While the stock market is rallying, the credit markets are still working on the assumption of absolute disaster. Where is such a dire forecast coming from?
Deutsche Banks published a study that shows the gloomy reality that the credit markets are predicting. They used the iBoxx index of investment grade corporate bonds and found that default rates in Europe are priced at 38%, in the US at 40% and at 51% in the UK. All of these readings are worse than in the Depression.
Nothing has changed over the past two weeks even in the face of a strong stock rally. The study concludes that there can only be two explanations for the divergence. One theory is that the credit markets are so illiquid that the numbers bear no relationship to the outcomes that investors expect, or that investors expect a rerun of the Great Depression.
So in the overall, the message is -- choose your poison -- recovery or depression.
Which do you think will happen?
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Reader Comments (Page 1 of 1)
3-31-2009 @ 5:08PM
BHarrison said...
In the Great Depression of the 1930s there was NO such "credit" indebtedness that we currently have. "Credit card indebtedness" is a relatively new credit instrument. Just as the FIs sold the "derivatives at vastly inflated prices to help keep their operations afloat, the credit card companies have been charging obscenely exorbitant rates and fees to bolster their sagging profitability.
The problems as I perceive it is the Harvard / Princeton MBA types who have sought to maximize the quarterly returns for all of the corporations at levels to support CEOs and upper management’s collecting excessively exorbitant salaries.
In hindsight, the basic problem behind these economic debacles has been the corporate quests to use any means, legal or illegal, ethical or not, to maximize the monthly and quarterly business activities and "profits" to perpetuate the corporate "games" to support management’s income and other compensations . . . and they pushed these practices to the point of the economic collapse of our economy.
A major consideration is whether we, as a nation, can afford to have these purportedly "bright and talented, yet unethical management, devoid of integrity, running our business enterprises. Logic would state that these CEOs and upper management have failed in their fiduciary responsibilities; and they have too much of a vested interests in covering up their "crimes of the past".
We need to purge these men from our corporate enterprises; and replace them with ethical men who do have INTEGRITY, without ties to the "old crimes". The "old dogs" in management may be "talented and experienced"; but it WAS THAT "talent and experience" over EIGHT YEARS that undermined our entire economy and financial infrastructure . . . I'm afraid that those guys are "damaged goods" . . . our nation doesn't need that type of "flawed "leadership"" for "recovery" and rebuilding our national financial infrastructure.
3-31-2009 @ 8:50PM
william lindblad said...
Well, I don't have to vent, although I sometimes fell like it. What you are looking at is not a paradox as it has a simple answer. They don't know. Since there so many fancy named securities sold around the world, the actual amount of debt still remains an unknown. That's scary, creates uncertainty and, as Gordon Brown puts it, destroys confidence.
He is right - confidence is the name of the game. Until that gets moving in a positive direction, little is going to change.