The spread between three-month LIBOR and the targeted Fed Funds rate remains elevated at 2.33%, twice as high as it was a month ago. Further, credit bears are building bets against Fannie Mae (FNM) and Freddie Mac (FRE) debt and that’s disconcerting through a macro lens.

Swingers!

When global central banks banned short sales, it was the financial equivalent of messing with Mother Nature. The resulting volatility throughout the asset class spectrum can’t be viewed as constructive regardless of your directional bias.

Of the 36 times the S&P has rallied 6% in a single session over the last eighty years, 32 occurred between 1929 and 1933. History doesn’t always repeat but it often rhymes and we would be wise to remember the prevailing trend during those daunting years.

Pickers and Grinners

During the last few weeks, high profile pundits emerged to proclaim a positive posture towards stocks. The cast of characters ranged from the Oracle of Omaha to several well-known bears in the financial space (present company included).

To quote Warren, savvy investors sell when others are greedy and buy when they’re panicked. Incumbent in that approach, however, is having the staying power to ride out the storm. As John Maynard Keynes famously said, markets can stay irrational longer than most people can remain solvent.

Getting Stuck by the Landing

Let’s take a step back for a moment. This problem has been percolating since the back of the tech bubble. The cumulative imbalances took a long time to cook and the unwind will be equally fierce.

Time and price; there is no alternative.

Entering September, we warned that either a cancer or car crash was imminent as corporate debt came due.

While one could argue we’ve conceivably seen both, the surreal script is written in real-time. The ramifications will be far-reaching and ripple through the societal pond for years to come.

The 1929 stock market crash didn’t cause the Great Depression, the Great Depression caused the stock market to crash. That’s worth noting with mainstay averages down 40% year-over-year and once venerable institutions having been laid to rest.

Social mood and risk appetites shape financial markets. The DNA of this market—a finance-based global economy levered to the hilt and laced with derivatives—is drastically different than anything we’ve ever seen.

That’s the other side of the trade, a toxic combination that consumes the world and turns us against each other.

Risk management over reward chasing as we find our way to better days. 

R.P.