There can be little doubt that even as the stresses in the credit market have spilled over into other financial markets, the reaction of the public has been muted. In the UK, other than the collapse of Northern Rock hitting the headlines, the credit crunch has been largely ignored. In the US the picture is the same, a benign indifference to the loss of over 200 mortgage lending operations and the huge losses and write-downs suffered by banks and financial companies

Whilst those directly involved in trying to arrange new credit though a mortgage, re-mortgage or loan are seeing a demand for higher interest payments especially for products designed for people with lower credit ratings, the lack of worry from the general public has to be seen as, well, worrying.

Why are the vast majority of people so unconcerned about the worst credit market crunch since the great depression of the ’30s? What are those that hold stocks, bonds and savings seeing and hearing that makes them think the problems will not affect them? Or maybe the question is wrong, what are the not seeing or hearing about?

There is a combined effect at work on the publics perception. As a writer I read an enormous amount of financial material every day. Articles, charts, blogs, newswires and analysis are all absorbed and screened against my own perceptions. It makes me view the world in a very different way from the general public.

How do I know? You should see the the facial expressions I see when trying to explain credit markets or arcane derivatives to ordinary folk. You know you have lost them when the eyes glaze over and the direction of their staring moves from your face to over your right shoulder. At first I found it puzzling, why would people not want to know what can happen in the future?
Of course the answer is simple. They didn’t want to know. What I thought and said clashed with what they heard and saw from the mainstream media and worse, my view was scary.

People do not like to be scared, it upsets the normality of life. That perceived normality must be engendered and nurtured constantly. Even when events, financial or non-financial, take place that threaten that normality the reaction from governments and organisations is to behave in a way that establishes a need to return to the normality that existed prior to the event. It appears to be wired into us, the yearning for a time in the past that seemed better, before things changed.

In financial markets its no different.

A look at the stock market this year shows this. Even after 2 credit market scares, stock markets as whole, bounced back to the highs seen before the event with 2 periods of heavy buying. Credit markets, after 6 months of complete fear, have begun to show signs of stabilizing as central banks ensure that short term debt can be rolled over into the new year.

The promise of a return to normality, that the fear and worry is only temporary, overrules any doubt that people may have in the system. They can now ignore the problem, they no longer need to know.

How does this help a trader or investor? Awareness that perceived normality is based on the dismissal of the possibility of events happening allows the open minded trader to constantly ask the simple question of “what happens if?”. That allows the trader to constantly judge risk, weighing the consequences to their positions if “it” happens. It also allows the trader to anticipate the attempt to regain “normal” market conditions.
I leave you with a simple chart that shows the desire for normality is ingrained even with the custodians of the economy. The chart shows the Federal Funds Rate (blue), the senior loans officer opinion survey, showing the tightening of lending standards (red) and the US total privately owned housing units completed (green). The pink vertical areas show previous recessions.

 
 
We can see how when rates reach a level that induce rising defaults and an impaired ability to borrow (shown by tightening standards of lending in a stressed market) that the ability to purchase assets is degraded. The response is to lower rates which, after the removal of the non-performing credit, allows banks and financial companies to increase the capital available for lending. The lower rates and the willingness of lenders to issue credit then allow lending standards to drop, re-igniting further asset purchases and price appreciation.
I have used housing in this example, you may like to compare the chart to stock markets.

 
Have we reached a point where normal conditions will be ignored?

Market Snippets
The banks involved in trying to launch a super SIV, the Master Liquidity Enhancing Conduit have decided the fund is now surplus to requirements. Most of those involved have now taken the stricken SIV assets onto their own books. Its speculated that funding for the M-LEC was not forthcoming from potential investors.
Not everyone is able to look the credit crunch in the face and act calmly. Mr Lord has returned to Sallie Mae, the struggling student loan lender, as CEO and faced the press in a conference call. After heated exchanges and an abruptness with his answers that left the reporters shaken, the conference call ended. Mr Lord, thinking the microphones had been switched off then turned to Sallie’s head of investor relations and said “Let’s get the f*** out of here.”

Commentary by Mick Phoenix

on behalf of An occasional letter from The Collection Agency

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. The views in the article are for informational purpose only.