071110-BIGGEST_TRAIN_WRECK by liaoxiuli

VIEWS: 31 PAGES: 25

									   THE BIGGEST TRAIN WRECK
   IN CREDIT MARKET HISTORY




Bob Hoye          www.InstitutionalAdvisors.com
Sept. 6, 2007
         Two Aspects of the
           Credit Market
1.   The yield curve is the difference
     between long and short-dated
     interest rates.

2.   The credit quality spread
     indicates the difference in yield
     between high-grade and low-
     grade bonds.
In a boom the curve inverts as
short rates rise faster than long
rates.
The Fed can fool around with interest
 rates and currency manipulations.

. . . .but the market rules the curve.
In a boom confidence narrows credit
spreads.

No matter how dedicated the Fed
manipulations are:

  market forces rule credit spreads.
           1873 Bubble
   US on fiat currency.
   The boom included stocks, bonds
    and commodities.
   The Franco-Prussian War
    amplified the boom in base
    metals.
   Secretary of the Treasury,
    William Richardson, was highly
    regarded.
    With this the boom should have
    run forever:
   As the typical strains appeared
    in the credit markets the leading
    newspaper editorialized that the
    Treasury System, without gold,
    was superior to a mere central
    bank.
   The Treasury could inject
    liquidity by buying bonds out of
    the market.
   Nothing could go wrong!
The period from 1873 to 1895
         was called

  “The Great Depression”
 Senior economists
 analyzed it as such
until as late as 1940
If you keep your data base
short enough it will fit your
          theory.
The Problem
The Result
All of the chickens
 are coming home
       to roost.
The biggest
cluster cluck
 in history.
        October 19, 2007
Liquidity is disappearing again
         ABX Indices
 AAA                       AA




  A                        BBB
      October 19, 2007


Subprime Contagion
                         Preferred shares of
                         Canada’s largest bank




                         BBB Subprime
                         mortgage bond
    Central Bank Promotion
   Nothing can go wrong.

   If it does, we are the only ones
    who can fix it.

   Both can be accomplished
    through “managing” the currency.
   This has fostered virtually
    unlimited government
    ambition.

   A gold-backed dollar manages
    the ambitions of government.
           The Problem

   Artificial money and artificial
    interest rates.

   Artificial securities with
    artificial pricing and credit
    rating.
            The Remedy
   Mr. Market and Mother Nature
    have been correcting extremes in
    the markets for centuries.
   The culture of omnipotent central
    banking has yet to be corrected.
   It will!
   It will be trashed.
          Bob Hoye

www.InstitutionalAdvisors.com

								
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