Merrill Lynch: The Credit Monitor
Got this via the good guys over at Econocator:
Merrill Lynch – The Credit Monitor
“Easy money” is the root cause of current credit volatility. While mortgage finance, Hedge Funds, LBO’s, Yen-based financing, SIVs/Conduits and CDOs have all been cited as sources of structural leverage they are derivative of the 1% funds rate policy from the early part of this decade. As the Fed began the process of removing excess monetary liquidity, market participants simply manufactured it with financial leverage.
This process was seven years in the making. We doubt it will be unwound in two months time. We caution investors: beware of false recoveries.
The irony is not lost on us: last week’s apparent short-lived recovery in credit spreads was prompted by rising expectations of a 2007 Fed rate cut. Yet, it is the 1% “easy money” Fed Funds rate policy that is the origin of many of the current structural problems in the credit market. A rate cut seems like a curious solution to a problem that was incubated by liquidity. Moreover, the currency outcome could prove troubling. Should credit rally on such an action, it may serve as an opportunity to add new shorts/underweights.
Band wagon? Or people just waking up after a long period of delusions?