by Macro Story
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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