Pivotal Events

By: Bob Hoye | Sat, Jul 6, 2013
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The following is part of Pivotal Events that was published for our subscribers June 27, 2013.

Signs Of The Times

"Detroit Recovery Plan Threatens Muni-market Underpinnings" "Plan to suspend payments on $2 billion of Detroit's debt threatens basic tenet of the $3.7 trillion municipal market: that states and cities will raise taxes as high as needed to avoid default."

- Bloomberg, June 16

The problem with too many cities and counties is that unions have been using monopolistic powers to rip off the taxpayer. City Hall will reduce the numbers of firefighters and police in order to keep extortionate pension plans going. The ordinary citizen is expected to service such demands without enjoying the benefits. Or should they be called privileges or prerogatives?

The ordinary citizen will discover the power of "No!" along with pending default.

"Lauren has boosted prices for her wedding-planning services by about 25% since 2009 as the economic expansion puts Americans in the mood for bigger parties and fancier locations."

- Bloomberg, June 17

We have used it before:

Like civilizations, bull markets are born stoic and die epicurean.

"China's worst cash crunch in at least seven years is an indicator of shadow lending gone awry."

- Bloomberg, June 18

"A more prudent approach would have been to wait for tangible signs that the economy was strengthening."

St. Louis Fed on the story about "tapering" the buying program.

- Bloomberg, June 21


Once again policymakers are caught between a crock and hard place. How do they continue the image of "being in control" when Mother Nature imposed a mini-panic? They talk about "Taper".

The mini-panic appeared almost everywhere, including China.

Did the Fed research department know what can happen to a speculative surge in credit markets in the not-so-merry month of May?

It is doubtful that something as simple as old market-lore is grasped by the suits at the top. The establishment still really believes that the Fed is in charge. Back in the 60s and 70s a bust follow a boom and on the recession the story would be that the Fed induced the recession to bring inflation down. That meant CPI inflation, not inflation in financial assets.

Absolute nonsense.

The 3 to 4-year business cycle has been well-documented back to the 1500s. It comes and goes as it pleases. When it is on the up interventionists look good and, inevitably, when it is down they look bad.

Variation on the shorter term also includes the cycle for share certificates and credit instruments. And when it is time for a significant change it is signaled by the credit markets.

By the last week in May we described the sell-off in bonds as the "Crack of Doom". Monday's Disorderly Credit Markets noted that initial slump had become measurably overdone. A period of relief would follow.

This seems on the path from excitement in April, reversal in May to heavy liquidation in the fall.

In the 1998 (LTCM) example, the main sell-off in lower-grade bonds began in that fateful August.

In the 1997 "Asian Crisis" liquidity problems in Thailand appeared on July 1st. As it rippled out around the world New York corporate bond traders believed the official line that the problem was "contained" and stayed long.

It hit the US corporate market like a freight train in that September.

Global credit markets have recorded a profound change and it has caught most traders, investors and central banks offside. Probably to an unprecedented degree.

The action could be volatile over the next six weeks or so, but as summer progresses more and more investors will become aware of the consequences of reckless policymaking. Not to overlook the implacable nature of the credit cycle.

Stock Markets

Senior indexes in New York were the last to be included in the big Rounding Top pattern. The S&P set its high at 1687 on May 22nd and the "test" made it to 1664 and then took out the previous low. Taking out 1560 will extend the downtrend. This could take a number of weeks.

Action in the senior indexes seems to be completing a cyclical bull market.

China and Hong Kong set tops early in the year and have been hit very hard over the past four weeks.

This seems to be extending their cyclical bear.

Over in the traditional cyclicals, Base Metal Miners (SPTMN) have extended the bear market that began in early 2011 at 1600. The last key low was 719 set in April. Monday's low was 662 with the Weekly RSI down to 27. This seems low enough to prompt a brief rally.

Financial markets have been perilous with central bankers pushing radical "stimulus" that seems to hook up when the market wants to go up. This financial historian is awe-struck by the audacity of policymakers. The audacity lies in imagining that there is such a thing as a national economy and that, because it is national, it can be managed.

Then after decades of accommodation, markets brewed up into a series of bubbles. The private sector has a long history of accomplishing great speculations on its own and created a Great Bubble that climaxed in 2007.

After all of the theorizing and editorials about Fed policy when it was time another 1929, or 1873 it was accomplished in 2007. A typical crash was also accomplished. The first business expansion out of the crash has been typically week. This has been accompanied by a favourable credit cycle that exhausted itself in May.

What has aggressive to belligerent central banking accomplished? It has not materially changed the path of financial history from a Great Bubble to a Great Contraction. What is has done is exaggerate speculative furies when Mother Nature allowed it. She also decides what will become the focus of speculation.

Since last fall this has been in credit instruments and the action became excessive in April and reversed - dramatically - in May.

Typically, this pattern for the curve (charts follow) and spreads sets up forced liquidation in the fall. This will include most classes of stocks.

Based upon the brief recovery in the credit markets the improvement in the general stock market could run well into July.

Treasury Yield Curve

Treasury Yield Curve Chart

Treasury Yield Curve

Treasury Yield Curve 2008 Chart

Hedge Fund Leverage

Hedge Fund Leverage Chart

European Bond Spreads

European Bond Spreads Chart

Stress Index

Dtress Index Chart


Link to June 28, 2013 "Bob and Phil Show" on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2013/06/doldrum-alert/



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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