Credit Spreads and Hope

I have pounded away at the gold-silver ratio, t-bills vs. long term treasuries and other indicators in an effort to get a look behind the scenes into the 'invisible' story being told by markets when they are viewed in non-nominal terms. Now that this leg of relief appears to be getting long in the tooth, I thought I would put up one of several ratios that can be interpreted as a credit spread. In this case the perceived relative safety of long term US treasury bonds vs. high yield corporate bonds (click chart to expand). I think I will start incorporating some version of this in NFTRH along with the other indicators as the story of the increased sentiment toward risk taking is of course a contrary signal.

It appears the financial apparatus is well into the process of getting back on track, pitching what can be described as high risk (to go with the high yield) garbage with buyers willing to take on the risk. The creator of that long term treasury debt, the chronic inflator known as the US government is backstopping everything, after all. This chart generated a bullish divergence for the stock market when everyone was convinced the bearishness would never end.

It would be wise for people to remember to be scared when everyone is brave and consider being brave the next time everyone is frightened. The reason I hedge on the latter is that it is no sure bet that our operating script ('B' leg down before new and hopeful highs in the market) will play out. Regardless, there is a lot of bravery going on out there in Ponzi-ville, and it should be due to terminate soon. Then we begin to watch for a would-be 'B' leg leading to 'C' up to new highs. Emphasis on 'would-be' as we want to make this mess prove itself to the bullish side. It remains a bear market after all, with potential on this rally to eventually reach the downtrend line noted on the chart, or even higher as there are longer term lines that can be drawn to higher levels. But first things first...

Comments

[johnbee:]

Credit and the spreads are being manipulated by Governments and in turn by the banks now in hock to them. So its a question of how well all the fudges, such as abolishing mark to mark, can hold the markets in line and whether anything else comes along to mess up their plans to get all values rising again, particularly housing.
Equity earnings will be shot to pieces for 2009 and people fearing unemployment will not spend until inflation in double figures makes them think they may as well spend before whats left of their savings get decimated. Governments need induce inflation to raise house prices and pay off debts, and will do so at the expense of savers. That seems to me to be the argument for equity investment in those companies who can notch up their prices and keep their margins, as where else will money go when interest rates rise with inflation to 10% and bond prices halve?
If you can't pick the right equities or guess the best currencies then buy hard assets in basic commodities such as agriculture and oil as they are the best defence. Gold may rise but who knows its real value as it can't be equated to any other value but fear. The public may well be banned from holding it as in the past, since by gold rising in price it effectively shows up the devaluation of paper currencies from inflationary acts, which is not to the liking of any Government.

Apr 30 09:45 AM