An excerpt from Mish's latest blog posting. He self-congratulates himself for calling the top on housing without the caveat that he was calling the top for years. He'll deny that of course. BUT the beauty of his blog is that it's all there as proof.
Now Mish is letting us know that the CLO market is going the way of the CDO market...soon. So we'll see if it happens. My belief is no, not yet. We are in the equivalent of the 2003 residential ABS market for corporate debt.
Sorry Mish, companies that can cover the debt with their cash flow in a liquid global environment ALWAYS get the financing. ALWAYS.
Recessions (and vicious bear markets) occur when Investment Grade companies cash cannot sufficiently entice lenders to lend.
While closer than we were say 2 years ago, we're so far from that right now it ain't funny.
Spreads ain't blowing out soon, I'd be surprised if we even move to historical trend this year.
The Catalyst
Here's an interesting sentence from the above article: "It is hard to predict what the catalyst might be for a rise in defaults."
I strongly disagree. The catalyst is easy to predict (even if the timing itself is difficult). It will be a sudden change in risk tolerances of hedge funds, investors, and/or others to do these deals.
I talked about sudden changes in sentiment in Consumer Sentiment Wanes as Housing Slumps.
Flashback Summer 2005
Floridians were camping out overnight in lines to buy Florida condos. Prices were soaring. Did prices start falling or did the pool of fools willing to buy Florida condos at increasingly absurd prices dry up first?
Flash Forward Summer 2007
Will stock prices drop first or will the pool of fools willing to finance increasingly absurd leveraged buyout deals and debt financed stock buybacks dry up first?
In 2005 the conventional wisdom was that it would take much higher interest rates to sink housing. Conventional wisdom was wrong: the catalyst was a sudden and sustained change in the willingness of fools to invest in Florida houses . In short: the pool of greater fools simply dried up.
Whether it's housing, leveraged buyouts, toggle bonds, distressed debt in general, or stock prices, it will be a change in appetite for risk that leads the charge.
With that thought in mind let's turn or focus on the question: "But are these 'rescues' permanent or are defaults merely being pushed off for a later date? That is a distinction [that] is impossible to determine until it is too late."
Too Late Already
I suggest that it is possible to determine whether or not it's too late. Furthermore I suggest that it's already too late.
Flashback December 13 2005: It's Too Late. This is what I wrote:
I think it's too late.
In fact I know it's too late.
How do I know?
The following Email I received tonight should explain it nicely.
When you see stuff like this, not only is it too late, it's way too late.
Just and there was too much housing and subprime garbage in 2005 to be unwound, there is now too many toxic CDOs, toxic CLOs, toxic toggle bonds, toxic LBOs, and simply too much toxic stuff in general to be unwound. And when the unwinding attempt really gets going (it has now barely started) there simply will not be any bids for most of this toxic garbage. Want proof? Just ask Bear Stearns. The debacle at Bear Stearns is but a drop in the bucket for what's to come. |
