Guest Post: Credit Versus Equity The War Is Waged

Tyler Durden's picture

Submitted by Tony Pallotta of Macro Story

Credit Versus Equity The War Is Waged

Bull versus bear. Greed versus fear. Smart money versus dumb money. Depression versus transitory soft patch. Credit versus equity.

In one corner is the credit market, a rather mighty opponent where $1 million defines an odd lot. Credit has spoken loudly.  They have priced in a severe recession, depression whatever you want to call it.

In the other corner stands the equity market and although fierce is smaller than its opponent where 100 shares defines an odd lot (a mere $700 in the case of BAC). Also known as the contrarian equity has priced in a transitory soft patch, the opposite of credit.

Equity hopes to bounce back from a recent loss where they completely failed to price in the 2008 Great Recession. It was a horrible loss for equity as throughout the year they continued to try and price in economic growth only to be knocked back down by economic reality as GDP contracted larger with each passing quarter. Credit on the other hand has put together an amazing string of victories. They have priced in previous economic recession with the utmost precision.

We are now on the eve of yet another showdown. Both corners are far apart and yet only one can be proven correct. The other must accept defeat. The stakes are large and the reward to those on the right side even larger. History will be the judge and time is all it asks.

Aaa Corporate Bond Debt VS SPX - Yields are currently at multi year lows and moving lower each day. Meanwhile equity has begun turning higher. Equity markets would say Aaa rated debt should be yielding 6.5% whereas debt says the SPX fair value is 600.

Baa Corporate Bond Debt - Similar to Aaa debt where rates are not only at decade lows but moving lower. Equity markets would say Baa rated debt should be yielding 8% whereas debt says SPX fair value is 600.

5 Year Interest Rate Swap Spreads - Similar to corporate debt not only is there a divergence but it is growing again.

Corporate Bond Spreads (Aaa / Baa) - Spreads already at multi year lows have begun to turn higher as have equities contrary to their inverse relation. Considering the little room spreads have to move lower it would appear equities have it wrong here and going not only in the wrong direction but also a rather large gap to fill.

Foreign Reverse Repos

This is a chart that has been making the rounds of late. It shows the amount of reverse repurchase agreements among foreign official and international accounts. Notice the trend during this current exponential move higher in deposits versus that of September 2008. Additionally notice the eerily similar price action in equities during both times.

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ZeroPower's picture

We've seen the epic credit vs equity battle in Fall '07

Credit was shit, you couldnt get any decent issues out, and stocks went up on hopium till '08. 

Whats smarter money - a cash-rich conglomerate trying to get out $1Bn worth of bonds, but can't, despite AA credit, because their spread will be 1000bp over last year's issue, and the mgmt (rightfully so) doesnt think its worth it....

Or a shitty tech (sorry, social network) IPO, inlfuenced by greedy syndicate desks, just looking for a window of 1 day to get out a measly $200mm off of 10% of their 'worth' just to show the markets the IPO scene is alive and well.


More and more convincing this IS like that year after all.

oogs66's picture

equity guys always talk about how important it is to look at credit, but they only do anything about it when credit is going better.  this will end in tears

eureka's picture

Equity is an illusion - pure expectation - pure subjectivity - pure projection and conjecture - all dependent on tax payer sponsored stimulus - i.e. inherently worthless without continued collective insanity - i.e. illusion.

midtowng's picture

Both markets seem pretty dumb, but if I had to chose I would bet against the equity market every time.

The credit market has a much better track record.

That means that the next crash is right around the corner, and I'm betting it has Greek fingerprints on it.

CoolClo's picture

Deflationary Depression, Bitchez....

In Fed We Trust's picture

Hands down the equity market will kick the credit market to the curb and fucking knock him down each time he tries to get up.

The corporations took over. They should rename the US the corporations of America.

Investors who bought the US debt all the suckers.

Maybe get Paid in hyper inflated dollars or paid at all?

DoctorMad's picture you think a mildly retarded ant will defeat the King Kong/Godzilla/Mothra super mutant debt deflation that is coming??? Good luck with that trade!

I did it by Occident's picture

Yes, that is part of their "fiscal/economic" toolbox.  It would help with the "surplus labor" problem. 

snowball777's picture

No, it wouldn't...misallocation of capital is just that...whether its digging holes and filling them here...or punching them in the terrain "over there".

Landrew's picture

I think you're right! People tend to focus on food and enregy cost thinking inflation. The fact that they lose their jobs,home values fall by 40% and return on savings is zero should tell them deflation and depression are here now!

ISEEIT's picture

As the bull thrashes about wildly, seemingly insane, the bear waits calmly, growling softly knowing the the bull shall soon enough collapse. Expired. The bear shall then have his fill.

agrotera's picture

Probably need to add a warning at the of the charts "viewer discretion advised, for mature and healthy audiences only" or  "do not view if you have heart trouble."

nasdaq99's picture

with the hft, algo dudes running the ranch, the concept of "price discovery" is quaint.  they will run it up until they can't and then run it down until they can't.  equities are a casino and aunt jennie has no where to go with her money except the pillow...........for another few years.  ben bernanke should be jailed along with the rest of the sociopaths running the banking business.

if hft accounts for ~50% of folume these days, then the real volume comparison to 10 years ago is, like 25%.....except in aug when we went off the clifff, now there was some volume...........uh oh!

duckhook's picture

more like % 65 of voulume

falun bong's picture

The average holding period of a NYSE stock is now: 11 seconds.

Look it up. If you think that's some kind of healthy, capital raising price discovery mechanism, you're nuts.

Best phrase I've heard to describe it: "a gulag casino"

GFKjunior's picture

Can some of you guys lead me into the direction of HFT techniques and coding? I have a CS degree but am unfamiliar with HFT software, can anyone let me know what big players like Goldman and Sachs uses for their algos and platform? Just trying to learn a little. Thanks

bobzibub's picture

Perhaps you can find a free course at MIT's or another schools' website. Most outfits won't divulge their details. Plus, most here are not quants.

But you probably can get the open source tools and data to build your own model. Then they'll come to you. : )

dcb's picture

I agree, 100%. past analywiw don't wor anymore.

I keep saying a maret functions based on how it is traded. if 70% are hft, then it's quant, trned lines, etc. every now ane then something happenws to throw things off in the news room, but I have founde that news that "DROPS" THE MARKET HAPPENS WHEN THE CHARTS SAY IT SHOULD. WHY IS THE DEBT ISSUE BIG NOW, NOT BEFORE, BECAUSE WITH IT HANGING AROUND MARETS SHOULDN'T HAVE GONE SO HIGH. THE MARKET MOVING STORY OF THE DAY IS  A LIE TOLD TP THE SHEEP SO THEY THIN THE MARKET FUNCTIONS BASED ON NEWS FLOW.


duncecap rack's picture

I'd like to see an update from the guy who was charting the similarities between now and 2008 with all the key inflection points labled with letters. I have been wondering for the last week or so if we are still following the script.

abaccus's picture can just look at the spx graph and say wow thats def an ABC correction move up now off we go to new lows

espirit's picture

Manipulation of "free" markets.

Political endorsement and collusion with multinational corporations.

Repartriation of profits to US for multinationals by changing the tax code.

Absolute misrepresentation of factual evidence.

Makes me ill to even read the mishaps brought upon the masses by the oligarchy.

RSloane's picture

Makes you want to grab a baseball bat and hit the streets doesn't it.....oh wait!

caerus's picture

we are imo in the middle of an historic equity crash...the big moves take time though and runs like the one in the ES from 8/9 to 9/1 give some people a false sense of pun intended

Rastadamus's picture

Step back! BITCHEZ!

kito's picture

Nobody knows what the equity market has priced in anymore. Recession with hopes of Qe3? Soft patch with No qe3? Thanks to central bankers, its all alice in wonderland

RockyRacoon's picture

Popular media only reports on "the stock market", so there is no benefit for keeping credit markets balanced and pumped.   The goal now is to make equities look good while backstopping debt markets thru the back doors.   This thing has the wheels coming off, but the regular folk will be the last to have the information needed to get off before the wreck.

Doña K's picture

Rocky, the regular folk (and for that matter all of us) should not be near any equity market. There are however, hard working people who have entrusted their money in IRA's and mutual funds (professional money managers) s/on

Many of these regular folk have no time to get involved on a daily basis or read ZH and other bloggers to know better. By the time they see their quarterly report it will be too late.


Captain Benny's picture

Bravo to Tony Pallotta, these charts are awesome and really help put it all in perspective.  Like many have been saying: deflation first, then inflation.  I'm still buying up things that I believe I won't be able to acquire during the deflationary ride... those heavy metals known as lead, gold, and silver...


kito wrote:

"Nobody knows what the equity market has priced in anymore. Recession with hopes of Qe3? Soft patch with No qe3? Thanks to central bankers, its all alice in wonderland"

I disagree.  While it may seem like Alice in Wonderland things are quite clear and the writing is on the wall.  The people behind the banking system have every intention to sacrifice their cohorts in order to save themselves.  Once friends to eachother, the central banks of the world are desperately trying to stay above water by pushing all their brotheren under.  Eventually one will drown.

Recession? Yes, actually a pretty severe depression looms.  QE3?  Sure, as long as you don't call it that name.  Even in depressions, prices for certain items skyrocket... so as the Turd likes to subtitle his site: Prepare Accordingly.

topcallingtroll's picture

As always, people will run to usa dollars and treasurys when the world gets scary.

If bennie plays it right we will still be the hegemon, the undisputed hrgemon, for another good twenty years or more.

We may have another american century as the china miracle follows the jpapnese miracle.

kito's picture

Topcalling--there is only so much debt the world will accept. Benny will not be able to shoulder our debt financing when our debt is 23 trillion in 2015. Yes, as per, thats where we will be.

topcallingtroll's picture

I agree there is only so much debt the world can accept, but those who get crowded out will not be the americans, at least not right away.

We are likely to be the last to fall, and the last sovereign to fall in a debt crises doesnt, but becomes the source of liquidity for everyone.

Ursa Major's picture

We may have another american century as the china miracle follows the jpapnese miracle.


Yes, and for that matter, the sea may turn to Lemonade, and the Pope perform the Hadj, but I would not want to bet on it...

dcb's picture

I would say this, except with hft now running the bond market as well, I am afraid it just doesn't work.

max2205's picture

In this corner, Godzilla weighing in at 5,000 pounds. In this corner, MinnnnnnieMe weighing in at 40 pounds.

Ding ding ding. Opening bell on Monday

Jasper M's picture

Seems to me likely that the opposing "decisions" in each market might very well be the very Same players, hedging their bets. 

"IF we get a recovery, stocks will rocket; if we don't bonds might survive"

Not how I would construct a portfolio, but I am not a pro.

MacroStory's picture

I'm the dude. I was following that comp purely to see if we were topping or not. Thought being topping patterns are more behavioral in nature and thus the comps. Once we began topping we started to lose the comp so I stopped. I was comparing the fall 08 though to recent again due to the behavioral (fall of Lehman, etc).  

Market Efficiency Romantic's picture

The wording perfectly puts it in a historic elite context: Similar to Russian civil war or the French vs the British, the Rothschildts created a war, financed it and were the only ones to profit, as they the stood on both sides.

Different take: Look at 'risk on' policies by central banks and governments pushing the people to the equity markets to buy shares from the elite at the peak, when equity has no idea to further increase productivity. The final ponzi scheme or the ultimate IPO.

Doña K's picture

The US and Israel did the same thing with the Iran Iraq war. They supplied parts and weaponry to both sides and managed to play it so that the balance of power was even at any given time. Thus making it a ten year cash cow.

Classic. But the masses and the media were arguing trivialities.


Never short military industrial complex companies, unless you have inside info of a project to be scrapped.

rocker's picture

Reality vs. Bogus

El Gordo's picture

Sell, sell, wait

Buy, buy buy.......or is it


Bye Bye Bye


jm's picture

Forget depression talk for now.  Credit is pricing in no more QE.  Traders are applying a major liquidity discount because they know they can't unwind shit. 



Shineola's picture

Both the credit market and the equity market are selling debt.  Hollow promises to pay at some point in the future.  These markets only work when honesty rules.   Honesty is out of town on an extended stay.  


rocker's picture

Default with Greece, or Extend and Pretend #4.  

falak pema's picture

ty; very interesting read and food for thought. Original.

Yen Cross's picture

A better interpretation ( May Be) Owning vs renting? Operation twist ( torque) and all...

Petrolia's picture

I'm just a simple being, not an economist.  But even I know that decades of excessive insane debt can't be papered over.  The coming pain isn't what's wrong the illusions of prosperity were wrong.

Love that piece. Poetic even.