at least until the Fed relents and unleashes NIRP and more QE, which are pushing the US straight into the next global crash...

... a crash which would not be there had the Fed not intervened in 2008/9 and blown yet another bubble to mitigate the collapse and natural implosion of the previous housing and debt bubble, which in turn was blown to offset the bursting of the dot com bubble.

We can only hope the bursting of the next, and biggest yet, bubble also takes away the almost thoroughly discredited central bankers with it...

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This is it's picture

No problem here. All looks good. Move on.

KnuckleDragger-X's picture

The normal thing is the casino sends around their leg breakers to collect the debt, but there's too many legs to break this time. The Fed is going to hand out a lot of magic money that can't be hidden from the sheep, and questions will be asked......

Haus-Targaryen's picture

This coupled with the Japanese 10 year selling for 6 bps and the 5 year German going for -32bps, there is a "flight to safety" on the short to medium term, but when you look at the 30 year JPY ... it ticket up, which makes me think there is some "long term survival risk" seen in Japan's government "solvency."

As people continue to leave equities and run to debt, both high yield and investment grade ... you'll see a lot of financially insolvent entities flood themselves with debt to make up for poor sales as recession sits in, when these loans go NPL and interest rates start ticking up across the high yield spectrum, it'll suck a ton of otherwise solvent entities into insolvency.

RiverRoad's picture

First they sell the stocks....then they sell the bonds.

Haus-Targaryen's picture

The quesiton is, where do you park industrial amounts of money in a very short period of time if not equity or debt?

Real Estate super bubble.

WTFRLY's picture

Nah, soon it will be "coins or ammo" for trade

Hitlery_4_Dictator's picture

The market is now cheap after the little correction we had, that's now over. BTD.

Goliath Slayer's picture
Goliath Slayer (not verified) Hitlery_4_Dictator Feb 1, 2016 2:17 PM

The chickens are coming home to roost. The USG has destroyed so many foreign countries over the years while Americans acquiesced and even cheered. America is now beginning to pay for its awful sins, especially this one >>> http://wp.me/p4OZ4v-3z

Ham-bone's picture

An observation regarding the Fed's IR hike cycles -

Despite a larger total population every interest rate cycle has brought weaker results than the previous.  This latest IR cycle has created 1/10th the net new full time jobs at 200x's the cost per new job than the '72-'81 period...the US is creating almost $8 million dollars in new federal debt for every net new FT job created...

Below are simple facts of net new FT jobs created and federal debt incurred every IR cycle from the qtr rates began declining to next cycles initial decline...

'72-'81

+430k FT jobs / qtr

+$15 B federal debt / qtr

'81-'89

+325k FT jobs / qtr

+$59B federal debt / qtr

'89-'01

+275k FT jobs / qtr

+$61B federal debt / qtr

'01-'07

+260k FT jobs / qtr

+$138 B federal debt / qtr

'07-present

+38k FT jobs / qtr

+$302 B federal debt / qtr

All the charts and details and fact that the Fed's IR cycles are entirely dependent on US core 15-64yr/old population growth...and why the Fed's rate hikes are ludicrous.

Scariest charts should be those showing the correlation of Fed IR action vs. 15-64yr/old US annual population growth...and the final chart in the link showing all OECD plus China, Russia, and Brazil 15-64yr/old annual population growth combined.  Because there is no more growth...and a Ponzi absent new consumers / customers can only survive in some sort of upside down NIRP world.

http://econimica.blogspot.com/

Libertati Aut Ad Mortem's picture
Libertati Aut Ad Mortem (not verified) Life of Illusion Feb 1, 2016 2:58 PM

You mean dual Israel first citizen Fischer that used to be President of the Bank of Israel?  Is there a difference anymore

tarsubil's picture

Right. Am I missing something? All the Fed has to do is buy HY with their funny money. They can print their money so they don't care if all the junk defaults.

savedeposit's picture

My shiny stack is still the same weight, also no problems here

KnuckleDragger-X's picture

Yep, shiny will buy a lot of fed toilet paper soon......

savedeposit's picture

Sure but I guess you don think I am going to

More Ammo's picture

My shiny stack just grew by 20 onces :)

Bill of Rights's picture
Obama wants Safer Weapons for Military, not more lethal

http://www.washingtontimes.com/news/2016/jan/31/obamas-gun-control-execu...

 

Speechless...

 

Global Hunter's picture

He and his advisors are so ill.  Who the fuck would have even thought of that with all the problems in the country?  Its scary in its stupidity.

macholatte's picture

I hear they have contracts going to Obama cronies working for these companies

 

Mattell - rifles
Hasbro - side arms
Lionel - trains & small vehicles
Big Monster - Trucks
Tonka - tanks
Wham O - artillery

 

tarsubil's picture

Don't forget the huge landmine contract that Lego got. Apparently, they really hurt if you step on them.

RiverRoad's picture

Goes with not bombing the oil trucks.

Dexter Morgan's picture

Some charts still matter. 

Luckhasit's picture

I wonder how derviatives play into this.

flysofree's picture

Martin Armstrong's market indicators point to minimum of 25-26,000 with a shot at 40,000 on the DOW.

The Saint's picture
The Saint (not verified) flysofree Feb 1, 2016 2:39 PM
Thenardier's picture

Baltic Dry is the most frightening graph, down to 314

XuscitizenSweden's picture

Excellent Interview with David Stockman from yesterday:

*David Stockman-We Are Nearing the End*

https://www.youtube.com/watch?v=5exbO-Ros2Q

 

CASH IS KING!

savedeposit's picture

Sure, but remember cash is paper, or digital ones and zeros

lester1's picture

The Federal Reserve's Plunge Protection Team and their covert stock buying program will keep the market elevated despite the bad economic data.

 

We could be in a recession right now and stocks will still stay propped up. Then we will know for a fact the Federal Reserve is buying equities to prop up the market.

 

Audit the Fed !!!!

Kefeer's picture

It is common knowledge since at least 2012 that the Central Banks are and have been buying stocks; even the NYPost reported it back in 2014. 

 

Likely, it goes back much further than that; with a ability to print "money" from nothing (counterfeit), then anything and everything goes to the psychopathic mentality; something we all have by nature and only revealed by degrees based on power, influence, circumstance etc.

 

http://www.thenewamerican.com/economy/markets/item/18520-central-banks-n...

 

 

Don Diego's picture

BTFD, you will thank me in the morning.

Truth Eater's picture

And the punchline, or the biggest irony in all of this, is that it is the Fed's own policies and the pursuit of the strong dollar, at least until the Fed relents and unleashes NIRP and more QE, which are pushing the US straight into the next global crash...

The real punchline is that this is THE PLAN!  Create the crisis, synthesize the solution.  And the solution means control of your money by digitizing it all and removing cash.  You are not free to spend your money as you see fit.

Paul John Smith's picture

And on the day of "digital currency" - Uncle Dan goes underground, stops paying 40K in taxes each year, throws away his cell phone, accounts, and seeks out what is left of courage in America (ain't much of it).

RiverRoad's picture

HY is and always has been the canary in the coal mine for every recession/depression.  The Fed's been blowing Tulip Bubbles waaay too long here. 

Libertati Aut Ad Mortem's picture
Libertati Aut Ad Mortem (not verified) Feb 1, 2016 3:10 PM

Excuse the out of place comment.  One of the best attributes of blogging are great appropriate links that are relevant to the subject matter, and great quotes.  Here is a quote from "On War" by Carl von Clausewitz:

 

"Whoever , stirred by ambition, undertakes such a task, let him prepare himself for his pious understanding as for a long pilgrimage; let him give up his time; spare no sacrifice; fear no temporal rank or power, and rise above all feeling of personal vanity, of false shame, in order to the French code, to speak the Truth, the whole Truth, and nothing but the Truth."

 

These are the words by which we shall live and the antithesis of corporate media. 

The Gladiator's picture

Just checked the DOW. 16466 and rising. FED was right,we were wrong.It can only go higher from here. Sell all your PM's and buy stawks.It is the chance of a lifetime.

polo007's picture

According to Macquarie Research:

http://docdro.id/bMDohqv

Central Banks

Why insistence on failed policies?

Neither QEs nor negative rates achieved their objectives...

- As BoJ went into negative interest rate territory on Friday, we find ourselves asking questions why Central Banks (CB) are insisting on pursuing policies that over the last eight years have largely failed to achieve their stated objectives (acceleration of inflation; higher and more sustainable growth rates and fixed asset investment; reduction in income inequality)? Neither the outright QEs (Fed) nor a mix of QEs and negative interest rates (ECB and now BoJ) have succeeded in these key objectives, with inflationary break-even rates near historic lows and growth rates remaining exceptionally erratic.

- Whilst these LT objectives remain a distant “dream”, monetary policies are having several impacts that are regarded as useful: (a) QE and negative rates tend to cheapen currencies (and hence help to steal growth from other economies); and (b) both strategies tend to further pervert the investment cycle, pushing investors and corporates away from productive investment and towards financial assets (equities & bonds) and financial engineering (share buy-backs and creation of monopolies/oligopolies). In other words, a lower currency adds to relative competitive advantage whilst higher asset values create a (temporary) wealth impact, which CBs hope will trickle down.

- As discussed (What Spanish Inquisition, Karl Mark and Fed have in common), an even more important reason for continuing with apparently failing policies is the desire of CBs to satisfy human (electorate) desire for redemption and salvation. Most people refuse to recognize that the next thirty years will be nothing like the previous thirty years and that there is an urgent need for hard structural reforms. It is so much easier to cheapen one’s currency and create asset bubbles, than to confront sclerotic labour markets, low domestic productivity and emotional areas of land usage and resources. Essentially neither followers of Karl Marx or CBs believe in the ability of free markets to resolve most anomalies and both respond to the human need for redemption.

...and indeed are likely to deepen deflationary pressures

- However as highlighted (The more they do, the worse it gets) only the Fed can reflate the global economy whilst all other CBs (including ECB, BoJ and PBoC) are essentially deflationary. Unless the Fed joins other CBs, the net outcome will be greater currency competition, leading to further contraction of US$ denominated demand as well as US$ denominated trade and liquidity. As it is, the global economy is already residing in US$ demand and trade recession. As far as wealth impact is concerned, there is no evidence of either trickle down or enhanced demand but there is a great deal of evidence for capital misallocation and rolling “asset bubbles”, which keep volatilities high.

The next stage is nationalization of capital markets

- We maintain (Time for policy U-turn) that as we progress through ‘16-17, there will be increasing pressure to shift public policies towards effective nationalization of capital markets. Whilst this is already gradually occurring, it is likely to become more open with CBs directly financing fiscal spending, consumption and infrastructure investment. Although in most jurisdictions it is technically illegal, we believe solutions will be found. As a direct injection into the “blood stream” this would have significant economic and investment implications that could last for years. In the meantime, we continue to recommend non-mean reversion strategies, such as “Quality & Stability.”

Chuckster's picture

Since the world has now decided negative interest rates are a good thing.  One would expect to get interest on margin rather than pay it.  Using this yard stick the Dow could go up  several trillion points.  Don't be a fool and be left out!  At what point will a dollar have negative value declared?  These "roll your own" geniuses think of everything.

polo007's picture

According to Macquarie Research:

http://docdro.id/SzuFP63

Bulls, Bears and low rates

In our latest commentary, we look at some of the key global indices and ask whether we are at the beginning of a potentially significant LT correction.

Cyclical vs secular. Although most investors tend to focus on short-term changes in direction, it is occasionally useful to look at the market indices from a broader, long-term perspective. If one were to look at real (inflation-adjusted) S&P for example, investors who would have bought S&P at the height of dotcom bubble (Aug 2000) would still be down today by ~8%-10%.

In other words, equity investors derived no real index return for 15 years. Is this unusual? The answer is no. If one takes LT market view, there were at least four periods in the last 130 years when investors derived no real index returns for decades (1881-1897; 1901-1920; 1929-1949; 1968-1982; 2000 to now). On the other hand there were several periods of extended and strong bull market runs (1920-1929; 1949-1968; 1982-2000). The key difference between these bull and bear market cycles is that LT secular bull markets start from exceptionally low valuations and are fed by accelerating growth rates and strong positive real interest rates (in turn driving credit and confidence). On the other hand, LT secular bear markets start with high valuations and their progress is punctuated by erratic growth rates, low real rates, and high degree of asset volatilities.

It is never totally clear when secular trends change (only hindsight demarcates the border), but to mark transitions from Bear to Bull, investors need to see previous real index lows being decisively breached, with valuations declining to exceptionally low levels, growth and real interest rates rising. Conversely, Bull to Bear transitions are marked by valuations rising to high levels, against backdrop of weakening fundamentals. Although within secular market, there are cyclical phases that sometimes last for years, they have difficulty exiting secular channel.

Which stage do investors inhabit today? In our view, S&P is continuing to exhibit signs of LT secular bear. Valuations remain high, economic growth rates erratic, and real interest rates low. The strong cyclical Bull market run by S&P between ’09 and ’14 was driven by combination of depreciation of US$ (’09-11), followed by massive expansion of the Fed’s balance sheet (’10-’14). Since the end of QE3 (late ’14), S&P index has gone nowhere, whilst US$ has been gradually appreciating, thus depriving cyclical bull market of its oxygen. Given divergent monetary policies, unwillingness of Fed to consider QE4, and lack of global growth, trade and liquidity, the next cyclical Bull market phase would first require a much deeper bear market correction. As described (here), this however runs contrary to the symbolic messaging of S&P, as one of what we define as six key signals that Fed monitors as it attempts to normalize monetary policy.

The dilemma is that on the one hand, the Fed is determined to squeeze cost of capital higher and build ‘dry powder’ of interest rates to enable it to stimulate, if economies weaken. However, this threatens to send US$ higher and global liquidity lower, and leaves S&P exposed with high multiples, eroding earnings, flattening yield curve and no liquidity support. Whilst current CB policies would preclude return to secular Bull (as dislocation required to set stage for a secular phase is unacceptable), another cyclical Bull requires either 20%+ valuation correction or change in public policy settings (such as QE4 or nationalization of credit via robust CB funded fiscal policies). Absent these two outcomes, the best that S&P investors can expect is exceptionally low equity returns that would be unlikely to beat bonds. Whilst the same trends are evident in other key DMs, we prefer Japan and Euro, due to different trajectories of their monetary policies.

Spungo's picture

Black lines matter!

Kefeer's picture

The goal is total control of the people via the "debt mechanism"; they have already destroyed many emerging markets and now eating their own in the form of Greece and Cyprus with Spain and Portugal coming next.

 

The elected officials are easily bribed to take the IMF loans with the strings attached and the national treasures are sold, the public services are cut and the people are left to destitution.  It eventually makes it to America and is already here.

 

We say nothing about 7-8 years of not being able to save money with a return greater than inflation and we bought the idea that there exists Too Big To Fail and we will not audit the FED.  Therefore we will get what we deserve and much more.  We will be the last to fall, but the pain will also be the greatest as the Fascists finally rule the world via debt enslavement.

 

Wait till the "cashless society" comes to pass and we will heartily agree and accept the notion.  For many, this comes as no surprise as to the ultimate outcome and for many they will more than loose everything including their souls.  No one is without hope; just got to seek it.

 

Only one true form of protection exists and it is not gold, silver or land.

Iconoclast421's picture

The last two bear markets both featured a >15% rally in HY spreads. Given how far they've blown out relative to the S&P500 decline, another such rally could occur right now. It would be short-lived, perhaps 3 months, but that possibility certainly should not be ruled out.