Credit Crunch Revisited

Today, fear seems to be in abundance in our marketplace. The credit crunch has become increasingly risky to the continued growth of our economy as the Real Estate market continues to decline in value. The danger is that this credit readjustment has an impact on the business environment and that companies start to hold back investment and R&D spending. Also, many families are finding themselves with mortgages that reset from fixed rate to adjustable rate at much higher interest rates. With this backdrop, people have growing concerns about their ability to sustain their current lifestyle. It should be noted that adjustable mortgage resets peak in February 2008 at $52 Billion. With the Fed lowering rates, people are banking that all the adjustable rate loans can be refinanced into fixed rate loans like 2001-2005. Unfortunately, credit has been repriced in the market and spreads have widened to compensate for the risk of the borrower defaulting. This means mortgages are between 6.5%-10% depending on individual credit. The widening of interest rates and credit risk has spread to the banking segment of our economy. There are $750 Billion of M&A loans that need to be securitized along with all the real estate loans that haven't been able to be sold in the marketplace. This backlog needs to be worked off before Wall Street starts to make new loans. Credit problems seem to arise in mid-economic cycles as earnings from companies slow. Most of the problems we are seeing today in our markets are due to the lack of information available to the public from the banks and investment community. With time, this will pass and confidence will return to our financial markets. For the last 30 years, the Central Bank has done whatever it takes to get the markets moving again and this time is no different. It is my belief that the Holiday Season will be much better for retailers than expected and that our exports will help offset the Real Estate decline. This is where I differ greatly from most of Wall Street. Our economy is very resilient as exemplified by post 9-11. In fact, the S&P grew it's earnings by 105% from 2002-2007. Mid-cycle slowdowns are scary but a necessary part of a healthy economy. This slowdown is no different from others we have experiened over the last seventy years.