Financial Times Editorial Comment: Markets need a bit more backbone
Financial Times Editorial Comment: Markets need a bit more backbone
Copyright The Financial Times Limited 2007
Published: August 24 2007 18:05 | Last updated: August 24 2007 18:05
The credit market has stubbed its toe. It hurts, and market players are hopping around cursing and swearing, but so far the noise is out of proportion to the actual damage done. A few subprime lenders in the US have gone bust, but no highly rated bonds have defaulted, and the price of most risky assets is still unusually high. It may seem counter-intuitive, but the market could do with something a little more lingering and painful: a nasty toothache, only cured by an unpleasant trip to the dentist.
Though there is less sense of crisis, money market conditions are still far from normal. Three-month US Treasury bills, for example, still yield far less than the 5.25 per cent base rate. It is still hard to trade or value bonds backed by assets such as mortgages or credit card receivables and, as a result, confidence in the creditworthiness of banks and financing vehicles such as conduits has not been restored.
Central banks need to get the markets moving, and to do so, may have to inject liquidity at maturities such as three months, as well as overnight. But they should do so at penalty rates. There have been excesses in the market over the past few years, deals done at prices that barely reflect the risks involved. These deals may well require surgery, rather than just being patched up with cheap money.
During the recent turmoil, the bonds and loans of highly indebted companies have been volatile, and few such companies can borrow more at present. That makes sense. Companies sponsored by private equity, in particular, were borrowing on outrageously good terms.
Other areas of the market, however, have barely been touched. In emerging markets, for example, Mexico is only paying about 1 per cent more than the US Treasury for medium-term debt, and Colombia is only paying a further 1 per cent on top of that. That is for loans in US dollars, and seems optimistic.
Equities, which have rebounded this week, are little scathed by the debt market kerfuffle. The US is roughly 5 per cent off its level a month ago, the UK has fallen by 6 per cent, and most European exchanges are similar. The Chinese market has been hitting new highs. When adjusted for the economic cycle, stocks still look expensive, with the US market valued at more than 1.8 times its historical average according to estimates prepared by researchers Smithers & Co.
If money markets are disrupted for a month or two there will be harm to the real economy, and central banks need to respond to that. On the other hand, they need to avoid a market bail-out that encourages the kind of relentless risk-taking that has pushed asset markets to today’s precipitous levels. For healthy investment returns in the long run, and to avoid a bigger crash in the future, investors need to feel some pain rather than calling for the nearest ambulance.
Copyright The Financial Times Limited 2007
Published: August 24 2007 18:05 | Last updated: August 24 2007 18:05
The credit market has stubbed its toe. It hurts, and market players are hopping around cursing and swearing, but so far the noise is out of proportion to the actual damage done. A few subprime lenders in the US have gone bust, but no highly rated bonds have defaulted, and the price of most risky assets is still unusually high. It may seem counter-intuitive, but the market could do with something a little more lingering and painful: a nasty toothache, only cured by an unpleasant trip to the dentist.
Though there is less sense of crisis, money market conditions are still far from normal. Three-month US Treasury bills, for example, still yield far less than the 5.25 per cent base rate. It is still hard to trade or value bonds backed by assets such as mortgages or credit card receivables and, as a result, confidence in the creditworthiness of banks and financing vehicles such as conduits has not been restored.
Central banks need to get the markets moving, and to do so, may have to inject liquidity at maturities such as three months, as well as overnight. But they should do so at penalty rates. There have been excesses in the market over the past few years, deals done at prices that barely reflect the risks involved. These deals may well require surgery, rather than just being patched up with cheap money.
During the recent turmoil, the bonds and loans of highly indebted companies have been volatile, and few such companies can borrow more at present. That makes sense. Companies sponsored by private equity, in particular, were borrowing on outrageously good terms.
Other areas of the market, however, have barely been touched. In emerging markets, for example, Mexico is only paying about 1 per cent more than the US Treasury for medium-term debt, and Colombia is only paying a further 1 per cent on top of that. That is for loans in US dollars, and seems optimistic.
Equities, which have rebounded this week, are little scathed by the debt market kerfuffle. The US is roughly 5 per cent off its level a month ago, the UK has fallen by 6 per cent, and most European exchanges are similar. The Chinese market has been hitting new highs. When adjusted for the economic cycle, stocks still look expensive, with the US market valued at more than 1.8 times its historical average according to estimates prepared by researchers Smithers & Co.
If money markets are disrupted for a month or two there will be harm to the real economy, and central banks need to respond to that. On the other hand, they need to avoid a market bail-out that encourages the kind of relentless risk-taking that has pushed asset markets to today’s precipitous levels. For healthy investment returns in the long run, and to avoid a bigger crash in the future, investors need to feel some pain rather than calling for the nearest ambulance.
posted by Carlos T Mock at 6:35 AM
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