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The Roving Financial Crisis

Remember the “roving blackouts” that plagued California in the mid-2000s?  Well, we believe that is a good analogy for the state of the world capital markets circa 2009.  We’ll call it “The Roving Financial Crisis.”

Given that we all just lived through it, a full history lesson is not warranted.  But to review briefly, the crisis that began in the subprime mortgage market morphed into a broader housing crisis which in turn caused a meltdown in the capital markets and led to the failure or reorganization of virtually every Wall Street firm save Goldman Sachs (and even Goldman gladly accepted government bailout money as a precaution).

Well, it was rough, but we survived it.  The question now becomes “What happens next?”

According to Reuters, “The credit crisis that rocked U.S. residential mortgages and corporate credit markets may roil commercial real estate and sovereign debt markets next, senior investment managers said on Monday.” (see full article)

The “debt payment moratorium” (a.k.a. default) by Dubai World brought these risks to the forefront.  We commented on this recently in “Who’s Next.”  We wrote then that the growing consensus was that Greece was most likely to default, and today we see that the credit ratings agencies agree: “S&P Puts Greece, Portugal on Notice.”

Shockingly, given given the state of Greece’s finances (deficits this year are forecast to be an almost unbelievable 13% of GDP), Greek debt is yielding only  2% more than Germany.  To say the least, this would seem an insufficient risk premium…

So, the roving financial crisis continues.  Time will only tell where it pops up next.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy