maybe the credit default spreads have it right...
I keep hearing the industry "experts" talk about how the dislocation in the credit markets is beyond all rationality. They seem perplexed that AAA companies are seeing their cost of debt insurance in the CDS (credit default swap) market skyrocket, or the spread on Fannie Mae mortgage securities rise.
But what if it is the ratings that are wrong, and the credit markets are giving us a more accurate picture of what's in store? Does anyone really have faith in the models the ratings agencies use to determine credit worthiness anymore? I fell over reading this quote from a finance guy who said that the CDS spreads imply we are in a deep depression.
Well, he said it... I just happen to agree with that assessment (not yet maybe, but over the next several years). Instead of thinking that the credit markets are just going to sort themselves out, allowing everything to get back to normal, maybe we should be preparing for the stresses in the credit market to bleed over into the real economy.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aDvSNAreJrOw
But what if it is the ratings that are wrong, and the credit markets are giving us a more accurate picture of what's in store? Does anyone really have faith in the models the ratings agencies use to determine credit worthiness anymore? I fell over reading this quote from a finance guy who said that the CDS spreads imply we are in a deep depression.
Well, he said it... I just happen to agree with that assessment (not yet maybe, but over the next several years). Instead of thinking that the credit markets are just going to sort themselves out, allowing everything to get back to normal, maybe we should be preparing for the stresses in the credit market to bleed over into the real economy.
``The credit-default swap market is completely distorting reality,'' said Henner Boettcher, treasurer of HeidelbergCement in Heidelberg, Germany, the country's biggest cement maker. ``Given what these spreads imply about defaults, we should be in a deep depression, and we are not.''
http://www.bloomberg.com/apps/news?pid=20601109&sid=aDvSNAreJrOw
Comments
I'd actually generalize this opinion even more. It seems like the industry experts are perplexed at every turn. They are perplexed over housing, perplexed over credit, perplexed over inflation, perplexed over jobs reports (or at least the interplay between inflation and the jobs reports).
I can give you a great example of what's going on here; it's like looking for your keys if someone else moved them. You remember leaving them on the table, so you look at the table, under the table, near the table. Meanwhile, the last person to touch them, put them back on the key rack where they really belong.
These experts are too close the problem. They think they see it all, but they can't. The invisible hand is moving the markets back where the belong, with risk being appropriately priced and prices moving to sustainable levels, but the experts see all the systems they put in place to specifically make that correction impossible. So instead, they act perplex, walk around with a confused expression on their faces, make statements like your quote. They just can't find their keys.