Do you Remember October of 1987, “Black Monday” and the market drop of 23% in a single day? That would equate to a 3,200 point drop today.
There are many important lessons learned from that day which you can read in detail at Breakingviews.com. The question back then is the same question currently raised from the “credit crisis”: Will this financial crisis turn into an economic crisis.
Financial crises do not have to become economic crises. To date, this crisis is contained. The amount of loans that could default is not significant enough to push the economy into a recession or threaten the financial system. A benefit of globalization is that the debt is widely spread among investors and institutions around the globe. If the situation does get worse, the Federal Reserve and other central banks have a number of tools available to deal with the problem.
As you keep your eye on the economy, there are three factors to watch for that will indicate it this is the beginning of an economic crisis.
1) The first factor is short-term interest rates. If treasury rates stay low or decline further, investors are not reversing the flight to quality. If short-term treasury rates climb to where they were before the crisis, investors are more optimistic and markets are returning to normal.
2) The second factor is the commercial paper markets, especially the asset-backed securities market. This is where short-term loans are made to companies and sold to investors. Asset-backed loans are secured by specific corporate assets. In coming months, I hope to see that companies are able to issue new commercial paper at reasonable interest rates.
3) The third factor is the dollar. Watch the dollar to see if foreign investors and governments sharply reduce loans to and investments in the
I believe the credit crisis is overblown and have not seen any impact on our ability to help clients obtain the financing they need to continue to grow their businesses. I do not expect that to change, but will be watching these factors closely.
