In the things that go "bump in the night" department, on Friday, Bank of Scotland shares plunged some 12 percent. This melancholy event followed an equivalent hit on Thursday when Toronto's Manulife cut its dividend in half.
The point worth discussing again is that the discovery of great financial problems is not sequential in that one failure leads to another. Sadly, interventionist economics is founded upon the notion that if one bank gets into difficulty the "lender of last resort" will move to "contain" the damage and prevent it from spreading.
This is the episodic interpretation of financial history. As the history of markets has indelibly recorded – the financial world is periodic – all banks become ambitious during a mania and all, more or less, suffer the same pressures on the consequent contraction. Some survive, others suffer insolvency, and others succumb to default.
On schedule, global credit markets took their turn to disaster in May-June 2007 and the contraction is tracking the usual path to another phase of severe liquidity problems. Equivalent to a major seismic event it will be felt around the world.
There were no specific news items about plunges in bank stocks in Shanghai or Tokyo, but the former recorded its worst weekly drop since February.
Going the other way, at important lows the transition from bad to good has been global. The 1973 to 1974 bear market was the worst since the 1930s and it bottomed in a few trading days in December when London, New York and Tokyo media each provided a local explanation of the turn. But, the reversal was global.
Last week clocked some shocks that could be in line with our expectations that the next phase of credit problems would start to appear after mid-year.
There has been little change in the yield curve, which continues choppy, or in corporate spreads, which continue to narrow. Of some concern is that the high-yield bond (CYE) is in a pattern that leads to failure. The action on the upside has been remarkable – as should the downside when it rolls over.
However, the Baltic Dry Rate (BDI) at 2772 on Friday took out support at 3000, which sets the downtrend. The rebound high was 4291 on June 3. The record high was 11771 on June 21, 2008 and its failure by the end of that month, along with the change in the credit markets provided the big warning on last year's disasters. At a number of important highs the failure of the BDI indicated or confirmed the advent of troubles.
Another indicator would be the dollar index turning up. It has been universally trashed down to an extreme low sentiment reading of 3 percent bulls. There has been some improvement from 77.5 on Wednesday to 79 today.
Heads up for developing change in credit markets.
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