Although the recent quarterly financial releases for the largest Canadian Banks show that although in aggregate, gross impaired loans and provisions for credit losses have increased somewhat year over year, most of this can be traced to an acquisition by CIBC. The dominant trend for loan losses in Canada is benign, reflecting a general absence of credit stresses. New issue volume is at record levels, and market liquidity continues to be strong, fed by sizable new sources, including cross-border flows. And Moody’s reports that at the end of the first quarter of 2007 the U.S. speculative-grade corporate default rate fell to its lowest level since April 1997….. For the time being, let the good times roll.

The success of the current market is however accompanied by a potentially troubling pattern, while the supply of ‘B’ and ‘CCC’ rated new issue volume new all-time highs in traded leveraged credit markets, credit spreads have remained flat or have declined. While the significance of this has yet to play out, it is worthwhile noting that in both the US and in Europe, banks have recorded significant increases in the size of their loan loss provisions.

Waiting for the Bubble to Burst

A recent survey by the Turnaround Management Association shows that 21% of respondents predict a rise in default rates during the last half of 2007, while another 65% expect a blowup by the end of 2008.  A minority of 14% take a “wait and see” approach, saying default rates will stay low at least through 2009 or later.

Those predicting an near term crash point to loose lending standards, highly leveraged transactions, a surge of sub-investment grade bond issues, and the drag on consumer spending likely from higher energy costs and a sluggish housing market.

Snippets

• The U.S. Commerce Department reported that U.S. GDP growth in the first quarter plunged to an anemic 0.6% – the worst showing in over four years and slower than the rate of
  population increase. In other words, if it keeps growing at this rate we’ll all go broke. For now economists say they will be happy if the US economy can squeeze out just on 2% real growth for 2007.
• How do you say asset bubble in Mandarin? The CSI 300 benchmark of big shares in Shanghai and Shenzhen has shed about 14% in the last couple of  trading weeks, yet overall, the index is still up 37% for the year. Foreigners haven’t piled into the market…because they can’t. Maybe that is the next stage of the mega-bubble in global equities…when China lifts capital restrictions so that offshore investors can buy in at 40 times emerging market earnings……
   
• Despite the equity market declines, we note that the worldwide asset inflation remains on track in June. Even Keynes’s “barbarous relic” is moving up in price. Gold has rallied 5.5% so far in 2007, rendering the average price for May a rather apocalyptic US$666…..And the Third Angel blew his horn…………And the Bond Market Vigilantes took heed……
   
• In another development of similarly biblical proportions, we note that Paris Hilton is in the local slammer….To this we can only sadly reflect: If you can’t drink and drive in America anymore…what can you do?

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