Posted on 07/08/2010 7:06:40 AM PDT by SeekAndFind
Virtually unnoticed, the yield on long dated pan-European sovereign debt has slipped below that on equities. So what, you might say; that's what happens when shares go down and bonds go up. But in fact this reversal in the traditional relationship between bonds and equities is an extraordinarily unusual event. It's happened only three times in the past 50 years. Alarmingly, all three of those occasions have been in the past decade. What are markets trying to tell us?
There are two ways of looking at the phenomenon. Either it is an aberration, and therefore a buy signal for stock markets, or much more worrying, it marks the final death knell for Europe's 60-year love affair with equities, and therefore the start of a generalised retreat from risk that will see the economy stagnate or worse for perhaps decades to come.
I'm an optimist, so I tend towards the former view, but even I would concede that the situation looks ominous; a double-dip recession in either the US or Europe continues to seem unlikely, yet the odds are shortening fast. If the economy starts to contract again, there are plainly highly negative implications for corporate earnings.
(Excerpt) Read more at telegraph.co.uk ...
A little history for those who don’t remember ....
Today, U.S. taxes are set to march higher. From the income tax to the dividend tax, all will rise in the next year or so. Also a challenge, albeit less discussed, are the increases in state and municipal taxes in the name of reducing shortfalls in public coffers. This change represents a reversal from the tax-lowering trend of the first part of the decade.
In 1932, a similar reversal occurred. Then-Treasury Secretary Andrew Mellon presided over an enormous tax increase. The top rate on personal income taxes rose to 63 percent from 25 percent. Add in new levies on telegraph and telephone use and, in an obscenely bad error for a recession, a tax on checks. In addition, corporate taxes moved up, as did levies on tobacco. Mellon, who had earlier personally crafted a series of rate cuts, consoled himself about this switch by calling it a temporary emergency measure. The revenue was a disappointment and the economy didn’t recover.
Today President Barack Obama is applying upward pressure on compensation where he can — in federal contracts, for example. The president is being egged on by various academics. This week Christopher Edley, dean of the University of California-Berkeley’s Boalt Hall School of Law, published an article in the Los Angeles Times titled “The Economic Power of Obama’s Pen,” urging the president to sign an executive order encouraging federal contractors to pay the so-called living wage, government code for wages higher than it might otherwise have paid.
Hoover likewise advocated keeping wages high during periods of economic decline. Even while still Commerce secretary, Hoover argued that worker spending was key to fostering recovery. Shortly after the 1929 crash, the new president hauled corporate heads to Washington and exhorted them to keep wages as high as they could. Henry Ford served as cheerleader for this policy, telling the press as he exited the White House, “Wages must not come down.” In short, Hoover and Ford were Keynesians before John Maynard Keynes.
ETA, the above post was referenced to Amity Shlaes, who wrote THE FORGOTTEN MAN — a history of the Great Depression.
Wait 'till all the new taxes kick in in 2011 to see what a 'risk averse' economy looks like.
This is what Obama wants. This is in order that another "New Deal" can be imposed upon the United States.
The dollar has been slowly falling against the Euro and the Pound over the past week. Gold and silver prices have been falling as well.
falling Gold prices do not signal inflation but deflation IMHO.
The article’s main point is that those factors that you mentioned ( e.g. government sucking the economy ) are PRICED IN to the current bond market prices. Hence, it would be wise for the investor to follow what bonds are signalling.
US Treasuries are essentially a proxy for risk aversion in the financial markets.
Of course, from a fundamental standpoint, the US’s debt situation is just as bad if not worse than the European countries currently coming under fire (the only difference being we have a printing press in the US).
However, until the Sovereign Debt Crisis comes to US shores, US Treasuries will be seen as a safe haven, rallying whenever investors are concerned about the financial system.
To whit, in the last few weeks, Treasuries have broken out of a multi-year trading range. Even more importantly, they have bounced off of the former top of this trading range, indicating that former resistance is now acting as support.
In plain terms, Treasuries have gone on “red alert” sending a clear signal to the rest of the investment world that all is not well in the financial system.
The last time Treasuries were this elevated was in the depth of the 2008-2009 Collapse.
Which is why it’s critical to note that Treasuries have completely refused to believe in the recent stock market rally of the last few days. Indeed, while stocks have erupted higher rallying 5% from the 2AM low on Tuesday July 6 to 1,060 today, long-term Treasuries have barely dipped let alone begin anything resembling a correction (a sign that danger has passed).
The world bond market is twice that of the world stock market. And bond investors are a typically more sophisticated that stock investors. So to see Treasuries failing to confirm the stock market rally by remaining elevated (not falling) is a major warning sign to the bulls.
Remember, the last time Treasuries were at this level was between November 2008 and April 2009: the absolute nadir of the First Round of the Financial Crisis.
Which begs the question… do bonds know something stocks don’t?
Let’s be blunt here. Now is the time to be preparing for another potential 2008 event in stocks. The warning signs are all there. Entire banking systems are beginning to collapse (Greece, Spain, etc). We’ve already had one Flash Crash as well as numerous stock short circuits in which trading is halted because the stocks in question suddenly trade at $0 or $100,000.
Could stocks rally some more now? Yes. But that’s not the point. The point is getting ready for what will happen in the coming weeks and months. Stocks could be wiped out, in eight weeks, what took three or even six months to attain (all of the gains going back to February if not November are now gone).
The questions every investor should be asking him or herself are today:
1.Have central bankers’ policies really solved the issues that took down the financial system in 2008?
2.Do I have faith that Ben Bernanke and his ilk are in control and can manage the Sovereign Debt Crisis if it comes to the US?
3.Do I truly believe that now is a great time to invest in stocks based on what I will likely make via capital gains and dividends?
This set of questions should be followed up with a second round of more intense, personal questions:
1.What would happen to me and my portfolio if the market continued its downtrend of the last eight weeks (meaning the S&P 500 at 922 or even lower by August/ September)?
2.What would happen to me and my portfolio is we had another Autumn 2008 type event (a 20-30% collapse)?
3.What would I do if the stock market had to be closed for several months (this happened during the Great Crash/ Depression)?
I agree, I think we are beginning to enter the deflationary phase of this whole house of cards. Things are going to get very ugly very soon. (not that they aren't already)
[1.Have central bankers’ policies really solved the issues that took down the financial system in 2008?]
No, because the problem is a moral one. When a significant portion of players in the market place believe it’s perfectly acceptable to use dishonest scales, shyte happens.
Do what thou wilt is NOT the whole of the Law.
Although I really don't see that my 401k and I have any alternative to 'duck & cover'.
Bonds were considered to be safer than equities until.....Obama and his henchmen ripped off the bondholders of GM and Chrysler.
My understanding is that the “bankruptcy” proceedings for the auto companies ignored 200 years of established law.
The bond holders, including police pension funds, got ripped off, and the unions were given stock that they had no claim on.
IMHO, it was the first IMPEACHABLE OFFENSE of the Obama Admin.
The bond holders were robbed by government diktat.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.