If you remember the August panic all the credit indicators were declining in sync at the alarming pace. You remember, the credit-default swaps collapsed, Libor exploded, junk bonds sold off, outstanding commercial paper went off by $200 billion at once. Many hedge funds hid from investors that they were 30% down (then they recovered, all tutti-frutti). That was a wake up call on the coming credit crunch.
Since then there was just a little panic in October-November and then the credit markets finally entered a dull phase. What I mean by that? At any given week some instruments are falling, some are improving, a little panic here, a little recovery there. Instead of those spectacular $10 billion write-offs we have $1 billion here, $1 billion there (but we will have several years of those $1 billion write-offs).
For example, take the last few days. Junk bond market recovered, CDS are improving, but Libor spread is making 20-year records and commercial paper is slowly bleeding. There is no widespread panic anymore, meaning the players are making slow and calculated adjustments in the positions. Some are writing off losses, some are bottom fishing or just trading.
- APCP fell by another $23 billion
- 1-month Libor went from 4.79% to 5.25%, 3-month Libor from 5.04% to 5.15%
- Junk bonds and CDS are recovering
I’m sure that another rate cut is coming, that Christmas rally will continue for another few weeks until year-end bonuses are invested. The manufacturing is still fine mostly on exports, productivity is already up like we are in the recession, which helps.
I think the market is mostly ignoring the deteriorating credit conditions and doesn’t understand that cost-cutting is already underway, and cost-cutting means that the durable goods and capital spending will start falling very soon. What market paying attention for is just the job market, which is a trailing indicator. It will probably take up to February for the most observers to realize that we are in the bear market. Only then the meaningful sell-off will probably start