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17 Aug 2022 21:28
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  •   Home > News > Business > Features

    Light at The End Of The Tunnel?

    A few developments in recent times have started me thinking that the worst of the credit crisis may be over. That does not mean we are about to revert to the debt-fuelled boom times of recent years but it may bring us a step closer to stability.

    Investment Research Group
    Investment Research Group
    Two lending managers, one with BNZ and the other with UDC, have told me that they have plenty of money to lend and in fact are being encouraged by their companies to find a home for it (within the normal bounds of prudence).

    Also, I have noticed a return to TV advertising by finance companies like GE Money and Instant Finance, hoping to lend again. For a time, the credit system was totally frozen and banks were not even lending to each other, let alone their annoying customers.

    A third suggestion that normality is gradually returning is the upturn in the Baltic Exchange Dry Index, a measure of international shipments of bulk non-liquid items such as coal, food and iron. From a high in June last year of 11793, the index plunged to 663 in December - a loss of nearly 95%. But it took off in February and is now trading at 2122, up more than 300%.

    This does not reflect resurgence in world trade, more the resumption of letters of credit that are essential to ensure exporters get paid. While credit may be easier to get, and at lower interest rates than at almost any time in living memory, it is too early to say that every- thing is reverting back to the bullish good times.

    There is still evidence to suggest that property prices will continue to fall, unemployment continue to rise and deflationary pressures to continue for some time. US website Seeking Alpha has confirmed that credit indicators are improving but is not confident of a rapid turnaround in economic fortunes.

    "This has turned into a full-blown consumer driven recession as evidenced by [recent] horrendous retail sales figures. Consumers are not borrowing. Do not forget - this is a housing driven crisis. The whole problem is predicated on the massive debt issuance attached to US homes. Even though the credit crisis appears to be improving slightly, the consumer is severely depressed."

    The credit crisis can improve, but so long as consumers remain debt laden and refuse to borrow, it's likely that the credit thaw will have little impact on future earnings and stock prices.

    Meanwhile commentator Doug Kass has drawn up a list of things that need to happen to restore capital markets to normality. Bank balance sheets must be recapitalised. Bank lending must be restored to normal levels. Financial shares' performance must improve.

    Commodity prices must rise as confirmation of worldwide economic growth.

    There has been some recent evidence of higher commodities, but he believes it is still inconclusive. Credit spreads and credit availability must improve. While credit spreads are improving, the yield curve is rising and interest rates have rebounded, the transmission of credit remains poor.

    Evidence of a bottom in the economy, housing markets and housing prices. Emerging markets must improve. China's economy and the performance of its year-to-date stock market have turned decidedly more constructive. Market volatility must decline. Hedge fund and mutual fund redemptions must ease to stop selling pressure on the markets.

    © 2022 David McEwen, NZCity

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