Monthly Archives:

October 2008

The Great Credit Crash

Since May 2007, we’ve seen the Great Credit Crash, with the fastest and sharpest sell off in credit that the modern world has ever seen.   In the US, in May 2007, the average BBB corporate bond yielded just 120bps (ie 1.2%) over a government bond.  The figure was 699bps as at the end of yesterday.  BBB rated bonds now yield 10% on average in the US and UK, and almost 9% in Europe. This chart is…

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When rates get to zero, what happens next? Quantitative easing

Later today the Fed will probably cut US rates by 0.5%, down to 1%. After this we’re only a couple of cuts away from a zero percent Fed Funds rate. When rates are at 0%, what can a central bank do to stimulate the economy? Well some possible answers are found in Japan, although with its economy still struggling to print positive growth numbers a full 18 years after its bubble burst, it may not …

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What’s the risk of governments defaulting?

The vast sums of money being thrown by governments at banks right now have clear implications for developed countries’ credit worthiness.  Meanwhile, emerging market governments are facing a crisis of their own.   I thought it would be useful to have a look at which countries the bond markets say are at greatest risk of default, both developed and developing.

The attached chart from Bloomberg t…

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Deflation might be coming, but will it really stay until 2018?

Inflation-linked bonds around the world have seen heavy losses in the past couple of months. 30 year UK index linked gilts are down by nearly 20 points (15%) since August, with similar selloffs seen in the US and European markets. After the inflation scare of the first half of 2008, with oil hitting $140 per barrel and food prices rocketing, the markets are suddenly realising how quickly global…

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The 2008 Great Crash – an historical perspective

It’s always very hard trying to get a sense of historical perspective, particularly when you’re living through something that will be discussed and debated long after we’re all gone. I think this chart helps. It shows the S&P going back to January 1928, and I’ve used a logarithmic scale so that you can get an idea of how this crash compares to those that occurred in previous eras.

The 30% fall…

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Mums go to Iceland (to get their savings back)

Readers of our blog in spring ’07 were probably a bit bemused as to why we were banging on about a little island over 1000 miles away from continental Europe, with a population the size of Sunderland/ Venezia/ Gelsenkirchen/ Cordoba/ Strasbourg/ Pittsburgh. It’s pretty clear now – Iceland is probably the world’s best example of the credit bubble, and the subsequent credit bust. Icelandic compan…

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UK housing market and rate cuts – are we nearly there yet?

In light of the news of recapitalisation of the UK banking sector (which Ben alluded to in his blog yesterday afternoon here) and today’s coordinated global rate cuts, I thought it would be an appropriate time to see whereabouts we are on the road to recovery.

The route map we have been following has been laid out on this blog over the past 18 months (see last comment here), and is updated in …

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Sick financial markets – a recap(italisation)

One of our credit analysts came up to me on Friday and told me to pull my finger out and get something on the blog. So apologies for the lack of comments from mid-September. As you can imagine, things have been rather busy.

A lot has happened in the last few weeks and I thought I’d shed some light. The credit cycle has turned. Abundance of credit has given way to its utter scarcity. Companies –…

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The demise of ‘supersub’ bank bonds

The original ‘supersub’ was the ginger scouser David Fairclough, famed for coming off the bench to rescue the mighty Liverpool FC. The financial markets themselves have returned to the 1970s with chants of stagflation and bank failures emanating from city players. Everyone is fully aware of sub prime, but as I explained in the FT today, corporate bond investors’ main concern should be about sub…

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