Sunday, September 19, 2021

Quality Spread Review #Investing #Bonds #Cycles - China's Lehman Brother's Moment Approaching?

Quality Spread Review
Those that view the message of the market on a daily basis are likely confused by trading noise. While trading noise contributes to the long-term trends, it does not define them. Human behavior tries to explain trading noise as a meaningful trend. This confuses the majority which, in turn, contributes to their role as bag holders of trend transitions.

Quality Spread's overall trend, revealed by trends of price, leverage, and time, defined and are discussed in the long term cycles section of The Matrix for subscribers.

Subscriber Comments

China Evergrande's snowballing debt crisis is grabbing headlines and worrying trading desks over the weekend. Is its failure, a slow train wreck unfolding, China's ‘Lehman Brothers moment’? Try and filter out the sensation, hype, and opinion and listen to the message of the market.  We call this message the invisible hand.

Quality spreads, the yield difference between high grade corporate bonds and junk, is highly sensitive to global contagions and liquidity crunches.

Let's walk through the Lehman Brother's crisis to illustrate how it works. The Quality Spread Oscillator (QSO), Baa-Aaa LTCO first climbed above 0 in September 2005 (See Quality Spread Oscillator Chart). This observation didn't raise a single eyebrow of concern, because Ben Bernanke's Helicopter Speech of November 2002 and stock market rally (since 2003) had the majority (herd) convinced that the FED, the monetary God of Thunder, could fix any problem.  QSO's close above 0 marked the beginning of the biggest global contagion and liquidity crunch since 1930, but any talk of it in 2005 would have been more likely to be confused with discussions about Cap'n Crunch. After a brief dip below 0 in mid 2006 and early 2007, the QSO suddenly jumped above 0 by the summer of 2007. It basically screamed "liquidity crunch" continuously until Lehman Brothers failed on September 15th 2008. Here's the point, the invisible hand (message of the market) was screaming, but frankly, nobody gave a rats ass until the 2x4 slammed down on investors' heads.

Quality Spread Oscillator

If you want to join the Internet's inane chatter about the meaning of Evergrande's failure, how the Chinese Central Bank, or the Fed will insulate the world from another contagion, my advice is don't bother. 100% guarantee they'll all get the timing wrong.

Listen to the invisible hand! If a liquidity crunch is coming, the long term QSO will be above 0. It's currently below 0. Can I track the QSO in the Matrix?

YES, Line 80 in the Trends Tab of the Matrix. The Matrix's QSO is updated daily and moves much faster than the long-term one shown above.

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