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3 Signs That Wall Street Is Safe

Posted April 5, 2008

“Since the beginning of the U.S. credit crunch last August, U.S. indices and even some of the international indices have taken a nosedive. Investors are getting antsy watching their portfolios shrink.” — Krista Das

Baltimore – (TFN): The following was taken from the April 4 Market Insights video with Krista Das featuring Martin Hutchinson, advisory panelist for The Money Map Report . Watch this video.

Krista Das:

Welcome to Smart Investing Market Insights on Today’s FinancialNews.com. I’m Krista Das.

Since the beginning of the U.S. credit crunch last August, U.S. indices and even some of the international indices have taken a nosedive. Investors are getting antsy watching their portfolios shrink.

Joining me now is Martin Hutchinson, a banking and financial expert who sits on the advisory panel for The Money Map Report.

Today Martin is going to teach us how to predict the end of the credit crunch and find the best entry point into the U.S. stock market.

Martin, thanks for coming on today.

Martin Hutchinson: It’s great to be here. Thank you.

Krista Das: Now you said that you have three signals that will let us know when the credit crunch is over. Tell us the first.

Martin Hutchinson: Well, the first one’s interest rates themselves. Because Ben Bernanke’s bought the federal funds rate down from 5 ¼ to 2 ¼ over the last six month.

Frankly, there’s not much further to go. He can’t take it down below one percent because all the money market funds get in trouble. They have to pay their dividends out of something.

So, therefore, he’s bought interest rates down a hell of a long way, but at the same time they’re now well below inflation. Inflation’s running at four percent, a bit above four percent.

So, with interest rates at two and inflation at four, that’s unstable. The inflation’s going to go on going up. So at some stage he’s going to understand that the inflationary problem has become more important than the credit crunch problem.

At that stage he’s going to increase interest rates, probably pretty sharply because he’s going to have to do quite a push to get substantially above four percent or five percent or wherever inflation is by then.

So that’s the first signal really is when Bernanke stops worrying about the credit crunch and pushes interest rates up.

Krista Das: Okay; so we should watch for short term interest rates to turn around. What’s the second signal?

Martin Hutchinson:The second signal is the credit default swap market, which is a very sort of arcane market that nobody really knows about. It’s only been going ten years or so. But now these derivatives markets being what they are have total outstandings of 50 trillion dollars.

You can look, for example, at the whole amount of U.S. corporate debt outstanding and that’s only 5 ½ trillion dollars. Now if a credit default swap goes wrong, somebody defaults, then you’ve got a winner and a loser. So theoretically that’s fine. A bunch of money sort of royals around the financial system and nobody gets hurt.

The problem is that a lot of these things are held by hedge funds and people who are really lousy credit risks.

So when the credit default swap market gets into real trouble because a lot of corporate bonds go wrong, you’ll suddenly discover that a lot of the guys who’ve written these things can’t actually fulfill their obligations.

So therefore, you’re going to get a default in this 50 trillion dollar market that is linked to all the other debt markets out there. And of course, a default of any meaningful fraction of 50 trillion is going to be a really serious bang and that will undoubtedly mark the bottom.

Anything else that hasn’t defaulted and gone wrong by then will go wrong then and so you can be sure that after the dust clears from that, the worst has happened.

Martin Hutchinson Rather watch the financial video?

Krista Das: Alright. So first keep an eye on interest rates. Second, keep an eye on the CDF. What’s the final signal to look for?

Martin Hutchinson :The final signal is when Ben Bernanke loses his job because he’s pushed into straights down, inflation’s been gradually rising and he’s pushing interest rates down, which makes it rise faster.

Now, the problem with that is that eventually the bond market panics because why would you invest in a treasury bond paying 3.6 percent for ten years if inflation’s above four. I mean you’re mad. Even if you don’t pay tax, you’re still losing money.

So eventually the bond market will panic and you’ll get a crash in treasury bonds. At that point Ben Bernanke will be forced out because although theoretically he’s appointed by the President, in reality he’s appointed by the Treasury bond market.

When that goes wrong he’ll have to resign, as G. William Miller did in 1979, which is the last time this happened.

That’s when we got Paul Vaulker who gave everybody a huge amount of pain, but put everything right. So when Bernanke’s resigned, firstly you’ll find he’ll turn interest rates, probably before he resigns.

Secondly, you’ll probably get a crash in the credit default swap. Thirdly, Bernanke himself resigns. When you’ve had all three of those, you can be sure that the market’s dropped as far as it’s going to go and it’s time to load up.

Krista Das: So bottom line, when should investors venture back into the stock market?

Martin Hutchinson : Well, basically to feel safe, when all three of those have happened. Interest rates are going up, the credit default swap market has had an explosion and Bernanke’s out of there. If all three of those have happened you can be pretty sure it’s not going to get any worse and it’s going to start going up.

Krista Das: Martin, thanks as always for joining us.

Martin Hutchinson : Great pleasure.

Krista Das: If you would like to learn more about Martin’s investing tips and his investment research service, The Money Map Report, click directly on the screen or visit Today’s Financial News.com.

That’s all for this week. Until next time, here’s to great profits from smart investing.

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