Capital Flow Transition from Public to Private Sector

Any record, especially 'Junk" bond issuance, during periods of aggressive currency devaluation is always dangerous.

U.S. companies issued risky "junk" bonds at a record clip this week, taking advantage of keen investor appetite for returns amid declining interest rates and tepid stock markets.

The borrowing binge comes as the Federal Reserve keeps interest rates near zero and yields on U.S. government debt are near record lows. Those low rates have spread across a variety of markets, making it cheaper for companies with low credit ratings to borrow from investors.

I continue to watch is the performance of long-term high grade corporates relative government bonds (LTCBTRILTGBTRIR). This ratio represents one of the best money flows measures between the public and private sectors.

Many stock market experts suggested that a rally could not materialize without job creation and the worst was yet to come in 1932. Contrary to popular consensus, capital flows retreated from the public to private sector. This is illustrated below down trendline breaks in the corporates to government bonds and large cap stocks to government bonds in 1932. The 2010 "flush" of the private sector and subtle return to it is very similar to that of setup of 1932.

Long-Term U.S. Corporate Bonds Total Return Index (LTCBTRI) to Long-Term U.S. Government Bonds Total Return Index (LTGBTRI)


U.S. Large Cap Stocks Total Return Index (LCSTRI) to Long-Term U.S. Government Bonds Total Return Index (LTGBTRI) Ratio:


Source: online.wsj.com

Thanks Bob