Feb 20 2008
Credit Turmoil Spreads
This Credit Crisis Has a Long Way to Run
Jeremy Grantham, Chief Investment Strategist, GMO, has a few things to say about what’s transpiring in the credit markets and the very negative implications it has for the U.S economy. Among the high profile managers, he was earlier than most in calling the looming crisis. His interview is worth a read.
Turmoil as credit spreads hit record levels
The Fed disclosed a little bad news, while private equity (former) darling KKR has delayed again billions of dollars in short term paper (see below). Meanwhile commodity prices are running amuck (see below), and Hospitals, Port Authorities, and even Student Loans are not able to raise money amid a $60 billion debt auction failure last week, while what actually sold of the $330 billion total, much of it went at exorbitant rates, such as UPMC Medical system’s AAA rating fetching lenders for some of its debt sold at a mere 17% rate last week. This set in motion a plan by UPMC to buy back $91 million of debt to stem bleeding of about $500,000, which a week caused by the auction market collapse.
Woah! Look out credit derivatives markets! Hold on to your hats!
Granted, with oil refineries blowing up and Chavez making nutty demands, it’s easy to dismiss this news. But on the other hand, welcome to the brave new world where refineries in the United States are ancient and growing more difficult to keep up thanks to unbridled environmental and NIMBY (Not in My Backyard) Lawsuits that effectively keep new production off-line, and the U.S. dependent on foreign sources — including refineries. Get used to it!
Recession Watch: Inflation Rears Its Head You bet– It just ain’t Oil. But what can you expect with M3 Money supply chugging at close to 15%?!? That after all the liquidity earlier this decade. Those new dollars all have to find a new home. All of which is confirmed through a flurry of other news:
- Consumer Prices in U.S. Increase More Than Forecast
- Wheat Shreds Goldman, USDA Forecasts Belied by
- Soybeans Extend Rally to Record, Corn Rises on China’s Demand
Private equity, the darling of high net worth investors and the Wall Street mega-bonus / 200 foot yacht buying crowd are running into trouble. Too many models in recent years were built around unsustainable profit margins. Paying a 25% premium on a company’s price while using 4-1 leverage was la-la land thinking common to contemporary finance in recent years, slopping thinking reinforced by a long stretch of big (and I mean BIG) profits from closing deal after deal.
Subprime loans defaulting even before resets
Oy vey! Much as we’ve reported before, many borrowers couldn’t afford the below market intro rates. Even a year ago loans were slipping into late payment mode within the first 90s days.
GMAC to Shut U.S., Canada Field Offices After $2.3 Billion Loss
Housing. Auto / Credit Cards. Commercial and Retail Real Estate. Private Equity. Those are the shoes as they will drop.
Wall Street Abandons Neediest Clients, Cuts Credit
” “There’s nobody out there trying to lend money on securities,” said Luminent Chief Executive Officer Trezevant Moore. Six lenders are offering five times leverage on what the San Francisco-based company has contributed, while a year ago, 20 banks extended 33 times, he said.”
Fed Forecasts Higher Unemployment, Slower Growth
Well, there’s nothing quite like confirming the obvious… We should always remember that the Fed views itself partially as the manager of economic expectations, therefore serving as cheerleader to the economy. But when such dislocates from reality — as it clearly has with Fed governors earlier this decade cheering on Adjustable Rate Mortgages while discounting the threat of housing bubbles — it really is no better than wishing bad things away. You know… see no evil, hear no evil, speak no evil.
