A Familiar Pattern

While the two markets have loosely tracked one another -- which makes sense given that both are risky asset classes whose fortunes are closely tied to the health of corporate bottom lines and the economy as a whole -- the stock market has generally outpaced the high yield (e.g., "junk") bond market since the S&P 500 index bottomed in March 2009.

That said, the last time the performance gap between the two was as wide as it is now was in the summer of 2007, just before things fell apart.

Back then, as some of you might recall, riskier credit markets began to falter as it suddenly dawned on fixed-income investors that the jig was up for a bubble-engorged economy and a financial system corrupted by recklessness and greed.

Equity investors, meanwhile, remained oblivious to everything that was going on around them and drove the S&P 500 to a new record high in October of that year.

Reality took hold after that, and share prices began a sickening 17-month slide, cutting the value of the market by more than half.

The obvious question, of course, is whether we are on track for something similar, or is it different this time?

Comments

[Bam_Man]

This time it really is different, Michael.
Both markets are beginning to anticipate a MAJOR increase in inflation due to the massive money printing that has been going on globally for the past four years. Some Central Banks (Brazil, India & China come right to mind) are EASING in the face of already high inflation to keep their bubble economies from imploding. Stocks will be "much less bad" as an asset class when the serious inflation kicks in and Central Banks do nothing but tell us it's "transitory". Bonds will be toast.

[roger]

For the time being,we have deflation in the
real estate market, and inflation in the
energy sector,inflation in the food market
and deflation in the electronic world,
inflation for the CEO's,deflation for labor,
and the dollar is rapidly melting on the
compost pile.

[brian]

Money can be based on "In God We Trust" or it can be based on "We The People." I repeat myself. Money can also be based on metal or some other commodity. A corn standard? A rice standard? Or just float?

[Central Bank News]

The equity risk premium is near all time highs, mostly because of the bond bubble which has been supported by central bank policy, among other things...

[Seadragonconquerer]

Dollars, and any paper asset denominated in dollars (stocks, bonds, ETFs, etc.) will - once the IranWar begins and oil spikes then sticks at >$200/barrel - burn away very quickly. I'll just quote Ann Barnhardt here : "get out, get out, get out" while there's still time.

[Rolf Norfolk]

Hi, Michael

Leo Kolivakis repeatedly forecasts what he calls a "melt-UP" as as result of monetary inflation, e.g. yesterday: http://pensionpulse.blogspot.co.uk/2012/03/waiting-for-market-to-correct.html

... your comments?

[A Lipstick World]

The Fed's Stress Test Was Merely The Latest "Lipstick On A Pig" Farce

Last week we learned two things: that Jamie Dimon specifically telegraphed he is now more powerful than the Fed, and that the US economy is back down to the same March 2009 optical exercises in financial strength gimmickry to stimulate rallies. Recall that on FOMC day, the market barely budged on Bernanke's ambivalent statement and in fact was in danger of backing off as the readthrough was that of no more QE... until JPM announced a major stock buyback and dividend boost. The catalyst: a successful passing of the latest and greatest Stress Test, which according to experts was "much more credible" than all those before it. Wrong. The test was merely yet another complete farce and a total joke. But as expected, the test had its intended effect: financial shares soared across the board, and banks promptly took advantage of investors and robot gullibility to sell equity into transitory strength. Bloomberg's Jonathan Weil explains.

How stressful were the Fed’s tests? One anecdote stands apart: Regions Financial Corp. (RF), which still hasn’t paid back its bailout money from the Troubled Asset Relief Program, passed.

The footnotes to the company’s latest financial statements tell the story. There, the Birmingham, Alabama-based lender disclosed that the loans on its books were worth $8.1 billion less than what its balance sheet said, as of Dec. 31. By comparison, the company’s tangible common equity, a bare-bones measure of net worth, was $7.6 billion.

So if it weren’t for the inflated loan values, Regions’ tangible common equity would have been less than zero, with liabilities exceeding hard assets. In short, the test was a joke, although it had its intended effect.

http://www.zerohedge.com/news/feds-stress-test-was-merely-latest-lipstick-pig-farce?

[Blurtman]

The last financial meltdown was precipitated by the RE bubble and securitization of toxic debt. The TBTF's are federal institutions that perform the USG's bidding by keeping debt fueled appearance of GDP growth going. Which is why no one is going to jail. They are working for the USG.

Regarding equities, one thing to do is to look at current metrics versus historical metrics. The TBTF's have a lot of cheap USG money sloshing around, and as in the past, the money will cycle through equities, bonds, PM's and even RE. As a small time speculator/short term investor, you have to get there before they do, and worry when the rug gets pulled out from underneath, once again.

[Christcommonwealth.blogspot.com]

Good post! The BEA's Balance on Goods and Services 3/9 release shows a similar trend with the trade gap:
http://bea.gov/newsreleases/international/trade/2012/pdf/trad0112_fax.pdf

[roger]

Question of oil reserves.
Contrary to popular belief,economy and politics
are inseparable.Economic sanctions= political
decision searching for economic advantage.
Economic sanctions on Iran are beneficial to BRIC's
and very detrimental to USA,UK and to a lesser degree
to Europe,a stupid move,chess players call it a BLUNDER.

[No seat at the table for piss ants]

March 18 - The Author of "Power, Inc."

As this year’s elections become more of a merger between a casino and
a circus, with billionaire ringmasters offering competing clown shows,
we begin with a discussion about who really runs our country and the
world. The CEO and Editor-at-Large of Foreign Policy Magazine, David
Rothkopf joins us to talk about his new book “Power, Inc. The Epic
Rivalry Between Big Business and Government – and the Reckoning That
Lies Ahead”.

http://ianmasters.com/content/march-18-author-power-inc-empire-retreats-iran-and-russia-are-winning-syria

[Expendable you]

Another Hidden Bailout: Helping Wall Street Collect Your Rent
Here's yet another form of hidden bailout the federal government doles out to our big banks, without the public having much of a clue.

This is from the WSJ this morning:

Some of the biggest names on Wall Street are lining up to become landlords to cash-strapped Americans by bidding on pools of foreclosed properties being sold by Fannie Mae...

While the current approach of selling homes one-by-one has its own high costs and is sometimes inefficient, selling properties in bulk to large investors could require Fannie Mae to sell at a big discount, leading to larger initial costs.

In con artistry parlance, they call this the "reload." That's when you hit the same mark twice – typically with a second scam designed to "fix" the damage caused by the first scam. Someone robs your house, then comes by the next day and sells you a fancy alarm system, that's the reload.

Read more: http://www.rollingstone.com/politics/blogs/taibblog/another-hidden-bailout-helping-wall-street-collect-your-rent-20120319#ixzz1paBZ72or

Bales Faced Losing Houses as He Fought 6,700 Miles Away

http://www.bloomberg.com/news/2012-03-19/bales-faced-losing-two-houses-as-he-fought-6-700-miles-away.html

[Marion Shaw]

Originally in the United States of America, an individual
could not vote if he did not a)own property or b)
could not read or write. This presumed that voting would
matter and not sheer force and might at the official
exchange of power. Since taxpayer money (fed fiat?)
underwrote the fradulent real estate boom in the first
place, perhaps it is only fair and equitable, that no
individual or investor club that profited from the boom,
can now move in and control the "bust." In other words,
any group trying to buy up foreclosed properties now,
must demonstrate that they owned only legitimate property,
prior to the "boom" and can read and write a clear
statement on the fundamental principles of the United
States Bill of Rights, as attached to the Constitution.

[Does this normally happen in a recovery?]

More than 20,000 California teachers pink-slipped

More than 20,000 public school teachers in California opened their mailboxes over the last few days to find a pink slip inside as districts met the state’s Thursday deadline for dispensing the dreaded news to the educators that they may not have a job in the fall.

The layoff notices are preliminary, the districts’ best guess at the amount of money they will get to educate kids next year after the Legislature concludes its annual budget fight this summer. But a proposed tax measure on the November ballot offers more uncertainty than usual.

Districts won’t know until two months into the new school year whether voters will approve a tax increase that would prevent a $4.8 billion trigger cut to education funding, as proposed in the governor’s budget.

http://edegrootinsights.blogspot.ca/2012/03/more-than-20000-california-teachers.html