The Only Chart That Matters Right Now
Let’s put the world on mute right now.
Every other day we’re getting bombarded with new projections about the numbers of deaths and infections from the coronavirus. This is truly scary stuff, even if the situation is improving.
On top of this, we’ve got an economic collapse triggered by the shutdown of the economy. Today alone, we saw jobless claims hit a jaw dropping 6.6 MILLION!
And finally, we’ve also got the truly staggering bailouts/stimulus programs being pushed by the government and the Federal Reserve. As it stands, we’re talking about $6 trillion and counting between all of these different efforts.
This is a mind-boggling amount of information. And we’ve got countless experts and talking heads appearing in the media attempting to explain the significance of these things to us.
So like I said, let’s put the world on “mute” right now. There’s simply too much noise for us to get a clear picture of what’s going on.
For me right now, I’m focusing on just one thing.
Investment grade credit spreads.
“The Canary in the Coal Mine”
It’s a complicated sounding term, but it’s actually a relatively simple concept.
Investment grade credit spreads measure the difference between the yield on high quality corporate bonds and the yield on Treasury bonds.
Think of it this way… lending your money to a corporation, even a high quality one, is a lot riskier than lending it to the U.S. government. At the end of the day, the government can print money to pay you back. The corporation cannot.
For this reason, credit spreads tell you a lot about the financial system’s risk appetitive. When credit spreads rally, it means the system is doing well. And when they collapse, it means there’s panic in the air.
This is especially true now that the Fed has announced it will buy investment grade corporate debt for the first time in history. In this sense, credit spreads on investment grade corporate debt have become “the canary in the coal mine” for this Fed intervention.
Note in the below chart that investment grade credit spreads bottomed BEFORE stocks did. Investment grade credit spreads bottomed March 19. Stocks bottomed March 23.
So if these same credit spreads collapse now, despite the Fed buying them, then we know the Fed has failed to prop up the system and we’re going to see an even larger crash.
A Breakdown Here Could Incite Market Panic
With that in mind, yesterday’s breakdown was extremely dangerous for the credit markets. As you can see in the chart below, the drop brought credit right to the line of CRITICAL support.
If we see a breakdown from here, then it’s HIGHLY likely the system will go back into a panic and we will see new lows for stocks.
This is the only chart I’m watching right now. I’ve got the rest of the world on mute. You should do the same.
Editor, Money & Crisis