The Intolerable Scourge Of Fake Capitalism

Investment Grade Junk

All is now bustle and hubbub in the late months of the year. This goes for the stock market too. If you recall, on September 22nd the S&P 500 hit an all-time high of 2,940. This was nearly 100 points above the prior high of 2,847, which was notched on January 26th. For a brief moment, it appeared the stock market had resumed its near decade long upward trend.

We actually did not believe in the validity of the September breakout attempt: the extremely large divergence between the broad market and the narrow big cap leadership was one of many signs that an internal breakdown in the stock market was well underway. It is probably legitimate to refer to the January 2018 high as the “orthodox” stock market peak – the point at which most stocks topped out.

Chartists witnessed the take out of the January high and affirmed all was clear for the S&P 500 to continue its ascent. They called it a text book confirmation that the bull market was still intact. Now, just two months later, a great breakdown may be transpiring.

Obviously, this certain fate will be revealed in good time. Still, as we wait for confirmation, one very important fact is clear. The Federal Reserve is currently executing the rug yank phase of its monetary policy. As the Fed simultaneously raises the federal funds rate and reduces its balance sheet, credit markets are slipping and tripping all over themselves.

This week, for example, seven-year investment grade bonds issued by GE Capital International traded with a spread of 2.47 percent. For perspective, this is equivalent to the spread of BB rated junk bonds. In other words, the credit market doesn’t consider GE bonds to be investment grade, regardless of whether compromised credit rating agencies say they are.

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