The global slump of 2008-09 has begun as poison spreads
The avalanche of bankruptcies has begun. Six US companies of substance have defaulted on bonds over the past fortnight, against 17 for the whole of last year.
As a "non-believer" in the instant rebound story, I am not easily shocked by gloomy reports. But the latest note by Standard & Poor's - The Bust After The Boom - gave me a fright.
The sick list is varied, though most for now are victims of the housing crash: Linens 'n Things, ($650m), Kimball Hill ($703m), Home Interiors ($310m), French Lick Resorts ($142m), Recycled Paper Greetings ($187m), and Tropicana Entertainment ($2.49bn).
Emphasis added by me.
Not scary enough?
As the Fed's latest loan survey makes clear, lenders have dropped the guillotine. With the usual delay, the poison is spreading from banks to the real world.
Diane Vazza, S&P's credit chief, says defaults are rising at almost twice the rate of past downturns. "Companies are heading into this recession with a much more toxic mix. Their margin for error is razor-thin," she said.
Two-thirds have a "speculative" rating, compared to 50pc before the dotcom bust, and 40pc in the early 1990s. The culprit is debt. "They ramped it up in the last 18 months of the credit boom. A lot of deals were funded that should not have been funded," she said.
Some 174 US companies are trading at "distress levels". Spreads on their bonds have rocketed above 1,000 basis points. This does not cover the carnage among smaller firms outside the rating universe.
Emphasis added by me.
This is where, again, I must otherwise disagree:
Thankfully, the Fed's monetary blitz has averted a depression. Emergency lending under the "unusual and exigent circumstances" clause of the Fed Act - the nuclear Article 13 (3), unused since the 1930s - has put a floor under the banking system.
There will be no "reset Armaggedon" as rates vault on honey-trap mortgages. Drastic Fed cuts - to 2pc from 5.25pc in September - have conjured away that disaster, at least.
Emphasis added by me.
Ambrose, of course, means "All other things remaining the same."
But things won't!
Something is going to come along, even if it would in normal times be considered a breeze, and blow over this house of cards.
See, even Ambrose records more is on the way:
"Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios," said Albert Edward, SG's global strategist.
"We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that 'the worst might be over' is truly staggering. Profits are disintegrating," he said.
Emphasis added by me.
Accuse me of being overly pessimistic? What about him? That quote is from a financial expert!
Lehman Brothers' Sun Mingchun says China will tip over in the second half of this year. "With so much latent overcapacity, an export-led slowdown could trigger a chain reaction which, in the worst case, could threaten the stability of [its] financial and economic system," he said.
Britain, Europe, Japan, and China will go down before America comes back up. This is turning into a synchronised bust, after all. The Global Slump of 2008-09 is under way.
Emphasis added by me.
Soothe the jitters by calling it a slump. But it's not!
And it won't feel like one, either.
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