Staring into the Abyss
To be sure, the credit crisis has already infected the economy, starting with the homebuilders, spreading to the financials, engulfing financials in drag such as General Electric, General Motors and Ford and will eventually phase through retail, technology, credit card companies and commodities.That’s the orderly scenario, a stair-step through industries until debt is destroyed and a more sustainable economic foundation takes root. It’s akin to credit cancer and once it spreads through our entire financial body, we’ll be in a position to enjoy the globalization-themed “outside-in” recovery that awaits.
The other option is an outright car crash, a collision where credit seizes, capital markets freeze, price discovery permeates and social mood shifts as we come to terms with the new world order.
Amongst his usual metaphoric ramblings, Todd sets out the stark reality US markets face today & for the foreseeable future. But how can we quantify crash avoidence versus a step-wise sector-by-sector decline? Another excerpt may help the reader:
Financial institutions have $871 billion in debt coming due into year-end.
If corporate America can successfully roll those obligations and buy more time, odds are we’ll see a sharp upside equity rally.
If, however, sufficient appetite doesn’t emerge for that credit, the potential exists for an unmitigated equity disaster.
A key player in all of this is as always the economic powers that be:
The boys on the Beltway know this all too well and we should expect a wave of announcements in the coming months designed to spur the herd higher.
Therein lies the risk to downside bets, a coordinated agenda that is by design the recipe for a short-squeeze.
So we have fight between a credit market that doesn’t want to trade versus businesses in sectors that haven’t yet felt the impact & the bureaucrats that may or may not have the power to avert disaster. Can the latter really muddle through this time?