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If all you have is a
hammer, everything looks like a nail. To those who keep thinking that the
events of the past 18 months are merely an interruption in a long-running
bull market, every tunnel has a light at the end of it. Unfortunately, what
they see seems to be little more than a mirage. As Naked Capitalism notes in "Companies Paring Exposures to Risky Counterparts," there's little
evidence that the worst is past.
As much as some
optimists would like to find evidence of recovery, it is far more likely that
the US will see a further deterioration in economic activity. We have not yet
seen much in the way of bankrupticies and debt restructuring. Until this sort
of thing becomes sadly routine, the bottom is not yet nigh.
One sign that conditions are worsening is that major companies are cutting
their exposures to business partners they deem to be in peril. This is a
corporate version of the paradox of thrift. While this activity may seem
laudable as far as each actor is concerned, it will have the effect of
pushing some enterprises over the edge. And those failures feed the
downspiral of activity and psychology.
From the Financial Times:
The world’s biggest
companies are terminating contracts with customers they fear will collapse, a
report will show on Monday in a sign of the turmoil spreading through global
supply chains.
Of the 337 international corporates surveyed by accountancy firm Ernst &
Young, most of which turn over more than $10bn a year, the majority said
important customers were in financial distress and were taking longer to pay
than usual.
A quarter said one or more key customers had gone into bankruptcy while
almost on in ten said suppliers had gone out of business. As a result, a
third of the companies surveyed have stopped trading with customers they
perceived as high risk.
John Murphy, global managing partner of markets at Ernst & Young, said
managers would have to scrutinise the health of even ultra-safe trading
partners very carefully. “A company’s risk profile can change
almost overnight,” he said.
Michael J. Panzner
Editor, Financialarmageddon.com
Michael J. Panzner is a
25-year veteran of the global stock, bond, and currency markets and the author
of Financial Armageddon: Protecting Your Future from Four Impending
Catastrophes, published by Kaplan Publishing.
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