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If we consider the twelve month period from June 2007 to June 2008, however, we see a
different story. Remember, banks had not collapsed yet. Wachovia CEO Ken Thompson was
fired on June 2, 2008 as the severity was becoming apparent but the government hadnt bailed
anyone out yet. From June 2007 to June 2008, the average was a loss of 11k jobs per month,
with six of those months reporting losses.
OIS-LIBOR Spread
This is the spread used to measure the health of the banking system and market liquidity. It
suggests that conditions have tightened, but there has not been a dramatic spike.
This spread spent most of 2015 right around 15bps. It is currently at 23bps.
To put this into perspective, the all-time high was 364bps on October 10, 2008. In the months
leading up to that spike, it was trading in the 75bps range.
During the Eurozone crisis it peaked at 52bps.
Financial conditions have definitely tightened, but we arent anywhere close to those levels.
Again, this feels like markets pressing the pause button to see if there might be a collapse rather
than a view of already being in the middle of collapse. If we see a run up north of 50bps, it
would suggest growing concern over bank strength and market liquidity, but at current levels the
market doesnt seem to be screaming run! even though bank stocks are taking a beating.
Takeaway
We all like patterns. It simplifies things, especially for state schoolers like me. If a quick review
of those graphs left you feeling like there wasnt any pattern, congratulations. I wonder if the
current market lacks a distinct pattern because we are just muddling along rather than moving in
a nice linear fashion (higher or lower). Some data suggests strength while other suggests
weakness.
An argument can be made that the world is about to end while an opposing view could argue
things are fine. This is a perfect example of why the Fed cant respond to every knee jerk
reaction. If youve been reading this newsletter over the last few months, youve probably
noticed that we have said market probability of a rate hike has oscillated too much after one set
of data or event occurs. The probability of hikes jumped too high in December, collapsed too
low last month, and even Friday jumped too high again after GDP came in relatively strong.
The Fed has a longer term view than the swap or Treasury trader trying to avoid getting
steamrolled by the market.
Admittedly, there is a heightened sense of caution. Everyone is on edge, afraid of repeating
2008. Isnt this a healthy thing? I havent heard of 100% LTVs based on aggressive projections
with interest only payments and no recourse. Tight spreads suggest a lower return, but is the
system at risk like it was in 2008?
The S&P has started the year with 23 days of +/- 1% movement, unprecedented volatility. For
the 10th week in a row (and 14 out of 15), the US oil rig count declined. Nat gas hit a 16 year
low. Global trade plunged 14% last year, the first contraction since 2009. More than $7T (with
a T) of global sovereign debt is trading with negative yields.
Our argument isnt that everything is great, but the fact that everyone is talking about it makes
me feel marginally better
This Week
Initial reports out of the G20 meeting in Shanghai this weekend look mildly disappointing.
There was hope for a Shanghai Accord of sorts, basically global central bank coordination. As
this is written, the meetings are still taking place but it certainly sounds like no such dramatic
statement is forthcoming. This could be bad for stocks Monday morning.
Lots of data this week, culminating with Fridays job reports. Expect another knee jerk reaction
to FF probabilities if the number is an outlier
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