The
global slump of 2008-09 has begun as poison spreads
By Ambrose
Evans-Pritchard, International Business Editor
Last Updated: 12:59amBST
13/05/2008http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/12/ccambrose112.xml
The avalanche of
bankruptcies has begun. Six UScompanies 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).
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 UScompanies 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.
The Californiacity of Vallejo(117,000 inhabitants) has just made history
by opting for Chapter 9 bankruptcy, the result of tax erosion from a 26pc fall
in local house prices. Half Moon Bay may be next.
“This is the tip
of the iceberg: everybody is going to line up for Chapter 9 in California,”
said John Moorlach, OrangeCountyboard chief.
USconsumers are juggling plastic to put off
their day of reckoning. The Fed survey said credit card debt had jumped 6.7pc
in the first quarter to $957bn, or $6,000 per working American, despite usury
rates near 20pc.
“My guess is that
many Americans continue to run up massive credit card debt because they have
little intention of paying it off,” said Peter Schiff at Euro Pacific Capital.
Quite.
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.
One dreads to
think what would have happened if Fed liquidationists (Plosser, Hoenig, Fisher)
had prevailed, as they did in 1930 - and still do in Euroland, where Germany’s
Axel Weber holds sway, and nobody of
sense dares lead a mutiny.
Despite the
rescue, UShouse prices are likely to fall 25pc from
peak to trough (Lehman Brothers, Goldman Sachs). We are barely half done, yet
10m-12m households are in negative equity already.
The bears at
Société Générale are going into Siberian hibernation, issuing an “Ice Age”
alert. They have slashed exposure to global equities to a minimum 30pc for the
first time ever.
Their weighting
of super-safe “AAA” government bonds has been raised to a maximum 50pc. This is
a bet on gruelling “Japanese” deflation. The bank expects equities to fall by
50pc to 75pc.
“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.
Today’s “bear
rally” may live on into June. Don’t count on it. Global bourses are no longer
rising hand-in-hand with oil in exuberant celebration of liquidity relief (US,
UK, and Canadian rate cuts).
Crude ceased to
be a friend of equities when it reached around $110 a barrel. At last week’s
close of $126, it became an outright threat. The Bush rescue package - $800 in
rebate cheques per household - has been rendered null and void by the latest
spike. The average UShome is now spending over 8pc of income on
energy or fuel.
OPEC is playing
with fire by refusing to pump more oil to offset rebel attacks in Nigeria. The
cartel’s output drop of 350,000
barrels a day in April is a hostile act at this point.
But there again,
why should Middle Eastern states help America as long as the White House keeps
filling the US petroleum reserve to prepare for war with Iran? Bush is playing
with fire, too.
The oil spike
will burn itself out. Chinahas hit the buffers. With inflation at
8.5pc, it risks political turmoil. Moreover, it has repeated Japan’s mistakes
in the 1980s, building too many
factories shipping too many goods at slender margins into a crumbling export
market.
Lehman Brothers’
Sun Mingchun says Chinawill 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 Chinawill go down before Americacomes back up. This
is turning into a
synchronised bust, after all. The Global Slump of 2008-09 is under way.
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