Wear-out isn’t just a concept for media and advertising planners; it also describes the public’s appetite for things like the word “subprime” and “credit crunch.” And after the Fed’s bailout of Bear Stearns — a move that we still think was the right thing to do here at HW — credit concerns eased somewhat, and investors started to breathe easier. Is the worst behind us? Really? Mark Gongloff over at the Wall Street Journal says it’s probably time we buckled up for a longer ride on the roller coaster of a credit crunch that likely has yet to run its course:
Throughout the joyless Space Mountain ride of the credit crunch, the brokerage sector has been the kid in the front car who screams first, signaling the dangers ahead. Many investors have been thinking lately that the ride is over. But listen carefully, and you will hear more screaming. Since the end of April, Lehman Brothers Holdings stock has fallen 19%. Merrill Lynch and Morgan Stanley are each down 13%. Goldman Sachs Group is off 10%. … the cost of buying … credit-default protection in swaps markets has risen again. Lehman’s is the highest it has been since March.
Gongloff isn’t alone. A market participant that we have a ton of respect for suggested to us Wednesday that this could be one roller coaster with reverb. “As for credit performance going forward, my bet is that [a] ripple effect in consumer credit ripples back to further weaken housing,” she said. “Expect a couple of rounds of that before bottom … I am a 2010 believer myself … with full recovery taking 8 to 10 years from peak to observable gains.” Pretty bearish stuff. We feel compelled to let the HW faithful know that this sort of sentiment is reality for plenty well-heeled and experienced Wall Streeters — even the types who managed through LTCM and the S&L crises of the past; it’s likely even the sentiment of brokerage CEOs, who are trying their utmost to put on their best face and pearliest smiles. At least behind closed doors. But it shouldn’t be surprising. Housing slumps don’t recover immediately, never have. So why do some expect this round to be different? If anything, this round is different — but not in a good way. Never before has housing finance been so embedded into the global financial engine. A mortgage default in rural Alabama can now hit the income statement of a large Japanese investment bank, which bought an obtuse derivative tied to the cash flow from that particular mortgage. Multiply that effect by billions. It doesn’t take much to see why this housing crisis is different from the rest. And that difference, at least to us, doesn’t suggest a quick turnaround. If anything, it signals a long-term and painful recovery that may not be seen for another two to three years. Add a recessionary cycle into the mix — that “reverb” we mentioned earlier — and the credit markets could be rattling for some time.
