Reflections on Lehman - The Corporate Bond Market
Over the past two weeks, I have sat down and taped several different pieces for CNBC. These segments are different; they might be used beyond the borders of CNBC and into the mother ship's, NBC Universal's, territory. They are all about Lehman, the collapse, my thoughts, etc.
Clearly, allowing Lehman to fail was a socio-economic blunder. Never let the arrogant personality of an individual supersede the good of the rest of the crowd. The ramifications of the failure clearly were never fully understood by regulators. But, the impact on the Credit Markets was what I found most astonishing.
The worst possible scenario for capitalism is to have a market "frozen," with no activity. I remember in the days following 9/11 - the urgency the Bush Administration relayed to the New York Mercantile Exchange that the Oil market must re-open as soon as possible. The Oil market was the first to re-open, adhering to The Bush Administration's wish. Reflecting back upon last September's events, the Credit market FROZE. It was as if every counterparty had the Swine Flu, and nobody wanted to make contact, or trusted, anyone.
We have come a long way since that terrible moment. The recovery path has provided tremendous opportunity in the Corporate Bond market. I see further opportunity ahead as the healing unfolds. The easy monetary policy allows corporations to enjoy friendly debt service conditions. Balance sheets are in much better shape as "meaner and leaner" is the theme. Although the continued loss of jobs plays negatively on Main Street, it does reduce wage and labor costs for corporations. The default rate probably peaks around 12%-15%, much lower than the 20% forecast earlier this year. By the middle of next year, that rate should be back into "Yankees Legend" territory - think Yogi and the Mick, at 7-8%. Let's not forget the ratings agencies also are "frozen." They moved slowly to downgrade, finally capitulating and downgrading everything in sight last fall. Could the potential "upgrade cycle" be just months away? All of this makes me think that the Corporate Bond market is still the place to be.