Signs of the Times:
We ran "Boom Sayer" exclamations for four weeks and
considering the nature of volatility it is reasonable to conclude that
current excesses will eventually be followed by "Doom Sayers".
But, let's not be hasty - usually the
next step from complacency is "Ooops!".
And that might have begun with this
week's discovery that the "fix" on Euroland
debt won't last as long as even the shorter maturities become due.
Pity.
This Year
"The biggest
wave of state-and-local government debt refinancing in two decades is helping
fuel the longest winning streak for municipal bonds since 2007."
~ Bloomberg, April 2
"Taxable
municipal bonds are poised to extend their best rally in 18 years."
~ Bloomberg, April 4
"Across the
Eurozone, and beyond, hedge fund managers are now pointing to 'significant'
pricing anomalies not seen since 2008."
~ Bloomberg, April 6
"JP Morgan
trader of credit-derivative indexes [linked to the
health of corporations] has amassed positions so large that he is
driving price moves in the $10 trillion market."
~ Bloomberg, April 6
Of course, these preceded Tuesday's
setback, but their significance is that there is considerable speculation in
credit markets. As we have been noting, favourable
trends in corporate spreads ended in February. This could reverse to widening
over the next four to six weeks.
As we have been noting, "Boom
Sayer" exclamations from March and
April last year were remarkably similar to this year's list. The best of last
year's have been published and, essentially, they
ended in April, which suggests a pattern.
Stock market action in both years set
a momentum high in February with positive sentiment recorded in March and
April - accompanied by bullish raves.
This week saw some "sudden"
exclamations of dismay. Does it indicate a new trend?
Perspective
The stock market is included in the
orthodox calculation of Leading Indicators. Problem is that at the end of a
great financial bubble, such as in 1929 and 1873, the recession started
virtually with the collapse of speculation, which was also the case in 2007.
This is one of the features of a bubble and its collapse. Stocks peaked in
October 2007 and the recession started in that fateful December.
Essentially, both the stock market
and the economy recovered when the panic ended in March 2009. We have thought
that the relation would continue such that the first business expansion out
of the crash would end with the end of the first bull market. It should be
admitted that we had thought that the US expansion would end with the
commodity-high of last April. Usually we leave the discussion about
recoveries and recessions to the cult of economics, but sometimes it's worth
a try. After all, the NBER typically determines the start of the recession -
one year after the actual start.
Naturally, we can't help but wonder
if the life that recently came into the economic numbers will turn down with
the stock market - with little delay. Taking out 1340 on the S&P would
set the downtrend. What would set the downtrend in GDP?
A couple of weeks ago central bankers
were comfortable that stimulus and fixes had - well - fixed things. No more
easing was required. Then, this week's hit to the markets seems to have
dislocated policymaker confidence such that Bernanke had to state that he
would not raise administered rates. Our view has been that it has been market
forces that have lowered such rates. In troubled times conservative funds go
to the most liquid items and they are short-dated instruments in the senior
currency and gold. This drives the former down in yield and the latter up in
price.
The swing in Fed opinion reminds of
Tokyo at its extraordinary peak at the end of 1989. Speculation was radical
and policymakers were trying to talk the action down - which is always impossible
because such speculation will run to collapse. With the initial break in the
Nikkei, policymakers became nervous and talked about lowering margin
requirements. Shortly after the top of a bubble??? Japan's subsequent
contraction has been one for the history books.
Our "new financial era"
recorded a number of cyclical speculative thrusts and cyclical bear markets
until a classical bubble was accomplished in 2007. Despite easing that
exceeds the determined efforts by the Fed at the start of the post-1929
contraction, financial history remains on the typical post-bubble path. One
could even say that central bankers have been extremely belligerent in
attacking the normal forces of contraction.
However, sovereign debt markets are
saying that it is not working well. An updated chart on the "Spanish
Fandango" follows.
Credit Markets
With the break in overall confidence,
the long bond jumped almost 5 points in three trading days. Junk, high-yield
bonds, and sovereign debt sold off. The sub-prime which had rallied from 38
in October to 52.5 in February has slumped to 47.4. The chart has broken down
and the target is the 38 of last October. Municipals are close to ending
their test of the highs in February.
This year's seasonal reversal to
widening in May could lead to very unsettled credit markets later in the
year.
The long bond was oversold and the
bounce has corrected this condition and the price is likely to drift down to
test the low.
Action in lower-grade stuff has not
been healthy, and an economist at an orthodox place (IMF) has discovered that
there is not enough collateral behind all of the debt. In Victorian times
this was called "over trading" and today its
"leveraging". No matter what the term, it is always followed by
liquidation or in today's terms "de-leveraging". The next stage
could inspire articles that it is impossible for the world's economy to
generate enough income to service the debt burden.
There will be plenty of opportunity
for a "new" wave of young economists to point out the glaring blunders
of the ancient and "barbarous relic" of interventionist economics.
Commodities
Base metals and crude oil declined
enough to prompt a rebound with the Fed turning on the speculation switch
again. Neither were oversold enough to set an intermediate bottom. Natural
gas got headlines in declining below $2.00, but it is not as oversold as at
the 2.23 low in January. Also, late April often sets a seasonal high.
Agricultural prices suffered a hit
last week, but not enough to break the chart out of the narrow trading range.
Coffee clearly needs a jolt as it has given up most of the huge gain to April
last year. It seems that the sector is being keep together by strong action
in soybeans and soybean meal. These are becoming rather overbought at close
to last year's highs.
After mid-year, adverse credit
spreads, a slowing global economy and a firming dollar could trash most
commodities - again. The chart shows three "over-boughts"
- at 474 in 2008, 370 last April and at 326 in February.
Currencies
Bernanke renewed his vows to
depreciate the dollar, which brought the DX back into its trading range.
However, this is still within the pattern leading to a significant advance.
Getting above overhead resistance at 81 could set the launch button. For
day-traders May is a long time away, but for investors it is nearby and could
record a reversal in credit spreads and forex
markets.
Spain
 
Bob Hoye
Institutional Advisors
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