Posts Tagged
‘credit markets’
by ilene - October 17th, 2010 5:48 pm
Courtesy of Yves Smith
A couple of articles in the Wall Street Journal, reporting on a conference at the Boston Fed, indicates that some people at the Fed may recognize that the central bank has boxed itself in more than a tad.
The first is on the question of whether the Fed is in a liquidity trap. A lot of people, based on the experience of Japan, argued that resolving and restructuring bad loans was a necessary to avoid a protracted economic malaise after a severe financial crisis. But the Fed has consistently clung to the myth that the financial meltdown of 2007-2008 was a liquidity, not a solvency crisis. So rather than throw its weight behind real financial reform and cleaning up bank balance sheets (which would require admitting the obvious, that its policies prior to the crisis were badly flawed), it instead has treated liquidity as the solution to any and every problem.
Some commentators were concerned when the Fed lowered policy rates below 2%, but there we so many other experiments implemented during the acute phases that this particular shift has been pretty much overlooked. But overly low rates leaves the Fed nowhere to go if demand continues to be slack, as it is now.
Note that the remarks by Chicago Fed president John Evans still hew to conventional forms: the Fed needs to create inflation expectations, and needs to be prepared to overshoot.
This seems to ignore some pretty basic considerations. First, the US is suffering from a great deal of unemployment and excess productive capacity. The idea that inflation fears are going to lead to a resumption of spending (ie anticipatory spending because the value of money will fall in the future) isn’t terribly convincing. Labor didn’t have much bargaining power before the crisis, and it has much less now. Some might content the Fed is already doing a more than adequate job of feeding commodities inflation (although record wheat prices are driven by largely by fundamentals).
From the Wall Street Journal, “Fed’s Evans: U.S. in ‘Bona Fide Liquidity Trap’”:
The Federal Reserve may have to let inflation overshoot levels consistent with price stability as part of a broader attempt to help stimulate the economy, a U.S. central bank official said Saturday.
“The U.S. economy is best described as being in a bona
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Tags: Central Banks, credit markets, deflation, Economy, financial meltdown, fiscal policy, inflation, Interest Rates, liquidity trap, Monetary Policy, printing money, solvency crisis, the Federal Reserve
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by ilene - June 10th, 2010 7:44 pm
Courtesy of The Pragmatic Capitalist
Excellent analysis here from Peter Eisenhardt at ICMA. Mr. Eisenhardt describes why the short-term credit markets are so important and why the recent seizure in the credit markets is an important indicator to keep an eye on:

Source: Reuters Insider
Tags: credit markets, Peter Eisenhardt, short-term debt markets
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by ilene - June 9th, 2010 11:27 am
Courtesy of The Pragmatic Capitalist
As we’ve previously described the primary differentiating factor between this sell-off and every sell-off since March 2009 has been the action in the credit markets. For the first time in over year we are seeing substantial deterioration across credit markets. This has been notable in IG credit. Spreads have started blowing out again as the sovereign debt fears raise memories of Lehman Brothers.
The action in yesterday’s market was notable due to the strong technical movement we saw in spreads. The 50 day moving average moving upward crossed the 200 day moving average moving downward. In a typical market this would be known as a “golden cross”, but as widening spreads are a negative indicator this is actually an inverse “death cross”. It sounds very phony as most technical analysis chart patterns do, but this is one that is worth noting. The crossing of the moving averages is a very rare event and generally indicates the beginning of a very strong directional trend. We have noted similar patterns in several markets over the last few years including the golden cross in the S&P 500 in June 2009 at S&P 900 and the death cross in Chinese equities just prior to their recent 20% decline.
From a purely simplistic technical perspective IG credit’s death cross is forecasting more difficult days ahead in the credit markets and that is certain to coincide with more difficulty in the equity markets. Investors would be wise to take note.

(Chart Courtesy of CDR)
Source: Tim Backshall at CDR
Tags: credit markets, death cross, INVESTMENT GRADE CREDIT, Stock Market
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by ilene - February 27th, 2010 11:27 am
Courtesy of John Mauldin at Thoughts from the Frontline
Where Is All that Greek Gold?
The Greeks Write Back
The Euro and a Conspiracy of Hedge Funds
So Where’s the Inflation?
No Help for Homebuilders
The economy grew in the fourth quarter by 5.9%, the most in years. The adjusted monetary base is exploding. Bank reserves are literally through the roof. The Fed is flooding money into the system in an effort to get banks to lend. An historically normal response by banks (to increase lending) would have been massively inflationary, causing the Fed to stomp on the brakes. Despite raising the almost meaningless discount rate (as who uses it?), this week Ben Bernanke assured Congress of an easy monetary policy, with rates remaining low for a long time. Many ask, how can this not be inflationary?
This week we look at some fundamentals of money supply and the economy. If you understand this, you won’t get misled by people selling investments, telling you to buy this or that based on some chart that shows whatever they are selling to be what you absolutely have to have to protect your portfolio and/or make massive profits. And we touch on a few odds and ends. And yes, I can’t resist, a few more thoughts on Greece. It will make for an interesting letter, as I’m writing on a plane to San Jose. And it will print a bit longer than usual, because there are a lot of charts.
Before we get into the…

Tags: Adjusted Monetary Base, credit markets, Federal Reserve, Germany, Greece, Hedge Funds, Interest Rates, John Maulding, Money, Money Supply, quantitative easing
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by ilene - February 23rd, 2010 7:19 am
Courtesy of The Pragmatic Capitalist
Good thoughts on the credit markets from this week’s episode of Wealth Track. Nassim Taleb has described treasuries as a “no brainer” short position. Marc Faber refers to treasuries as junk bonds. Bond experts David Darst and Robert Kessler provide their outlooks for obtaining yield in a de-leveraging world:
Source: Wealth Track
Tags: credit markets, de-leveraging, Junk bonds, U.S. treasuries
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by ilene - August 13th, 2009 8:36 pm
Courtesy of Mish
Want to know where the S&P 500 (SPY) is headed? The corporate bond market likely holds the answer.
So far this year, investment grade debt sales are on a record pace according to the article Blackstone Group to Sell Debt as Investment-Grade Spreads Widen.
Bloommberg notes that Blackstone (BX) joined Microsoft Corp. (MSFT), the world’s largest software maker, in making a debut offer this year and that investment-grade debt sales of $774 billion are on pace to reach a record.
Meanwhile yield spreads on corporate debt vs. treasuries have declined from 603 basis points on Jan. 2, to 254 basis points today according to Merrill Lynch & Co.’s U.S. Corporate Master index.
Access To Debt Markets Keeps Zombie Corporations Alive
Ability to raise cash now will keep many zombie corporations alive. GM went under when its borrowing dried up. Ford (F) stayed in business because it had a bigger pile of cash relative to its burn rate.
Thus it’s no wonder that stocks are rallying in the face of record demand for debt, demand that has dramatically reduced long term corporate borrowing costs.
“Liquidity is the name of the game for financial-related firms,” said Guy Lebas, chief economist and fixed-income strategist with Janney Montgomery Scott LLC. “Many issuers as well as buyers realize that the improvement we’ve had in spreads over the last eight weeks marks the final step in the credit rally for 2009.”
23 Day Rally In Corporates
The question now is where to from here? The article notes the investment grade bond rally lasted 23 consecutive days, ending two days ago. The widening today is a statistically irrelevant 1 basis point.
Evidence of a pullback is more readily apparent in junk bonds.
Yields on high-yield, high-risk, bonds relative to benchmark rates widened 14 basis points yesterday to 878 basis points, the third straight day of increases after 16 consecutive days of tightening, according to Merrill Lynch & Co’s U.S. High-Yield Master II index. High-yield notes are rated below BBB- by Standard & Poor’s and less than Baa3 by Moody’s Investors Service.
S&P 500 During Corporate Bond Rally

click on chart for sharper image
Keep an Eye on Bonds!
As long as corporate bonds fetch a good bid, which in turn allows companies to raise cash at decreasing costs, the
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Tags: corporate bonds, credit markets, S&P 500, stock market rally
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by ilene - August 11th, 2009 4:47 pm
Courtesy of Karl Denninger at The Market Ticker
From Bloomberg:
Aug. 10 (Bloomberg) — Two years after credit markets seized up and caused the worst financial crisis since the Great Depression, companies are hoarding the most cash in at least a decade……
Even as government reports show that the first global recession since World War II may be easing, corporate treasurers are raising cash as fast as they can, wary of losing access to capital. Corporate defaults reached 10.7 percent worldwide in July, the highest since 1991, according to Moody’s Investors Service. Credit markets that started to freeze in August 2007, have now triggered more than $1.5 trillion in writedowns and losses at the world’s biggest financial institutions.
Do you really think the crooners on CNBC and in other parts of the media are smarter than the CEOs and CFOs that run our largest corporations?
But never mind Bloomberg, they’ll try to plant "green shoots" through misleading reporting:
The recession may have ended in July, said Jeffrey Frankel, a member of the committee at the National Bureau of Economic Research that dates business cycles. The median estimate of 60 economists surveyed by Bloomberg is for growth of 2.10 percent in 2010, after a contraction of 2.50 percent this year.
A member? This is what NBER’s Hall had to say yesterday at 2:30 this afternoon:
National Bureau of Economic Research’s (NBER) Hall: May wait until economy moves past prior high before deeming recession over; could take 18 months – Comments that the upturn could in fact be part of a larger decline.
How come that comment wasn’t part of Bloomberg’s story? Oh wait – they have it in a different story!
Aug. 10 (Bloomberg) — Declaring the U.S. recession over may take more than a year because of the risk that recent signs of stabilization will prove short-lived, according to the head of the group charged with making the call.
Ah. And what have I said?
Complicating a recovery call is the possibility that renewed declines in financial markets or home prices will cause the economy to shrink again, Harvard University economist Martin Feldstein,
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Tags: credit markets, GDP, leverage, Recession, S&P, Stock Market
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by ilene - July 25th, 2009 9:08 pm
Courtesy of Michael Panzner at Financial Armageddon
Below is my latest column for the Huffington Post, entitled "Wall Street’s Gains Equal Main Street’s Loss?":
Stock prices have been on a tear lately, bolstered by quarterly earnings reports that have in many cases outpaced expectations and growing optimism that the worst of the crisis-cum-downturn is behind us.
The S&P 500 index, for instance, is up more than 40 percent since its early-March lows, while the technology-laden Nasdaq Composite has scored a 13 percent gain — and, through yesterday, a 12-session winning streak — in the last two weeks alone.
Ordinarily, a bull run like this would be cause for optimism, on the belief that savvy investors see a light at the end of the tunnel. But in the currrent environment, could the good news that is powering share prices be bad news for the economy?
Consider the following recent reports from a cross-section of corporate America:
- Microsoft announced that revenues declined more than 17 percent amid falling global demand for PCs and servers. According to the Financial Times, the world’s largest software company "sounded a far more cautious note about the prospects for a recovery in the second half of 2009" and its CFO said ‘it’s going to be difficult for the rest of the year….We’re really still not sure we’re out of the woods.’"
- The CFO of UPS, the 100-year old package delivery giant with a presence in 200 countries, warned the company didn’t have "any confidence that either demand or activity is going to pick up substantially" in the next several months.
- Diversified manufacturer 3M, with operations in 60 countries, cautioned that it’s "still facing a challenging sales environment with no meaningful improvement in demand yet from several major industrial customers," the Wall Street Journal reported. "He added there is a risk that recent upticks in orders could be a ‘false dawn’ caused by an over-correction in inventory levels earlier this year by 3M’s customers rather than a sustainable recovery in demand."
- Texas Instruments, the second largest U.S. chipmaker, said "there’s little evidence yet that real growth — based on an improving market for cell phones, computers and other tech products, instead of inventory corrections
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Tags: Commercial Real Estate, credit markets, earnings, Main Street, Stock Market, Wall Street
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