The Canary Correction - Part 1


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Matt Blackman

10 Jul, 2006

in Indices and 2 more

caption: Figure 5 The annual percent change in the flow of funds into interest rate swaps and currency derivatives is trending down (red line). A significant drop in the flow of funds preceded the bear market of 2000 and subsequent recession in 2001-02. Ditto for the Thai baht melt and Asian flu (1997), Mexican peso crisis (1994) and 1993 bear market. Take? Whenever funds flowing into these derivatives hit a relative low, it means smart investors are getting cautious.
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In Part 2
Part 2 will explain how this slowdown corresponds with periods of narrow yield premiums between a basket of emerging market bond yields and U.S. Treasury bond yields indicating periods of investor complacency. Here are some other major points we will cover in part 2.

  • We will examine an index that has been uncannily accurate in providing advance warning of emerging market trouble and what it is saying now.
  • What does the yield curve inversion in the United States for the third time in the last six months mean, and how accurate has it been in the past in prognosticating bear markets.
  • Global property market trouble spots. Based on the importance that real estate and related construction activities have taken on in global economies, what does a real estate correction mean for the economy?
  • As the traditional driver of consumer spending, real wage growth is essential to long-term economic strength. We will take a look at the trend in wage growth after inflation and what it means.
  • All markets and economies are cyclical. What are the most important cycles currently at play, and what do they mean for markets going forward?
  • Finally, we will tie these factors together to provide an overall snapshot from 30,000 feet and what it means for markets in the coming months and years.

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Member (5 posts)

Where's Part 2 ??? did the canary die ?

Aug 06, 2006

Member (461 posts)

I have two concerns about derivatives.
1) The speed at which funds have flowed into them in the last few years. Normally this rate of inflow has been followed by a major correction in other markets that have experienced this rapid an increase.
2) The rate of change of inflows is now declining and this has been associated with corrections or at least emerging market meltdowns in the past. I don't believe that derivates will end the world. They are here to stay. But as they are relatively new and have experienced irrational exhuberance of late, gives me reason for concern, especially given excesses in other asset classes. Matt Blackman

Jul 12, 2006

Member (5 posts)