What is it Doctor?!

It always seemed in the sci-fi movies I watched as a kid, at some point a small group of scientists would be staring at some creature and the buxom blonde assistant would say, "what is it doctor?!" He would reply, "I don't know, I've never seen anything like it before." Not long afterwards you knew someone was going to be eaten. This grown up economic horror film is not dissimilar.

Reading the fixed income research from one of the largest investment banks today I saw that phrase again. "I've never seen anything like it." The behavior of the policy makers in Washington indicate they are also among the group peering at the creature. So the reasonable question is, who gets eaten next?

The only positive I can find is that I can find no one who is being positive. Only the VIX index show some sign of moderate complacency, which is in itself, not a good sign.

In a "normal" market condition, (i.e. those starting in 1981) the VIX showed periods of irrational fear to be "buy" signals. However those signals existed in a background of secular economic growth, but more importantly, in a period of secular bull market. Last autumn's extreme spike would normally be an all clear signal to pick up the pieces after irrational fear. However this time, the global deleveraging and credit contraction represents a very different backdrop. The economic inertia of a body in motion is proving very powerful.

The constellation of financial stars that came together to drive equities and bonds to a generation long bull market are no longer in place.

In 1980/81 the Fed Funds rate target was 18 to 20% to fight inflation. Today the target is 0 to 1/2%. The falling in interst rates made buying future earning and stocks attractive. Where do we go from zero?

There will be market dynamics in the coming years, but they will not be the same as the previous bull market. The 1000% 17 year bull market was a once in more than a century event. It may be a stretch to expect it to occur twice in a generation. Be flexible, be ready to change. Think.

John Barnyak
President