It's the bond market stupid

In the early days of the Clinton Adminstration,1993 and onward,the powers that be would ask the question,"... how policy decisions would affect the bond market?" Robert Rubin, then Treasury Secretary, ingrained the concept that uncontrolled spending could cause interest rates to rise and these thoughts weighed on Bill Clinton, James Carville and other key advisors including Larry Summers.

It is about time that Larry Summers have a little talk with President Obama. Why? There are two bond markets and subsets of those two markets. First there is the government bond market. Second there is the corporate bond market. Within the corporate bond market there is the high yield (aka the junk market) and the corporate investment grade market. The ETF we use to track the high yield market is HYG and corporates are tracked via LQD and CFT.

Both these are in a state of quasi freefall. Meanwhile governments via treasuries remain strong. The November stock rally coincided with HYG, CFT and LQD moving lock step with stocks. If the equity market starts to rally and these ETFs do not, then one will know this rally has no legs.

President Obama declared on Tuesday that P/Es are low and valuations are cheap. Funny I guess he does not realize that the P/Es can go even lower and valuations could fall as cash continues to be depleted from the balance sheet of corporate America as the decession continues to play itself out. President Obama needs a few Economics 101 lessons from Larry Summers because such statements would not be made if he was watching the corporate bond market trade. Make no mistake about it there is trouble in corporates.

One of my oldest and dearest clients Bennet Sedacca ingrained in my head that stocks cannot do well if corporate bonds are in trouble. General Electric (GE) has fallen below $7 from above $10 in a few weeks because the corporate bond market is voting against General Electric and specifically General Electric Capital.

If President Obama and Larry Summers begin to talk about restoring the bond market then one can breathe a little easier. Until then, we are in trouble, James Carville noted, "Every time I would talk to someone, they would say, ‘You can’t do that, it will freak the bond market out.’ I said, ‘Goddamn, whoever the bond market is, these bastards are powerful.’” Indeed powerful bastards they are and the way they are voting is not pretty. Let's hope things turn around quickly with corporates but it does not look good.