By just about any metric, we’ve seen a drastic improvement in the credit crisis indicators. The corporate bond market has found a bid in recent weeks, the TED spread is improving, the LIBOR/OIS spread is improving and the two year swap spread is substantially more healthy.
Although the levels have come in substantially we are coming off all-time highs in many of these indices. In addition, the strains we are currently seeing are still very high levels in historical terms. A TED Spread of 1.0 is not low and not a sign of a healthy lending market. Nonetheless, there have been huge improvements across the board. Particularly in the corporate bond market where demand for commercial paper has improved drastically.
But the credit crisis has evolved. This is no longer just a banking/lending issue. This has turned into a full blown consumer driven recession. And consumers aren’t borrowing. Do not forget – this is a housing driven crisis. The whole problem is predicated on the massive debt issuance attached to US homes. Even though the credit crisis appears to be improving slightly the consumer is severely depressed and unlikely to take on debt of any kind in the coming months or quarters. The credit crisis can improve, but so long as consumers remain debt laden and refuse to borrow it’s likely that the credit thaw will have little impact on future earnings and stock prices. You can take a US consumer to the bank, but you can’t make him borrow.