[Skip to the end]

The worst of the ‘great repricing of risk’ that followed the discovery of the ‘great sub prime mortgage fraud’ could be behind us.

The aggregate demand from the expansion phase of the mortgage fraud episode caused output and growth to expand faster than it otherwise would have, and when that lending stopped and that source of aggregate demand was removed all was suddenly thrown into reverse- slowly at first as mainly housing reversed, and more recently with a rush as the Mike Masters commodity liquidation gave it all a final push down and even consumer lending dried up, as today’s Mastercard report reflects.

Not to mention the various blunders along the way by policy makers who continuously demonstrated a lack of a fundamental understanding of monetary operations. Seems with Citibank the government had learned something as they broke their pattern and didn’t take 79.9% of the equity.

This policy change itself serves to reduce systemic risk for the financial sector, as government assistance may no longer automatically mean the elimination of that much shareholder equity above and beyond ‘payback’ to the government.

The blowout ‘bottom’ for this cycle may have come in the credit products, where it all started,
rather than equities as had generally been the case in previous cycles.

IG On-the-run Spreads (Nov 24)


IG6 Spreads (Nov 24)


IG7 Spreads (Nov 24)


IG8 Spreads (Nov 24)


IG9 Spreads (Nov 24)