Market Recap Tuesday November 15, 2011
I’ve said this a number of times before, it is human nature to ignore what you don’t understand. If you don’t see something as a problem then it is not a problem. If you ignore something it will disappear. History has proven that to be a very dangerous trait. Yet that is exactly what investors are doing right now.
Credit markets are not very complicated. It only takes a little studying to understand the various products and what they are telling you. Without credit you have nothing. You have no economy. You have no corporate profits. The past week some major events have happened in the credit markets yet I am amazed at how many investors are simply ignoring them. [...Read Less...]
I said yesterday there is a bubble in the perception of risk. Many investors truly believe the central banks will print at will even though that contradicts what these very banks have been saying publicly. The level of stress in the credit markets and speed in which that stress is rising is greater than any central bank can handle.
So rather than a typical market recap discussing various asset classes which again have diverged from the ES let’s take a look at what is happening within credit.
Look at how difficult a small economy and relative debt like Greece was to the EU. In fact that problem is still not settled as the leaders still refuse to sign a letter of intent on austerity. Italy and or Spain where the big concerns. They are simply too big to save and there is no plan in the works. Look at the charts below. The worst case scenario is happening. The speed of the scenario is even greater than anyone anticipated.
Italian 10 Year Yield – 7%
Spanish 10 Year Yield – 6%
Spain for example today issued debt and failed to raise the allotted amount. I guess you could call that a failed auction. A truly negative feedback loop has begun within credit and it is driven by fear and lack of confidence. With rising risk, a questionable CDS market and investors dissecting balance sheets the race is on to sell sovereign debt. To limit overall exposure. Debt is being sold across the board into a somewhat bid-less market.
As prices fall collateral calls rise. The ability to fund through the repo market decreases. But what is most scary is the credit cards are simply being turned off for sovereign nations. We are not talking banks or other large corporations. No we are talking sovereign nations.
In just two weeks Italy in essence has seen their future debt service double. Italy now needs to be careful with future auctions. A failed auction or further rise in rates would be very dangerous. It also appears the ECB is pulling back from direct purchases while continuing to say they refuse to be the lender of last resort. How monetizing debt is beyond their scope and not something they will do. Those realities are helping to fuel investor fears.
This is not isolated to credit markets. This is real and is happening fast. If you “trade equity” you are not protected or sheltered. The two are one and history will once again show that ignoring credit is a very costly mistake.
