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Thursday, October 09, 2008


it could really happen

following on my prior ruminations, this piece from vox eu is a very sullen read.

Back in June 2008 I wrote a piece for VOXEU predicting a mild recession in 2009. Over the last few weeks the situation has become far worse, and I believe even these pessimistic predictions were too optimistic. I now believe Europe and the US will sink into a severe recession next year, with GDP contracting by 3% in 2009 and unemployment rising by about 3 million in both Europe and the US. This would be the worst recession since 1974/75. In fact the current situations has so many parallels with the Great Depression of 1929-1932, when GDP fell by about 50% in the US and by about 25% in Europe, that even my updated predictions could again be over optimistic.

UPDATE: john jansen:

... Lacking balance sheet there are no firms or proprietary capability to step in and warehouse securities and the market sinks into a dysfunctional fetal position. That is the current state of the bond market. ...

Today when IBM offers the new 10 year bond the market forced that gilt edged untainted by the credit crisis technology company to pay T+388 basis points. It was over 120 basis points cheaper than a comparable bond traded yesterday. That is a sign to me that the credit markets are in the direst state and that funding is drying up for corporate America.

Can you imagine the result if a financial company other than JPMorgan or Wells Fargo visited the market and tried to raise funds? There would be no takers for a host of large cap financial names or smaller regional bank names.

I have said this before and risk redundancy but more and more it seems likely that the resolution of this crisis will be an historic financial calamity. Each and every step which central banks and regulators have taken to resolve the crisis has been met with failure. In the beginning, the steps would produce some brief stability. In the last several days, the US Congress (belatedly) passed a bailout bill, the Federal Reserve has guaranteed commercial paper and in unprecedented coordination central banks around the globe slash base lending rates. Listen to the markets respond.

The market scoffs as Libor rises, stocks plummet and IBM is forced to pay usurious rates to borrow. There is no stability and no hiatus from the pain. It continues unabated in spite of the best efforts of dedicated people to solve it.

We are in the midst of an unfolding debacle. It is happening about us. I am not sure how or when it ends, but the end, when it arrives, will radically alter the way we live for a long time.

Whoever wins the US election and takes office in January will need prayers and divine intervention.

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Keep in mind that back in the day, when IBM made a big long bond issue it was almost a given high-water-mark for bond valuations (low for long bond yields). Wouldn't that be something if that is still true and long term rates go up from here?

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I want to say thanks for this blog (I don't remember if I've said it before). I read many, but yours has such a distinct writing style, wisdom, and perspective on history that I deeply appreciate.

If only there wasn't such a critical and pressing topic to cover :( I had become hopeful when the ferocious debt deflation I've feared for several years seemed to be playing out like a slow motion controlled train wreck instead... but apparently that was just the prelude.

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i'd like ot go back to writing about the cubs and nietzsche, hbl. :) i really would.

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carlos, if corporate spreads on names like IBM go up from here this will be armageddon. i can't believe that would be true -- there's a HUGE liquidity premium now to compound massive financial solvency concerns. hopefully, at some point, that backs out.

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