Years ago, Larry Williams used to look for a situation he called the ‘Jaws of Death’
Jaws, with a twist, from Hussman:
…the markets are presently trading on a theme that largely overlooks the potential (and in my view, the reality) of a significant U.S. recession. At the point of recognition, we may very well observe abrupt weakness in both stock prices and the U.S. dollar.
HT ClusterStock
The Vix shows equity markets anticipating a fall in volatility, but credit indicators suggest otherwise.
Are we again seeing the return of the credit/equity decouple? With interbank lending rates still sky high, there’s perhaps still a case to say equity is looking overpriced. From Bloomberg:
In a replay of the last four months of 2007, interest-rate derivatives imply that banks are becoming more hesitant to lend on speculation credit losses will increase as the global economic slowdown deepens.
Indeed, the OIS-Libor spread - a key Fed metric - is still showing elevated stress in the money markets. The spread measures the (unsecured) interbank lending rate over the market’s perception of interest rate risk and is, therefore a proxy for pure financial risk.
A narrowing to 25 basis points in the so-called Libor-OIS spread would be viewed as a positive…. Forward markets signal that won’t happen until sometime after June 2010. The premium averaged 11 basis points in the 10 years prior to August 2007.
