The following is part of Pivotal Events that was published for
our subscribers June 27, 2013.
Signs Of The Times
"Detroit Recovery Plan Threatens Muni-market Underpinnings"
"Plan to suspend payments on $2 billion of Detroit's debt threatens basic
tenet of the $3.7 trillion municipal market: that states and cities will
raise taxes as high as needed to avoid default."
- Bloomberg, June 16
The problem with too many cities and counties is that unions have been
using monopolistic powers to rip off the taxpayer. City Hall will reduce
the numbers of firefighters and police in order to keep extortionate pension
plans going. The ordinary citizen is expected to service such demands without
enjoying the benefits. Or should they be called privileges or prerogatives?
The ordinary citizen will discover the power of "No!" along with pending
default.
"Lauren has boosted prices for her wedding-planning services by about
25% since 2009 as the economic expansion puts Americans in the mood
for bigger parties and fancier locations."
- Bloomberg, June 17
We have used it before:
Like civilizations, bull markets are born stoic and die epicurean.
"China's worst cash crunch in at least seven years is an indicator
of shadow lending gone awry."
- Bloomberg, June 18
"A more prudent approach would have been to wait for tangible signs
that the economy was strengthening."
St. Louis Fed on the story about "tapering" the buying program.
- Bloomberg, June 21
Perspective
Once again policymakers are caught between a crock and hard place. How do
they continue the image of "being in control" when Mother Nature imposed a
mini-panic? They talk about "Taper".
The mini-panic appeared almost everywhere, including China.
Did the Fed research department know what can happen to a speculative surge
in credit markets in the not-so-merry month of May?
It is doubtful that something as simple as old market-lore is grasped by the
suits at the top. The establishment still really believes that the Fed is
in charge. Back in the 60s and 70s a bust follow a boom and on the recession
the story would be that the Fed induced the recession to bring inflation down.
That meant CPI inflation, not inflation in financial assets.
Absolute nonsense.
The 3 to 4-year business cycle has been well-documented back to the 1500s.
It comes and goes as it pleases. When it is on the up interventionists look
good and, inevitably, when it is down they look bad.
Variation on the shorter term also includes the cycle for share certificates
and credit instruments. And when it is time for a significant change it is
signaled by the credit markets.
By the last week in May we described the sell-off in bonds as the "Crack of
Doom". Monday's Disorderly Credit Markets noted that initial slump had become
measurably overdone. A period of relief would follow.
This seems on the path from excitement in April, reversal in May to heavy
liquidation in the fall.
In the 1998 (LTCM) example, the main sell-off in lower-grade bonds began in
that fateful August.
In the 1997 "Asian Crisis" liquidity problems in Thailand appeared on July
1st. As it rippled out around the world New York corporate bond traders believed
the official line that the problem was "contained" and stayed long.
It hit the US corporate market like a freight train in that September.
Global credit markets have recorded a profound change and it has caught most
traders, investors and central banks offside. Probably to an unprecedented
degree.
The action could be volatile over the next six weeks or so, but as summer
progresses more and more investors will become aware of the consequences of
reckless policymaking. Not to overlook the implacable nature of the credit
cycle.
Stock Markets
Senior indexes in New York were the last to be included in the big Rounding
Top pattern. The S&P set its high at 1687 on May 22nd and the "test" made
it to 1664 and then took out the previous low. Taking out 1560 will extend
the downtrend. This could take a number of weeks.
Action in the senior indexes seems to be completing a cyclical bull market.
China and Hong Kong set tops early in the year and have been hit very hard
over the past four weeks.
This seems to be extending their cyclical bear.
Over in the traditional cyclicals, Base Metal Miners (SPTMN) have extended
the bear market that began in early 2011 at 1600. The last key low was 719
set in April. Monday's low was 662 with the Weekly RSI down to 27. This seems
low enough to prompt a brief rally.
Financial markets have been perilous with central bankers pushing radical "stimulus" that
seems to hook up when the market wants to go up. This financial historian
is awe-struck by the audacity of policymakers. The audacity lies in imagining
that there is such a thing as a national economy and that, because it is national,
it can be managed.
Then after decades of accommodation, markets brewed up into a series of bubbles.
The private sector has a long history of accomplishing great speculations
on its own and created a Great Bubble that climaxed in 2007.
After all of the theorizing and editorials about Fed policy when it was time
another 1929, or 1873 it was accomplished in 2007. A typical crash was also
accomplished. The first business expansion out of the crash has been typically
week. This has been accompanied by a favourable credit cycle that exhausted
itself in May.
What has aggressive to belligerent central banking accomplished? It has not
materially changed the path of financial history from a Great Bubble to a
Great Contraction. What is has done is exaggerate speculative furies when
Mother Nature allowed it. She also decides what will become the focus of speculation.
Since last fall this has been in credit instruments and the action became
excessive in April and reversed - dramatically - in May.
Typically, this pattern for the curve (charts follow) and spreads sets up
forced liquidation in the fall. This will include most classes of stocks.
Based upon the brief recovery in the credit markets the improvement in the
general stock market could run well into July.
Treasury Yield Curve
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Typically intense speculation in credit markets ends with a reversal
in the curve to steepening.
-
In May-June 2007 the curve was likely to reverse to steepening, and
it did.
-
Something similar was likely for this time this year.
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The breakout was accomplished at 180 bps at the end of May.
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The move since is impressive.
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In ordinary business conditions, a steepening curve enhances banking
spreads.
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In the face of speculative financial markets the reversal is a "Sell" signal
for commercial banks.
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Central banks are not traded on any market.
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Pity.
Treasury Yield Curve
Hedge Fund Leverage
European Bond Spreads
Stress Index
Link to June 28, 2013 "Bob and Phil Show" on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2013/06/doldrum-alert/
