As you probably know, our model here for tracking and staying ahead of the next financial crisis is to watch for trouble to move from “the outside in.” This means that the weaker elements in the system always fail first.
Therefore, we prioritize watching junk debt more than investment grade debt, investment grade debt more then US Treasurys (the supposedly safest bonds in the world). We watch Italy closer than Germany, and Turkey closer than Italy.
The weakest elements always go first.
And when the central bank created credit-liquidity cycles come to an end, this is especially true.
And when the weakest players topple, the contagion up the quality chain usually starts happening fast.
This is why we've long been advising a prudent and careful strategy of money management over these past several years, as painful as that’s been while the party has been raging higher.
And while we’re not anxious to be vindicated (because there will be a lot of misery in the world when these credit bubbles finally burst), we’re confident that we will be.
Has that time begun? Is it finally time to call it, and pronounce this long-lived credit cycle dead?
Well… we’ve thought so before and been wrong, so let us be the first to temper our remarks here. If the extraordinary efforts of the central authorities have taught us anything over the years, it’s to be cautious and humble when it comes to marking “market calls.”
Since we don’t have a crystal ball, let's share the data that’s been accumulating on our desktop these past few months that has us thinking that the long-awaited market correction may have indeed arrived this week. This evidence suggests that the crumbling decay in the markets has just recently passed several critical marks, and that a major breakdown to the downside may be unfolding before our eyes.
And while we’ve not (yet) ready to issue an official “Alert” to all of our readers, this is for sure a serious warning.
Let's start by looking at these critical charts…