Debt Servicing Costs Exceed Growth Rates
Mish has a good post, Financial Services Bloodbath. The article quoted is from the finanical sector, but part of the quote is of particular interest:
"Credit costs are going up, well above underlying earnings growth," said Smith, who joined ANZ from HSBC Holdings Plc last year, in a webcast briefing. The Melbourne-based bank, Australia's third largest, will also take a $200 million charge for derivatives linked to U.S. debt insurer ACA Capital Holdings Inc.
Many, many, many companies took on wads of debt and it is quite possible that credit costs will exceed earnings growth for a number of these companies. The rest will see reduced earning growth as debt is repriced to reflect risk. This is generally a longer term problem as debt is usually paid back over years. It means the market earnings will not be able to perform as they have in the past few years, and it will take longer than expected to get past this.
Mish's post is about the monolines and financials which will be absolutely crushed by the rising cost of debt. My comment is pointing out that the rising cost of debt hurts the entire market, and even thought the Fed's reduced the rates, there has been no price reductions in debt because risk is in the process of being repriced in.
And, if you are wishing from more rate reductions, be careful what you wish for. Basically tax payers are paying for providing that cheap money and it is about to get a whole lot more costly. The rest of the world's willingness to buy US debt was weak during the last rounds of auctions, and not quite enough debt was sold. It doesn't matter what the Fed reduces the central banking rate to, it will have to pay more on treasuries or they will not be sold.
On my reading list this morning:
My comment, the Fed can't prevent a recession.
My comment, in the fall of 2006 when I first learned of these things search as I did I couldn't find any information on what they were and how they worked, but the amount of money they represented was absolutely frightening. Now the information on how they work is being talked about and Ekkk, what an absolutely bunch of moron regulators are to have done nothing about these things, oh say about 8 years ago. Greenspan is at the top of the list.
My comment, for sure income has to grow faster to get out of this mess, but how does it grow when you have layoffs, increased price inputs for commodities, and increased debt servicing costs?