AA Credit Spreads Blowout

Hello Folks!

Just a few quick notes tonight since the markets were closed. The credit markets are once again starting to unravel.

Credit spreads on AA debt have gone through the roof:

My Take:

Here we go again. As you can see, we have soared right by peak that was seen in November when the financial system practically fell apart. This chart tells me that any debt below AAA is all pretty much worthless.

From a macro point of view, it tells you that the bond market is once again nervous and cracks are beginning to reappear in the credit market.

AAA spreads have still behaved fairly well:

Final Take:

I suspect the government guarantees on a lot of AAA paper have allowed these spreads to remain relatively intact. Overall though, things generally don't look too rosy in the credit markets.

It will be interesting to see what Obama has to say on Wednesday. Word on the street is the banking losses and guarantees that the government is responsible for may be approaching $10 trillion. Its gonna take one hell of a "bad bank" to hold these type of losses. The sad reality here folks is the government does not know what to do in terms of fixing the problem because they can't afford to carry this type of debt load.

I think this is why you see Washington changing their minds every 3 days. There is no way to contain this type of damage. We simply cannot finance enough treasury sales to pay for this. Its an absolute disaster plain and simple.

The only answer is a total nationalization of the banking system. Most of this debt needs to be defaulted on and its going to be very painful. Many companies will evaporate overnight when the government realizes this debt problem is too large to contain.

Toto, We're Not in Kansas Anymore

Toto should consider himself to be lucky!. It appears the state of Kansas may be unable to make payroll next week:

"Kansas has suspended income tax refunds and may miss payroll this week as a partisan battle erupted Monday in the Statehouse over how to address the problem.

Republican legislative leaders demanded that Gov. Kathleen Sebelius cut the budget before they would agree to inter-governmental loans to fund state employee paychecks, as well as numerous other state payments.

But Democrats said the Republicans, who hold significant majorities in the Legislature, were trying to blackmail Sebelius, a Democrat, by threatening to shut down government."

Bottom Line:

Expect to see more and more of this as state funding begins to unravel. The states spent just like our HELOC loaded consumers during the debt bubble. Expect to see massive cuts in state budgets and programs as their tax receipts continue to dwindle. I didn't even mention the state pensions that are massively underfunded. I will save this one for another day.

The ES Futures have been down since Asia opened last night. The S&P currently sits at 811. This is 15 handles lower than the 826 close from Friday. We will likely open in the red tomorrow unless something big happens overnight.

Its all about Obama on Wednesday. Lets see what happens!