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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Mike M2 who wrote (1788)	1/19/2001 6:56:40 AM
From: Baldur Fjvlnisson	Read Replies (1) \| Respond to of 74559

GOODBYE TO FREE-FLOWING CREDIT """...If the sudden, rapid slowdown both of consumer and corporate spending appears awesome, even more awesome is the speed with which the American financial system has shifted from unfettered credit excess to a nascent credit crunch, even though excess reserves of the banking system are at a higher-than-usual level. Evidence of a developing credit crunch is all of a sudden everywhere. What’s behind the shift? Given the ample supply of bank reserves, it’s obviously not Fed action that has caused this dramatic change in the financial climate. Its apparent main cause must essentially be a fundamental reassessment of risk throughout the economy, triggered by escalating, alarming news of bond defaults and bad bank loans. On Oct. 16, Bank of America reported a sharp decline in third-quarter income as non-performing loans had jumped nearly 50%. The next day, Chicago’s Bank One reported a 37% drop in earnings in large part for the same reason. Losses from large syndicated loans by U.S. banks so far have more than tripled this year to about $5 billion. That’s higher than in the last recession. New bank lending has slowed to a crawl. Just as bad, if not a lot worse, is the situation in the other lending channel of the financial system: the capital markets. The junk-bond market has collapsed, with yields at their highest level in a decade. Actually, a growing number of investment-grade bonds are trading as if they are junk. As stock prices drop, dealers and inventors quickly mark down the value of related bonds as well. According to S&P, corporate debt downgrades have vastly outnumbered upgrades for nine quarters. Recently, the manager of the world’s largest bond investment fund declared that he would avoid corporate bonds "at any cost" because deteriorating credit quality would lead to many more "debt faults." For many companies, each and every avenue for credit is being closed. Not surprisingly in view of the rout in the stock market, the situation is just as bad as for equity financing. More and more IPOs have to be "postponed." For the time being, it looks like a slow-motion credit crunch, but wait until the markets awaken to the probability of a hard landing. While policymakers and investors yearn for a cooling economy to prevent rising inflation and fend off future Fed rate hikes, they are unprepared for the havoc that a sharply slowing economy will play with corporate earnings – and with America’s extremely vulnerable financial system...""" Dr. Kurt Richebacher is editor of The Richebacher Letter, published by The Fleet Street Group. Subscription inquries call (888) 737-9358. prudentbear.com