Friday, May 30, 2008

Credit Crisis Deteriorating

As politicians and industry media assert the beginning of growth again. Prudent investors however would notice that recent moves in credit markets have yet again foreshadowed a different story. Ambrose Evans-Pritchard of the UK based Telegraph internet newspaper spotted the events, and the world should listen.

“The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.

The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.

…‘The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March.’

Lehman Brothers took writedowns of just $200m on its $6.5bn portfolio of sub-prime debt in the first quarter even though a quarter of the securities had "junk" ratings, typically worth a fraction of face value.

Willem Sels, a credit analyst at Dresdner Kleinwort, said the banks are beginning to face waves of defaults on credit cards, car loans, and now corporate loans. ‘We believe we're entering Phase II. The liquidity crisis has eased a little, but the real credit losses are accelerating. The worst is yet to come,’ he said.”

Naked Capitalism also took notice of this, along with a few other observations regarding US treasury auction related issues. All said and done, things do not look great.

Unfortunately, having a negative economic bias has become politically incorrect today, and comments from Evans-Pritchard will probably never make it outside of England. Taking a stand against the crowd entails courage and conviction, as only the truth could help one avoid getting caught in the next market drop, and perhaps profit off it. Keep your mind open, stay informed.

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