Monday, June 25, 2007
The Coming Credit Meltdown or not
With interest rates spiking higher over the past month or so it is not surprising to see a few people pointing out the causes of weakness in the market. It is a little funny to an old market watcher to see this degree of pessimism just one day before an important low in bond prices. If WaPo is right you better scrape together some pencils and apples to sell 'cause the depression is starting now.
It is impossible to predict when the magic moment will be reached and everyone finally realizes that the prices being paid for these companies, and the debt taken on to support the acquisitions, are unsustainable. When that happens, it won't be pretty. Across the board, stock prices and company valuations will fall. Banks will announce painful write-offs, some hedge funds will close their doors, and private-equity funds will report disappointing returns. Some companies will be forced into bankruptcy or restructuring.Robert Samuelson is a bit more restrained.
But the damage won't be limited to Wall Street and its investors. For if we've learned one thing in the past 20 years, it is that what happens on financial markets, in booms and in busts, can have a big impact on the rest of the economy.
But this grim fate is hardly preordained. Judged by historical standards, the increase in interest rates is modest and may reflect a strong economy as much as tighter credit. Indeed, credit is still ample, just less so than a few months ago. Aside from subprime mortgages, delinquencies on other bonds and loans remain low. Interest rate "spreads" -- the gap between rates on safe and risky loans -- also remain low.
I really shouldn't beat up on these guys at all because I happen to think they are right but their timing is classic. Not quite Death of Equities funny but close. The credit markets are choking on bad debt right now and I seriously doubt the bear market in bonds is finished but let this post stand as a testiment to the folly of making financial decisions based on what's in the news. In this case, at least short term decisions.