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, and investment grade debt more closely than US Treasuries (the supposedly safest bonds in the world). We watch Italy closer than Germany, and Turkey closer than Italy.
The weakest elements always go first. So keep your attention there and try to ignore efforts to deflect your gaze towards the solid center.
This is particularly important advice when the central bank created credit-liquidity cycles come to an end. When they do, the weakest players topple first as the "liquidity tide" rushes out, the contagion very rapidly advances towards the higher quality core. Our prediction is that these deformed markets with their broken dependence on fickle computer algorithms will break fast when they do.
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 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.
The Big Picture
The past ten years have been, in the words of our friend David Stockman, one gigantic deformation.
by wendal 
