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Tuesday, October 21, 2008


continuing credit watch

following on yesterday -- another reduction in LIBOR is being taken as a good sign that money markets are at least starting to function again.

the financial times, however, notes that all is not well.

Last week, Jeffrey Rosenberg at Bank of America wrote that he thought lower-rated corporate bonds and equity markets were in for a rough few weeks ahead. We wrote that the most recent round of “stabilisation” measures aimed at the world’s banks and credit markets were in that light, merely passing the buck.

Throughout the crisis, credit markets have led equity. And it’s for that reason that the latest round of equity rallies look like a short-term uptick in an otherwise downward moving market.

Falling Libor and resurgent money market funds do not a credit crisis undo. In the credit market at large, fear is increasing, not abating.

... Mish reports that current prices imply a 5.6 per cent default rate. All the major indications are that defaults will increase beyond that. Historically speaking, we’re still nowhere near an expected peak [which could be in excess of 10%].

And indeed, the panic about a surge in defaults is being born out right now on the usually prescient CDS market. The iTraxx Crossover index of junk-linked CDS is at an all time wide, and the LevX index of swaps on leveraged loans is collapsing.

The global outlook is not good. Economists are predicting a severe global recession. In a Deutsche Bank note on Monday, Joel Crane wrote of the economic outlook:

…we now expect a major recession for the world economy over the year ahead, with growth in the industrial countries falling to its lowest level since the Great Depression and global growth falling to 1.2%, its lowest level since the severe downturn of the early 1980s. We also see a steep drop in global inflation to 3.1% next year thanks to a collapse of energy prices and rising unemployment.

Quite something to wake up to. As for a recovery - a bottom - the Deutsche analysts don’t see stabilisation occuring until 2010. A recovery won’t occur until further beyond that: “unlikely in the foreseeable future”.

... We’d again stress the point: this is a credit crisis, and equity is the first loss tranche.

accrued interest analyzes the strange spreads noted here yesterday in agencies and comes to a similar conclusion as hayman advisors did -- there's just no money for these instruments as deleveraging proceeds, and unlevered capital which could buy it is going the extra mile for treasury safety.

There are specific reasons why each of these sectors has widened. But the real question is, what is going to drive the trading levels on these sectors toward economic reality? Or maybe a better question is, if its an arbitrage, what's stopping the market from taking advantage of the arbitrage?

The answer is leverage, or a lack of it.

... We know that Fannie Mae has been put into conservatorship by the Treasury, so that spread should be close to zero. So let's say a hedge fund predicts the spread will drop to 0.3%. That would imply a price return of about 4%. But hedge funds can't charge 2 and 20 to make 4% for clients. That 4% return either has to happen quickly or they need to leverage it.

Its going to be a while before we find a happy median between the excessive leverage of the past and the unavailable leverage of the present. Until that happens, yield spreads are going to remain very wide on a variety of fixed-income sectors. Meanwhile, investors in beaten up sectors are going to have to be patient.

UPDATE: more from john jansen on corporates:

Repair and rehabilitation may be occurring elsewhere in the credit markets, but it does not seem to have spilled into the corporate bond market.

even if liquidity concerns are subsiding -- as they have from time to time in this now-15-month-old crisis -- economic concerns are clearly moving to the fore.

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check out this doozy (dated 3/16/08!):

(excerpt): According to LEAP/E2020, by the end of 2008, a formidable debacle will affect pension funds all over the world, endangering the entire system of capital-based pensions. This financial calamity will bear a particularly dramatic human dimension because it will come at the precise moment when the first wave of baby-boomers phase out of the labour force in the US, EU and Japan: pension fund revenues are collapsing at the very moment when they should be making their first large series of payments to pensioners.

did we not give enough credit to the financial engineering wizards? or rather, score one for the ptb and the ppt? how about calling the ppt the "plunge certainty team"?



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gm, link i gave earlier was bad. sorry.

try this one?

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they called it, dc. spot on.

let's absolutely pray for all our sakes that their call in the first link you attached is wrong, wrong, wrong.

Indeed our researchers anticipate that, before next summer 2009, the US government will default and be prevented to pay back its creditors (holders of US Treasury Bonds, of Fanny May and Freddy Mac shares, etc.). Of course such a bankruptcy will provoke some very negative outcome for all USD-denominated asset holders. According to our team, the period that will then begin should be conducive to the setting up of a « new Dollar » to remedy the problem of default and of induced massive capital drain from the US.

people think things are bad now. but they've no conception of what a dollar crisis would look like. indeed, maybe no one does.

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glad you checked out the first link too, gm.

this was my first awareness of the "geab" website - via moon of alabama (recommended by yves at nc).

per the comments at - (which led me to "geab' links today):

"you can print all the money you want and not create inflation as long as prices are steady and falling".

we know there are some brilliant minds at work. can it be this is "the plan"? can they be this good? or lucky?

can the u.s. really emerge at the top of this heap - albeit battered and bruised with a massive global financial body count?

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