Doug Noland writes a good piece this weekend.
prudentbear.com
If I had to read it again (sometimes his essays are painfully long) I would skip the first third and go down to the TYC and HI and GSE's stuff. A good read as it appears that a real financial crisis may be taking shape. His argument makes a fair amount of sense. Here are a couple excerpts:
>>>>In this context, we had two major developments this week. First, we have a major company (Tyco) apparently experiencing difficulty rolling its commercial paper. Over six sessions, the spread on Tyco bonds blew out 300 basis points to 430. Second, we have heightened concerns within the Bush administration that GSE debt growth is out of control and their derivative activities an increasing systemic issue. These developments are getting too near the U.S. Credit system’s jugular for comfort.
At the minimum, we’ve passed a critical inflection point in the unfolding financial crisis, with the U.S. corporate bond market moving toward dislocation. It is today fair to say that this unavoidable predicament was only delayed by last year’s extreme Fed accommodation and massive GSE-led reliquefication. This “respite” has come to an abrupt conclusion. It now appears the commercial paper market is closing down for many, including major borrowers such as Tyco. I don’t think we can overstate the importance of such a circumstance. Throughout the corporate bond market spreads have widened, in many key instances dramatically. We’ve reached a point where this is very much a systemic issue impacting some of the largest corporate borrowers including Tyco, Household International, WorldCom, Williams Companies, as well as a bevy of others including Motorola and Calpine (naming just a few). <<<
The Noland sums up his piece with this;
>>Not only are we approaching a critical juncture for the acutely vulnerable U.S. financial sector, the marketplace is about to come face to face with the shocking realization that the Fed has erred terribly and has little power to mitigate the deep structural damage imparted on the U.S. financial system and economy. Unfortunately, more money is not the solution, but will prove increasingly part of the problem. We do worry that there is today $8 trillion of what is perceived to be safe “money,” backed by various promises, guarantees, Credit insurance, “default swaps” and other derivatives, as well as sophisticated structures and vehicles domiciled who knows where. It’s a most dangerous confidence game. And in a troubling parallel to Argentina, it is our view that the serious stage of the unfolding U.S. financial crisis commences with a faltering dollar. <<
Joe |
