The following is part of Pivotal Events that was published for our subscribers September 7, 2011.
Signs Of The Times
"Do I wish that I had more Treasuries? Yeah, that's pretty obvious."
~ Bill Gross to the Dow Jones, August 29, 2011
"Confidence Drops to Lowest Levels Since April 2009"
~ Conference Board, August 30, 2011
In one month, the number plunged from 59.2 to 44.5 (no typo). The consensus estimate was 52.0.
"US Dept. of Energy devises security system to thwart rampant copper thefts."
We don't admire thieves, but in respect of market calls we hope they sold the copper forward. It may soon be too late.
"There is a good chance that the August 11th low was the final selling climax."
~ Business Insider, August 31, 2011
On September 9th, Prime Minister Harper addressed the Canadian troops that helped out in Libya with:
"A handful of soldiers is better than a mouthful of arguments. The Gadhafis of the world pay no attention to the force of argument. The only thing they get is the argument of force."
Some observers have thought that severe weakness in August set an important low. We wondered if it had pre-empted seasonal weakness that can start around mid-September. Our conclusion was that credit conditions were deteriorating rather quickly and that another season of heavy liquidation seemed unavoidable.
Within this we thought the sun would shine on the stock market and this would continue with precious metal weakness into Labor Day.
The discovery that all of the PhD boasts about "stimulus" were failing in Europe did not observe the August holiday tradition in France. As Sovereign Debt rates soared it seems to have advanced the arrival of the next liquidity crisis.
Since the middle of August, spreads have widened, with Baa from 180 bps to 215 bps. Investment grade corporates widened by 35 beeps in a fortnight.
High-Yield went from 603 bps to 662 bps as Junk went from 1015 bps to 1140 bps. This is on the widening trend and becoming serious.
In the money market, 3-month Libor has increased from .290% to .336%. In percentage points no big deal, but the reversal to rising in May 2007 was a warning then and it is now.
Another reliable indicator has been the gold/silver ratio. Since the low close of 43.3 on August 26 the ratio has increased to 44.7. This is confirming mounting credit concerns and rising above 47 would set the uptrend and that would say the trouble has arrived.
Usually reliable indicators are providing another warning of financial distress as the calendar is moving to the season that often records distress. Of course this condition only follows an outstanding surge in speculation.
In early January our Momentum Peak Forecaster indicated that just such a surge would culminate at around April. When the action is big in commodities, as in 1973, the recession started with the signal. In the 1980 mania in precious metals the Forecaster registered in November 1979, suggesting the mania would complete early in 1980. Eventually, the NBER determined that the recession started in January 1980 just as the play in gold and silver began to fail.
Events since April continue to suggest that a recession is underway, and it likely started in May. This could be out by a month or so, but typically the NBER makes the decision some 12 months after the melancholy event started.
The rally we expected into Labour Day was interrupted by some mini-hysteria in Europe.
Firm markets could continue into next week when seasonal strength could wane.
Back in 2007 we called for the "greatest train wreck in the history of credit". This was at a Halkin financial seminar in London in early June. The power point was prepared a week before the discovery of the Bear Stearns problem.
A little later, this page projected that credit deflation could get so bad that the lowest grade securities would eventually trade at huge discounts. Instead of the usual quote in a percentage of par, they would trade in parts per million (ppm). The very worst could trade in ppb.
In this regard, a couple of days ago Greece one-year notes were trading at 88%. Today they are at 94%, or 6 parts per hundred.