Stephanie Pomboy’s Astringent Take of the Credit Markets

Founder and president of MacroMavens Stephanie Pomboy, a co. providing macroeconomic research and commentary to the institutional investment community, had this to say in the latest edition of her worthy MacroMavens commentary.

From Barron’s: For openers, she doesn’t buy the growing conviction that what we’ve been witnessing is more than a bear-market rally.

She readily grants that spreads have narrowed, but notes that they remain “far, far wider than they were at the 2003 cycle lows.”
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The complacent reaction among the investment cognoscenti is that the credit markets are wildly oversold. More likely, she sniffs, it has something to do with the fact that “an overwhelming portion of some $8 trillion in mortgage debt (or 80% of the total) is teetering on the edge of, or in some state of, negative equity.”

As to the Fed’s claim that the equity of homeowners as a group stands at 43%, she points out that what the Fed neglects to tell you is that roughly a third of them have their houses free and clear. Lo and behold, some basic arithmetic reveals that 67% of homeowners with mortgages have equity of less than 15%. That, Stephanie comments drily, suggests the “destruction priced into the credit markets hardly seems out of whack with potential reality.”

And while, thanks to “the transfer of toxic assets to taxpayers” and the magic of accounting legerdemain, the scarred financials to some significant extent may be spared further pain, the same, alas, can’t be said for the nonfinancial sector. Little recognized, she insists, is how much the extraordinary gains in domestic nonfinancial profits from the low in 2001 to the peak in 2006 — a stunning rise of 388% — owed to the housing bubble.

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