Back in the 80’s and 90's we used to call long bonds / short stocks the “depression spread”. I always thought that was a severe description to describe times when stocks would correct and interest rates would work lower. But then again we worked on the trading floor of the Chicago Board of Trade, and let’s face it, commodity guys are not the most positive lot as it is, and the term, like most trading floor sayings, had no doubt been passed down by smarter operators than us.

I’m reminded of that term today after the employment number came out showing a huge loss of jobs the previous month, and the day after the Dow Jones Transportation finally gave in and fell 8% in one day. Throw in that the United States is very likely to elect a President to the left of Jimmy Carter, along with the historic and economic implications of that, and there is not a lot for blue chip stock holders to be happy about. Investors today are shunning anything with yield in preference for safety.

That need for security has created a stampede into low yielding investments, and with long-term trends like the monthly Dow Jones Transportation Index just starting to turn lower, the flight to low yield is likely to continue for some time.

In the currency markets the victim of this flight to safety as been the carry trade which topped out about a year ago. See “The Death of the Carry Trade” 11/07: http://www.forexfactory.com/news.php...17#post1710789

The Carry Trade, like any market became a victim of its own weight. No doubt government securities of countries with higher interest rates are attractive, but with the frost on the economic pumpkin in the largest economy on the world – The U.S. – all those high yielding Aussie, NZ, GBP, EUR etc government bonds and notes have to be hedged. Meaning to capture those yields and eliminate market risk sovereign funds and other institutions must have a matching short currency position against every security on their books. That is A LOT of selling pressure.

Currencies are a game of relativity. It’s not so much that the low yielders such as USD & JPY should be bought based on fundamentals as much as it is that NZD, AUD, GBP & EUR are being sold because of fundamentals – namely massive hedging pressure from debt holders whose investments are denominated in those currencies.

It is very definitely a new age of investing we are entering into. I wouldn’t go so far as to call it the “Depression Spread” but it will be different than anything we’ve experienced in 25 or 30 years or so.

Jay Norris
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