Credit-default spreads are rising for several key sovereign debts as well as major US states. An escalating inability to service outstanding debts will be a leading factor as the bear market progresses.
The basic problem, which will be accentuated enormously by outright deflation, is this: The world does not have enough revenue to service the debt built up over the past 7 decades. The default, restructuring, and repricing of impaired debt is already well underway.
Seemingly sound credit risks will turn out to be vulnerable, too, because distressed sales further suppresses the value of the underlying collateral.
Moreover, the spectre of rating downgrades during deflation is looming. in one way or another, leverage will exit the system. As it does, insolvency will both the best laid plans. Choose your partners carefully in the coming era.
Bear market forecastThe Federal Reserve possesses a special talent for raising short-term interest rates shortly before big stock market declines. It pushed rates higher before the declines in 1929, 1987, and 2000, for instance.
The latest hike, from .50% to .75% in the Discount Rate is not of the same magnitude as the rate hikes before those historic plunged.
But, in psychological terms, it came as a surprise to many pundits. More important, the increased stamped the Fed's approval on economists' upbeat assessment of the US economy. We can not image in a better 'snapping point' for second-wave psychology, which endeavors to re-create the positive vibrations of the preceding peak.
According to the most recent survey of the National Association of 'Business Economists', the 'recovery' is 'firmly on track' and stocks should comply with the forecast by climbing 'significantly in 2010 and 2011.' The average prediction is for a 23% rise in the S&P over the next two years.
Hedge fund managers are convinced that the economy will accelerate, and they are 'snapping up' stocks to take advantage. Many are pouncing on the recent decline as 'an opportunity to beef up' positions. And money managers are as bullish as ever.
In fact, amazingly so. The mutual fund cash-to-assets ratio slipped to 3.6% in December; this is a more bullish extreme than all but one data point in the 50-year history of the indicator.
The only time fund managers were more exposed to a stock decline was in July 2007, the month of the peak in the value Line index and three months before the Dow made its all-time high.
Less extreme readings of 3.9% and 4% coincided with the start of historic bear markets if 1973-74 and 2000-2002, respectively.
Meanwhile, consumer energy prices fell in January; it was the first time such prices have fallen in any month since 1982. In our view, even as the sledgehammer phase of deflation sets in, many will go about celebrating the lack of inflation.
There are many signs of deflation, but none is more important than the latest figures for total bank credit. Total lending at US banks fell 7.4% in 2009, the biggest decline since 1942.
In other critical deflationary breakthroughs, Wal-Mart just suffered its first quarterly US sales decline in history; new home sales fell to a record low rate in January; and the CRB index of commodities just completed a Minor degree second wave rally and should be on its way to new lows.
Gold and silver continue to move in step with equities and commodities. The trend for precious metals remains down. The US dollar index has rallied strongly, in line with our forecast. The euro, the dollar's near-opposite, started a major downtrend last November. Price should be lower into next year.
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source ; Thestockadvisors.com
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