Way back in the days of yore, more like 2010, we penned a missive called The Great Differentiation. Our view was that the post credit supercycle landscape would usher in a return to the "radical" notion that not all credits were the same. Shockingly, that reality (you mean Greece isn't Germany? who knew?) almost imploded Europe and every trick in the book has been wheeled out to keep the system afloat. Those programs (coordinated easing, bond buying, massive repo facilities, lighting novenas) were the foundation of our Nov. 2011 idea that "things would kinda, sorta work out." Now what?
Punxsutawny Phil missed the long winter call by a mile and participants are "jones-ing" for a crisis. The VIX was below 16 much of today, significant of nothing except professionals have created a way to get cheap insurance when nervous. Other archaic charcoal and cave wall metrics of credit differentiation (fear) such as TEDs and Swaps have receded over the "sorta work out" time window. The key going forward is to re- calibrate the system and not hope to return to the "everyone's the same" fantasy that fed the credit beast. We would prefer to see rates inside the Fed "promise" scratch their way off the floor and spreads grope for a wider realistic functional norm. The process alone may be too much to handle as any and every adjustment out is hyped into a new crisis. However, the most maligned and forgotten metric for the great differentiation, a wide dispersion LIBOR, appears to congealing around a higher base. Q2 could be about differentials in short rates, again.