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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: yard_man who wrote (191232)9/10/2002 1:48:10 PM
From: reaper  Read Replies (3) of 436258
 
for all of the 'we are not Japan' apologists, this is EXACTLY how the credit markets are working in Japan right now. huge companies are technically insolvent (liabilities are worth more than the debt) but with PIK interest payments you can pretty much go on forever.

of course, the life-blood of an economy is to earn a RETURN on the capital base. there is no return when interest and principal payments are PIKed and added to the end of the loan. this is precisely why all the interest rate cuts by the Fed have been to no avail; none of the 'new' money is earning a return, it is simply replacing the old money. the stock market is well aware of this, as is the bond market, which is why ten-year yields hover at 4% and spreads on risky bonds are at levels not seen in years.

btw, i would NOT count on people in ARMs getting blown up by higher rates. adjustable rates are going LOWER.

Cheers
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