While investors have cheered China's Q2 GDP growth of 7.9% as evidence of the country's policy success, they may be missing a hugely destabilizing spiral in monetary policy that is generating it. The country looks set this year to generate new bank lending equivalent to over 30% of GDP, or twice official targets, while money supply is growing at an annualized 26%. That's enough to make even Alan Greenspan in his bubble blowing heyday blush, and bubbles are blowing aplenty in China. The quality of most of these rapid fire loans dictated by Beijing is surely abysmal. About $170 billion of Chinese bank loans are estimated to have been funneled into the Shanghai stock market in the first five months of 2009, or 20% of the total new loans banks made in that time period. Is it any surprise that China has just surpassed Japan to become the world's second largest equity market, and the best performing this year?
I suspect another large chunk of that lending has found its way into speculative commodity stockpiling, as well as the real estate market. It's a bit rich that Chinese officials are criticizing US economic policy when they are are essentially following the easy money credit boom model in order to forestall a cyclical economic recession. China suffered a record yoy fall in exports of 26.4% in May, and Beijing has ramped up money supply growth partly to prevent the US dollar from falling below 6.80 Yuan, to sustain the country's comparative advantage amid weak global demand. China can certainly achieve its talismanic 8% growth target by throwing vast resources into mechanical short-term growth objectives, but the question is whether these policies are sustainable or simply delay the necessary re-balancing of the economy away from manufacturing and infrastructure investment toward domestic consumption.
Investment productivity remains appalling, and has been declining for a decade; it is very likely much of the stimulus spending will be a total waste. Far from 'leading' a global recovery (unlikely anyway as it only comprises 8% of global GDP), China will be among the last countries to escape from the effects of the global crisis, being trapped in a deflationary trap of chronic export overcapacity as its foreign consumers deleverage over the next few years. It seems doomed to repeat Japanese policies of the early 1990's, which left that country carpeted in concrete but slumping back into recession.
This article continues at www.deadcatsbouncing.com
Friday, 17 July 2009
China: Monetary Policy Spirals Out of Control...
Wednesday, 15 July 2009
US Banks: Commercial Mortgage Crisis Looms...
Although I would expect financials to lead the final phase of this bear rally to my longheld target of around 1000 on the S&P, given the very supportive market conditions engineered by the Fed and other central banks to boost operating earnings, the medium term risks of a wave of new defaults hitting bank balance sheets are rising. As the ratings agencies belatedly find religion on default risk, S&P recently announced radical changes to its methodology for assessing the appropriate ratings for Commercial Mortgage Backed Securities (CMBS): 'It is likely that the proposed changes, which represent a significant change to the criteria for rating high investment-grade classes, will prompt a considerable amount of downgrades in recently issued (2005-2008 vintage) CMBS. Classes up through the most senior tranches of outstanding deals are likely to be affected.' Commercial mortgages originated in 2006 and 2007 account for about 65% of the loans currently on rating agency watchlists for downgrade, comprising $47.7 billion of 2006 loans and $55.3 billion of 2007 loans.
During those years at the peak of the credit boom, lenders regularly underwrote mortgages based on collateral properties' projected property cash flows, as opposed to actual cash flows.And those projected cash flows in many, and perhaps most cases, have failed to materialize. The drop in cash flow resulted in debt service coverage ratio (the minimum ratio of cash available to the amount needed to pay interest and required principal pay-downs.) What's interesting is that a large portion of the earlier commercial mortgages did not require principal amortization.
The chart below details debt outstanding by year of origination, highlighting the unprecedented boom from 2004-7 when annual volumes almost tripled to $300bn, followed by collapse since. Delinquencies are likely to hit 5-6% in 2010, implying a huge new wave of writedowns on already stressed US bank balance sheets.
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Wednesday, 1 July 2009
Market Timing Beats Diversification as an Investment Strategy...
Is diversification dead? Many investors, notably university endowments and pension funds, have been guilty of grossly underestimating the cross correlations in the supposedly diversified assets they hold, leading to huge losses in 2008.They have been guilty of slavishly followed academic portfolio theory, while ignoring market reality. Since the mid 19990's, leading endowments like Harvard and pension funds like Calpers have diversified into alternative asset classes such as commodities and hedge funds to achieve the investment Holy Grail of higher returns at lower risk, based on historical asset relationships. However, their very attempt to collectively broaden their investment remit began to change those relationships between assets. As these huge new investors gatecrashed relatively illiquid commodity markets in particular, they inflated a classic speculative bubble, which attracted most of the hedge funds they had invested in at arms length. They were chasing simple out-performance of the market in the form of investment Alpha, but actually accidentally overdosed on momentum chasing Beta.
Diversification is illusory when the entire financial system is imperilled and systemic factors and 'tail risk' dominate, making the overall portfolio of many professional investors riskier than it appeared based on mining historical data. Furthermore, there has been implicit leverage operating across many markets, particularly via hedge funds, that has been exposed painfully and pulled asset dynamics together. Rather than trying to construct spurious diversification, market timing driven by a rational macro perspective has never been more important, and is perfectly feasible with the right framework. Last September I recognized and wrote repeatedly of the divergence between credit and equity markets as hugely bearish for the latter. This February, the extreme divergence in standard deviation terms of leading equity markets from their long-term averages gave a bullish stance a very high probability of success. Below I've calculated asset correlations via leading ETFs in the last 3 months to June 30th; the larger the positive number between two assets, the worse the diversification effect and vice versa; for instance oil is 83% correlated with emerging market equities, so holding both is effectively doubling your bullish bet, whereas US small cap stocks and oil movements are only marginally related. So what are the implications for portfolio construction?
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Friday, 26 June 2009
US Savings Rate Surges Higher...
Today's announcement that the US savings rate has hit 6.9%, the highest in 15 years (albeit boosted by transfer payments), confirms my view that we are seeing a huge cultural shift in US consumer behaviour. One of the mysteries of the slump has been how international trade volumes have collapsed far faster than reported growth would imply, and that would be explained in part if US consumer spending had been even higher in the boom years than officially reported, and thus the retrenchment as cash savings soared has sent shock waves across Asian and European exporters. Are US personal savings even higher than the 6.9% annualized rate reported for May by the BEA?
The circumstantial evidence certainly suggests as much, notably the relative ease with which the Treasury is funding deficits despite a marked loss of foreign interest beyond the very short duration market. The reported personal savings rate would finance a $600bn deficit, plus another $400bn from the corporate sector, leaving about $800bn to be funded by foreign central banks and private buyers. But if personal savings are already at the levels I forecast last Autumn in the high single digits, it suggests that the pressure to attract foreign capital flows is not as great as markets currently assume.
Between 2000 to 2007 US consumer debt grew as much relative to income as in the previous 25 years, and that huge leverage is now being unwound, which will be the key global economic trend in coming years. Each percentage point on the savings rate translates into about $100bn flowing into the financial system to be invested. I've maintained that a key impact of the crash of 2008 would be to make the US more financially self-sufficient, particularly as the trade deficit evaporated with lower consumer spending.
This article continues at www.deadcatsbouncing.com
Wednesday, 24 June 2009
Agriculture in a Secular Uptrend...
Last June, I wrote in Food: What's the Chinese for 'Big Mac? that: 'An imminent bursting of the investment bubble in industrial commodities from copper to oil will drag the agriculture complex in its wake' as indeed it did, but a year on, the fundamental long-term story remains compelling. For agriculture, as for energy, two decades of declining real prices have led to huge underinvestment that is now being revealed by relentless demand pressures. In 2008, the world's urban population equalled the rural for the first time in human history. China also became a net food importer for the first time ever. Overall, world food supply and demand remain precariously balanced. A variety of factors point to serious food shortages emerging over the next decade, with demand for food forecast to double over the next 25 years despire reduced availability of arable land and water. For the first time in history, urban demand for water is outpacing farm demand throughout the world and water tables are falling across key producing regions . Globally, we are losing about one per cent of productive land each year because of degradation and urban sprawl, notably in southern China.
Arable land per capita has essentially halved from 0.42 hectares per person in 1961 to 0.22 hectares per person now. Optimists expect innovation to bridge the gap, and it's possible that developments like genetic engineering and smart irrigation may boost productivity, but as international funding for agricultural research has been stagnant in real terms since the early 1970s , I wouldn't bet on it. While political factors that have seen productive land in areas like the Ukraine and Zimbabwe lie fallow may abate, the impact will be marginal overall. Up until the 1960s, increased food demand was met by increasing farmland under cultivation. Then, we began trying to meet demand by increasing yield via fertilizers, irrigation, and better, if more homogenous, seed varieties (one of the downsides of this has been a loss of resilience, as the same varieties are grown worldwide, and 80% of the global wheat planting area is vulnerable to the UG99 wheat fungus, now spreading rapidly in Africa). It worked to the extent that between 1975 and 1986 yields for wheat and rice rose 32% and 51% respectively, the so-called 'green revolution'. However, since then, these techniques have stopped producing increased yields due to adverse feedback effects: you can't spray fertilizer and irrigate fields beyond a certain point without damaging the land, thus reducing yields. Meantime, the shift to a diet higher in animal proteins in Asia, as real income per capita rises, is putting severe pressure on global supplies.
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Friday, 19 June 2009
Will Healthcare Costs Burst the US Debt Bubble?
As frantic (but ultimately doomed) efforts to reflate the decade long credit bubble continue, total US government debt, including state and local, has reached 100% of GDP, up from 72% in 2000 and just 45% back in 1982. Note that this figure doesn't take account of the bloated Fed balance sheet, since the convention is to treat the financial system bailout as a series of asset exchanges; it can be argued that since most of the bank assets the Fed swapped Treasury bonds for are worth a fraction of the exchange value, this understates public liabilities. It is also before plunging tax revenues as a result of the current recession fully impact public budgets, and the $787bn stimulus plan begins to be spent (the vast bulk of it on social programs rather than productivity enhancing infrastructure and research). Adding in corporate and consumer debt takes the US leverage ratio to 375% of GDP (from 150% back in 1982). Which brings us to the thorny issue of health care reform. The US spends $2.5 trillion or just under 18% of GDP on health care. This compares to 11% spent in notoriously hypochondriac France and almost double the 9% in the OECD as a whole.
Annual growth in health care costs has exceeded growth in US per-capita GDP by over 2.5% over the past 50 years, with exponential acceleration over the past decade. Medicare and Medicaid, the publicly funded parts of the US health care system, cover only 30 per cent of Americans, yet will suffer deficits of trillions of dollars in the next decade if present trends persist. From an economic perspective, health care is not a 'normal' good, where demand responds rationally to price signals or utility so some form of rationing is necessary to avoid disproportionate 'consumption' of its services.
The U.S. system’s overall quality of care lags that in Europe on population-adjusted mortality and morbidity results (notably maternal and infant mortality) and life expectancy has stalled in recent years; despite cutting edge innovation, America gets poor value for money from its gold plated medical system. Under the new plan, millions of workers would get health cover from an insurance exchange rather than from their employer (although amazingly 37m would still be left totally uninsured by 2019). In other words, fewer workers would receive employer-sponsored health insurance. The CBO assumes that employers would still compensate those workers at market rates, but more of that compensation would be in the form of wages and salaries. That’s crucial from a revenue perspective because wages and salaries are subject to income and payroll taxes, but employer-sponsored health insurance is not. Otherwise, total reform costs rise to 10% of current GDP over the next decade, on top of the huge stimulus and bailout costs accumulated. As I wrote back in March in US Debt Burden: Negotiate, Inflate or Repudiate?, there comes a tipping point at which creditors lose confidence in a country's ability and discipline to grow its way out of debt. This plan, however well-intentioned, may bring that moment closer.
This article continues at www.deadcatsbouncing.com
Wednesday, 17 June 2009
Emerging Markets: Decoupled or Deluded?
Emerging market equities (and indeed bonds and currencies) have surged in the global flight from safe assets and increased liquidity. The relatively more optimistic growth outlook for these economies has analysts dusting off the 'Decoupling Theory' (more of a marketing catchphrase than an economic theory in my view). India and China are expected to grow at or above 5% this year, contributing the bulk of global growth even as most of the advanced economies remain deep in recession. Investor inflows into emerging markets have surged dramatically; in the three months after the March lows, they exceeded those for all of 2006, and already central banks are intervening to build international reserves again. There is no question that these markets had become fundamentally cheap at the lows, having sharply underperformed developed world markets in 2008. While the S&P 500 Index slumped 38.5% in 2008, Brazil was down by 41.2%, Russia fell 72.4%, India 52.45% and China lost 65.39% of its market value.
Brazil, Russia India and China (BRIC) hold a total of $2.8 trillion in international reserve assets, about 42% percent of the world's total. They comprise about 15% of the world economy, 40% of the world’s population and output (in purchasing power parity terms), and thus there is a widespread belief that the group has the potential to lead global economic growth. China has been a particular darling of the decoupling theorists; despite accounting for just 8% of the global economy, and not yet quite matching Japan's economic weight in dollar terms , it has become an article of faith that China's no-holds barred stimulus response can lead us out of this downturn (and the current 26% annualized money supply growth makes the Fed's efforts seem half-hearted).
That seems a bizarre assumption, when China has been critically dependent on US consumer demand and investment spending (up 40% yoy in May) of very dubious productivity. Chinese domestic demand has grown slightly from a weak base, encouraged by government subsidies for rural consumers of white goods and electronics. Most of the stimulus is leaking into rampant speculation however, leading to commodity stockpiling and renewed stockmarket and real-estate investment by companies being force-fed government mandated bank loans, rather than a real increase in domestic final demand. Current GDP growth statistics are highly suspect, and the reality is probably about half the reported levels.
This article continues at www.deadcatsbouncing.com
Friday, 12 June 2009
Who was Smuggling $134bn in US Bonds into Switzerland?
Sometimes a bizarre event seems to capture the madness of the times, and this news from Bloomberg fits the bill. A couple of Asians carrying Japanese passports have been arrested by Italian border police with a case load of non-negotiable US bearer bonds to the value of $134bn. It's not as crazy as it sounds. The Fed did actually issue bearer bonds up to the value of $500m each until the late 1960's (when electronic record keeping superseded them), and these look on initial examination like the genuine article. If they are real, they could only have come from a handful of countries with sufficient dollar reserves to have accumulated such a huge sum, notably China and Japan. In the much more likely event they are fakes, it would be the biggest such operation in history, and would almost certainly imply state involvement, with North Korea the prime suspect. Either way, even in the context of the trillions we have become accustomed to seeing tossed around in bailout plans, we're talking serious money.
The significance of this story is that it highlights the very topical importance of retaining investor faith in a fiat currency; if the supply of money is suddenly perceived to be vastly higher than believed, whether as a result of policy or widespread fraud, confidence can be badly shaken. If this was another crazy North Korean forgery scheme, it gets close to a casus belli on top of the relentless provocation of the US in recent months. If, in the less likely but just about possible case that an Asian country were genuinely but secretly attempting to dump dollar paper for other assets, the implications are very disturbing for international markets.
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Wednesday, 10 June 2009
Geithner Toxic Asset Plan Collapses: Will US Banks Follow?
Back on 25th March, I wrote in regard to the Geithner toxic asset PPIP scheme that:
'The key issue isn't investor appetite, but bank reluctance to face up to the true market value of their portfolios; less than 20% is currently marked to market, the rest at par or marked to model. Will they really sell into auctions that will explicitly confirm the inadequacy of their capital positions and undermine the credibility of their internal risk models?'
Well, now we have our answer; they won't. Astonishingly, the Treasury is quietly shelving the PPIP scheme, hoping that $100bn of equity issuance (including the imminent Citi deal) and the boost to earnings from a steep yield curve and economic recovery will somehow be sufficient to bolster bank balance sheets.
That looks quite unbelievably reckless to me, and pretty much guarantees another solvency crisis sooner rather than later. Of the ten banks now returning TARP money, eight had been pressed by the government to take funds in October, amid efforts to shore up the banking system. Although some individual institutions now claim that they took the money unwillingly, government intervention was necessary to prevent the entire system from collapsing as trust between banks evaporated as they all held unknowable quantities of impaired derivative assets; we were literally hours from systemic financial meltdown.
Even today most banks remain plugged into government life support systems. Central banks still provide generous collateral rules for borrowing, in an effort to provide banks with liquidity. Although some banks have managed to issue debt without government guarantees, the global banking system needs to refinance some $25.6 trillion of wholesale funding by 2011: without an implicit state back stop this would be impossible. And the value of banks’ assets is being sheltered by central banks’ asset purchasing programmes and in some cases flattered by more generous accounting rules. The fact is that the US has a dangerously undercapitalized banking system even now after huge equity issuance, that is being spoon fed by Fed policy to earn its way back to health. The risk is that there simply won't be enough time before the next surge in write-offs from prime residential mortgages and commercial MBS hits those fragile balance sheets.
This article continues at www.deadcatsbouncing.com
Friday, 5 June 2009
US Unemployment hits 9.4%...that's Bullish, Right?
The US economy has now lost six million jobs since the recession started in December 2007, with most of those losses occurring in the last six months. The record of 17 successive monthly job losses matches that reached during the 1981-1982 recession. Clearly, the latest employment data support the view that we are bottoming out, but while the rate of decline in unemployment (as in many economic statistics from trade to industrial production) is abating, current elevated levels will underpin the new culture of thrift apparent among US consumers. The GM/Chrysler bankruptcy will hit jobs this Summer; although manufacturing only employs tens of thousands, auto dealerships employ about 1m people in the US. The savings rate, already at 5.7% as of April, is likely to hit 7-8% by year end. In fact, when marginally attached and involuntary part-time workers are included, the rate of unemployed or underemployed workers hit 16.4% last month, up from 15.8% in April and almost twice the level of a year ago.
On that basis, it's unsurprising, but also unsustainable, that government transfers have now reached over 16% of personal income, up over a third in a decade. While the terrifying freefall sensation engendered by last Autumn's Lehman collapse and TARP fiasco is now over for the US and global economies, we are going to level out at a much lower altitude. There can be no return to the leverage fuelled boom conditions of 2003-7, given the scale of the aggregate debt burden faced by the US at about 400% of GDP. A US recovery will be grindingly slow and capped at maybe 2%, suggesting unemployment will almost certainly remain near double digits through 2010 as projected by the CBO . One slight positive is the declining demographic trend in new labour force entrants, although medium-term this will likely add fuel to the inflationary barbeque being cooked up by central banks from China to the UK. The key question is whether a slowing rate of decline in economic statistics is sufficient to justify the huge investor inflows into risk assets such as emerging markets and commodities, or whether we are simply seeing a mini-bubble echoing that of early 2008 which will be burst by sobering economic fundamentals.
This article continues at www.deadcatsbouncing.com
Wednesday, 3 June 2009
Oil Price Surge: Deja Vu?
As we are now seeing an 'echo' of the huge spike in oil prices that in my view precipitated a US recession as much as the implosion of the credit markets, it's worth revisiting the 2008 bubble in energy prices. The historic oil price shock of 2005-8 was triggered not by a supply interruption like that of the 1970's but simply by stagnating supply in the face of soaring demand, reducing the daily supply cushion to uncomfortably low levels at 1-1.5m b/d (now up to 5m plus) and magnifying the potential impact of any threatened supply disruption , be it from Nigerian militants or a Gulf Hurricane. The impact on prices was exacerbated by a speculative mania that gripped the poorly regulated and opaque energy markets from late 2007, creating a parabolic blow-off move to the $147 high last July. Crucial to this whole destabilizing episode was the role of Saudi, which was no longer willing to act to regulate prices (production actually fell in 2007) whether through policy (and Crown Prince Abdullah spoke in April 2008 of 'leaving it in the ground for our children') or the much rumoured degradation of their key Ghawar field.
On the demand side, Chinese consumption had been growing at 7% pa for two decades, and was 870k barrels higher in 2007 than 2005 (imports of 3.6m b/d), while over the same period of strong economic growth, daily consumption fell 122k in the US, 346k in Europe and 318k in Japan in response to soaring prices. World GDP grew 4.9% between 2003-7, against 2.9% annually in the 1990's, pushing the equilibrium price for oil sharply higher in the context of stagnant supply and that 'fundamental' price was probably just sub $100. On July 17th last year, I wrote: 'As US energy demand is now slumping (both natural gas and gasoline), Asian demand growth has peaked, and 800k b/d of additional Saudi supply is coming on stream, I'm expecting $100 to be tested by the Autumn...any re-regulation moves to limit index fund buying by the CFTC will speed the slump in energy prices.' Ultimately, demand elasticity proved higher than the bulls expected, and US consumption began to collapse even before the financial crisis last Autumn; energy as a share of US total consumer spending had risen from sub 5% to 7.5% in three years, effectively a tax increase on already stagnating incomes. Changing fundamentals alone cannot explain the move in crude oil from $92 in December 2007 via $147 in July 2008 and then to $40 by December, although the key driver was undoubtedly the flatlining production at 85m b/d that resulted from two decades of underinvestment. The question is whether now, with well over 100m barrels of oil held offshore by speculators betting on the steep contango structure evident until recent weeks, crude has run dangerously ahead of fundamentals.
This article continues at www.deadcatsbouncing.com
Thursday, 28 May 2009
China Hedges Against US Inflation...
That China has had serious misgivings about recent Fed actions is no secret, but their massive accumulated reserves (about 66% of their total foreign holdings) have left them captive to US policy. The last thing they want right now is to precipitate a crisis of confidence in the dollar by official statements or action, but Beijing is acutely aware that it will be the biggest loser from manufactured CPI inflation to erode the crushing US debt burden. On 27 March I wrote: 'Near term, a combination of growing private sector savings and Fed manufactured inflation will erode the consumer debt mountain, but probably not fast enough to avert a public debt funding crisis sooner or later in the long period of broad economic stagnation that seems the most likely outlook.' As markets accept the reality that trend US GDP growth is now at best 2% medium-term, sooner is a good bet. China's portfolio strategy of focusing new investment on the most liquid short-duration paper and exiting its Agency exposure seems to reflect those risks. But might China be about to embark on a more radical step to reduce its dollar exposure?
Friday, 22 May 2009
Bond Market Rediscovers Inflation...
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Wednesday, 20 May 2009
Bear Rally: Too Much, Too Soon?
Having called for a ferocious rally from extreme oversold conditions in equities back in March, my current caution on the speed of the recent advance is inspired by a keen sense of history and market psychology. The 2007-9 bear market in equities has been unusually severe but it has also been unusually short by the standards of previous big bears, as detailed in the table and chart below. This suggests that a period of base-building will be necessary before markets can embark on a sustained recovery. The table compares the fall in the Dow Industrials between October 2007 and March 2009 with the seven biggest bear markets of the last century. The peak-to-trough decline of 54% exceeds every prior downturn except the depression bear of 1929-32, when prices slumped by 89%. It is remarkable that the NASDAQ decline 9 years after the tech bubble peaked is actually larger than the fall in either the Nikkei or Dow at an equivalent stage of their generational bear markets.
The falls in the six other bear markets ranged from 45% to 52%. Prices seem to find a floor after a decline of about a half. This was true even in the 1929-32 bear: after a 48% drop between September and November 1929, equities rallied by 48% before embarking on a further prolonged slide. A recovery from the levels plumbed in March this year was clearly predictable on historical patterns. If the bear market ended in March, however, it will have been only 17 months in duration, five months less than the shortest of the twentieth century bears.
This implies that there may be more work to do on the downside, at a minimum in terms of time if not price, before a sustained advance can credibly begin. It must be borne in mind, however, that the huge boom in leverage that drove economic and earnings growth in recent years (over $5 of debt for each increment of US GDP) cannot be repeated, and on the contrary sustained deleveraging by the US consumer and banking system will be a major headwind constraining a recovery. Some of the prior bear markets show little resemblance to the recent decline. The 1909-14 and 1937-42 downturns were influenced by world wars and a repeat of 1929-32 is unlikely under the Bernanke Fed; policy mistakes made in the early 1930s have so far been studiously avoided. Some respected financial and economic analysts argue that equities experience severe bear markets at the end of 30-year economic cycles, and thus place the recent decline with the 1919-21 and 1973-74 bears, which also occurred around 30-year cycle troughs. (Equity market behaviour around the 30-year low in the 1940s was distorted by the war.) Using market history as a guide, how probable is a retest and even a breach of the March lows? Certainly more likely than the consensus assumes...
This article continues at www.deadcatsbouncing.com
Friday, 15 May 2009
Tumbling Swap Spreads Underpin Recovery Outlook...
When doctors seek to check the vital signs of a patient, they have a roster of standard checks such as temperature, pulse, blood pressure etc. Economists equally have a data checklist that helps forecast the economic outlook, although it is much more variable and determined by personal preference. Personally, I look at things like the Euro/Yen rate and swap spreads (a derivative reflecting the difference in coupons between corporate and government bonds of equal maturity) as a shorthand for risk appetite. The 2 year swap spread over Treasuries has tumbled from the extremes seen at the height of the market panic last Autumn to reach levels not seen since early 2007 at about 40bps (see first chart below). This has been paralleled by a dramatic fall in high-yield bond yields (second chart), which have halved since December, albeit still elevated by historical standards. I highlighted the narrowing of swap spreads back in February as a bullish sign, and predicted that this, along with outperformance by emerging market equities and commodities, should prove a precursor of an improvement in other risk assets from high-yield bonds to US equities. So where to now, after an historic rally in highly geared recovery plays?
This article continues at www.deadcatsbouncing.com
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