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...