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Unusual
inter market trends may be reflecting a Fed bail out. Let’s face it, the sub prime market is a mess. We’ve been watch credit spreads widen since early June. That is, investment bonds have been moving lower versus safer Treasury bonds. A break below support now looks likely and foretells of more widening ahead. The credit market has finally woken up and is beginning to reprice risk.
Chart 1 - Investment Grade Bonds are underperforming Treasuries - Credit Spreads are widening The major losers out of all of this will be the small people. Investors who were caught up in the real estate frenzy and took on mortgages they had little, if any, chance of ever repaying. Remember, it was the Real Estate boom that ultimately saved us from a protracted recession in 2002 as the Fed slashed interest rates in response to the vicious Bear Market. Now it seems the tables have turned. Real Estate looks rocky and the stock market is powering ahead. So forgive me for asking but is another bailout being engineered before our eyes? We know the public is totally out of the stock market right now. The public still have their gaze fixed on the real estate market. We know that the fundamentals for stocks are not favorable and there is no rhyme or reason for overvalued stocks to be in a protracted bull market. Fact is they are! You’ve got to hand it to the money masters, they certainly seem to know their jobs. Ramp up the money supply and create another frenzy to rescue everyone who invested in bad property deals. An increased money supply causes the Dollar to drop. But that’s ok as long as you can prevent interest rates from soaring (monetizing debt) and cap the market value of Gold to ensure that inflation expectations remain mild. Voila we are now in a Fed engineered stock market bull which defies normal economic wisdom. The game will last as long as 2 important indicators hold:
Chart 2 - Industrials break resistance; Gold moving up to resistance (below); Interest Rates hitting resistance (blue line - below) Providing the Gold Price doesn’t move quickly higher (a gradual rise would be ok) and provided interest rates don’t rocket above important resistance, the clandestine money pump will be safe. Sure in time Gold will move higher as will interest rates but as long as it is gradual and over a long period of time I don’t think it will cause the market too much bother. In fact it will give market participants time to adjust themselves accordingly. The strategy is therefore to get out of cash and to into anything tangible. Gold (and Gold Mining Corporations), Oil, Commodities, Art, Collectibles and yes, perhaps even a little real estate.
This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis. CONTACT
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