Has the commodity rally that began just before the New Year ran its course? We posed the argument in early January that the technical breakout in interest rates would point towards the general economic activity of 2016. The interest rate breakout higher, towards lower rates would ultimately show itself in the form of deflation, which would in turn, weaken the commodity sector. I believe we are at a major inflection point for the year’s trading.
As it relates to continually tightening credit, we need only look at the current credit spreads to see just how tough it is to procure operating cash in corporate America. Currently, according to the Merrill Lynch US Financial Index, the typical cost to borrow money has increased from 70 basis points over Treasuries to over 390 basis points over Treasuries. A 500% increase in borrowing costs will put the clamps on any new business spending. Now, to put this into perspective, please note the following from John Mauldin.<![endif]–>
it can get much worse for some banks. In the “for what it’s worth”
department, Iraq’s bonds are now considered safer than those of many US banks.
The country’s $2.7 billion of 5.8% bonds due 2028 have gained 45% since August
2007, according to Merrill Lynch & Co. indexes. Investors demand 4.84
percentage points more in yield to own the debt instead of Treasuries, down
from 7.26 percentage points a year ago. The spread is narrower than for notes
of Ohio banks National City Corp. and KeyCorp, suggesting Baghdad may be safer
for bond investors than Cleveland. National City and KeyCorp, based in
Cleveland, have debt ratings of A and spreads of 959 basis points (9.59%) and
7.55 basis points (7.55%), respectively. Iraq debt has no ratings. Clearly the
market is ignoring the rating agencies which give the banks an “A&quo
t; rating. Their debt is priced at the junk level. Go figure. (Source: Bloomberg)”
For those of us here in Ohio, like myself, that light puts a whole new spin on where WE are in this economic cycle.