Peter Grandich On The Markets 2007+2008

Quick Note –

I have a special fondness for Canada (except the Vancouver Canucks, who are once again leading their poor suffering fans to yet another big disappointment come playoff time) and while I believe it’s in much better shape than its neighbors to the south, I don’t think it can escape being impacted by what’s unfolding here. Like it or not, Americans buy more than three-quarters of everything Canada exports, which accounts for nearly a quarter of Canada’s GDP. Yes, it may no longer be true when America sneezes Canada catches cold, but it appears prudent for Canadians to at least put on a sweater and gloves.

CAUTION

The Sub-prime mess and an economy heading toward or already in recession is most likely going to create some headlines like this in the not-too-distant future: “Troubles in the Corporate Debt Market.” Up until this fall, defaults on corporate bonds were at their lowest levels in more than 25 years. But, with an absolute binge of borrowing in this millennium and an economy heading for the dumps, I anticipate heightened concerns going forward in the so-called “high yield” (who buys low-yield bonds, anyway-lol) market. Citigroup’s (yes, they are in trouble themselves) credit research team has issued a warning worthy of heed:

Summary –

The public-at-large, especially those poor souls who watch “TOUT-TV” (CNBC-TV), have no real idea how enormous this crisis is. First and foremost, the debt markets are ten times larger than the stock market yet most investors misunderstand it or watch it - UNTIL NOW!!! Economic life begins and ends with the debt market as financings for governments, companies and pension funds with credit instruments are done there on the belief loans will be repaid on a contracted schedule with interest.

Here’s why I believe history will end up not being kind to former Fed Chairman Greenspan: banks and pensions profited when there was a wide difference between short and long term interest rates. They took in on the short side and loaned/invested out on the long side. But thanks to Greenspan’s allowing rates to fall incredibly low and seeing the yield curve all but disappear, banks and pensions ended up willing patsies for the plethora of exotic instruments Wall Street created at the expense of borrowers who could least afford the risk. Now the time has come to pay the piper in the debt market, and for America to pay for years of living way beyond their means.