high yield bonds

Inflation Monitor – January 2016

Inflation Monitor Summary – Composite Ranking

Inflation Monitor Summary December 2015

* The Inflation Equilibrium is a quick summary for the whole data series of the inflation monitor. If you don’t like statistics, this is the chart for you.


Inflation Monitor – January 2016 – Introduction


Happy New Year. I hope you enjoyed your holidays with lots of eggnog and holiday cheer.

2016 has started with a bang… or rather a thud. The US equity markets have had their worst start to the new year ever. I guess you could say that the thud has not happened yet since the US stock markets are still falling. The Chinese stock markets have gotten all the blame, but I think the drop in equities is overdue.

In week one, S&P 500 (-6%), NASDAQ (-7.3%), and Dow (-6.2%). Gold surprised to the upside +3.1%.

End of week two, S&P 500 (-8%), NASDAQ (-10.4%), and Dow (-8.2%). Gold is still up 1.8%.

If you have been following this Inflation Monitor for the past year you will know my thoughts on the markets. We saw strong deflationary data last year. Not surprisingly, no one noticed. The fact that it took the equity markets this long to react to this data is really the only surprise I see.

If you have not read my 2015 recap, then now is a good time to read it. Last year the S&P 500 ended with a performance of -0.7%, which is surprising since many blue chip companies were down between -10% & -20% for the year. If you did nothing but look at the index, you would have missed the large dislocation of the index performance and the performance of the underlying stocks.

The risk you should consider this year is contagion. This is the risk of assets selling off because other assets are selling off, having very little to do with underlying fundamentals. For example, if the high yield bond market continues to sell off or worse yet, crashes, then the investment grade corporate bond market may also sell off. This in turn could lead to a sell off in equities and other assets. The spread of this contagion is not knowable, but you should be aware of this risk.

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2015 Recap: High Yield Bonds, Instability, and Financial Contagion

2015 recap

“It’s tough to make predictions, especially about the future.” -Yogi Berra


Is this the start of a high yield bond rout that many bond experts have been predicting?

Is the S&P 500 performance this year a good indicator of the overall market?

Will instability in the bond market spread to other asset classes?

What is the blueprint for the next financial crisis?

These are all questions that clients have asked recently and I thought this would be a good chance to discuss these issues as a wrap up of 2015.

Lets start by taking a look at what has happened this year, where we stand today, and try to pass some judgement on what could happen in 2016. Normally I don’t write about “predictions”. Yogi Berra was a wise man. However I think this post is relevant to the nature of the markets and the growing instability that is occurring under the surface.

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Inflation Monitor – October 2015


Inflation Monitor Summary – Composite Ranking

Inflation Monitor - Summary Oct 2015


* The Inflation Equilibrium is a quick summary for the whole data series of the inflation monitor. If you don’t like statistics, this is the chart for you.


Inflation Monitor – October 2015 – Introduction

The last month has been really interesting. My prediction seems to be coming true. I have stated for most of this year that the second half (3rd or 4th quarter) of this year would show the US entering into a recession. While I still believe that the US has a strong economy relative to the rest of the world. There are just too many factors bringing it down.

The powerful people in this country as well as many academic economists have been pushing for a more global economy for a few decades. Now that we have a more global economy, it is more interconnected than ever. With the benefits of this type of system, come drawbacks. Having global booms and busts is one of those symptoms.

Despite what the media personalities say on TV, the US is not an island. The US cannot decouple their economy from the rest of the world. I am not aware of this happening in any meaningful way for the past few decades. Prior to that, the global economy was not as interconnected, so any data would be less relevant. I have not looked at prior data, but I assume it has a similar theme to what we have now.

What is important to remember is that the global economy is interconnected by money flows, relative currency valuations, asset valuations, inflation, jobs and many other factors. Most countries are dependent on one or more other countries for their economic prosperity. Unless the worlds nations decide to get into a economic battle as they did going into the great depression, this dependency will not change.

While this service is called the inflation monitor, it is important to discuss the economy as well since it has such an important bearing on inflation and deflation. But as you know if you have been reading this for any amount of time, most of what is driving inflation or deflation at the moment is debt.

I do not want to be hyperbolic, but the debt bubble that exists today is extremely dangerous and when it pops, a huge amount of wealth will be destroyed. While this bubble can be managed, as it has been up to this point, the Fed is not strong enough to control the global economy’s debt.

There is one point I want to leave you with. Bear markets are dangerous, they are not a time to “make money”. The most important thing you can do in a bear market is to “not lose money”. Depending on the nature of it, this might be harder than you imagine.  Logic does not always prevail in a bear market. 2008-2009 should have taught you that lesson, please go back and refresh you memory.

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