The comment above was based on revelations about the low number of corporate bankruptcies in the first half of the year. According to James Grant [of Grant’s Interest Rate Observer (Grantspub.com)], it was due to extreme leniency on the part of creditors and hedge funds. Grant reported that defaults would have been much higher if it weren’t for lenders’ “willingness to refinance almost anything.” In fact, according to various reports some hedge funds are so optimistic they’re actually hoping for a default that will transform their debt into equity. The “Loan-to-own practitioners assume their new equity will be worth significantly more than the pre-bankruptcy debt,” says Grant.
Another sign of the unparalleled global optimism about debt is the Nobel committees award of its peace prize to Bangladeshi economist Muhammad Yunus for his pioneering “microcredit” scheme. Yunus made his first loan at the end of the last major bear market in 1974 and he formalized his nothing down, no-collateral lending arrangement in 1983, when the Dow Jones Industrial Average spent it’s first year hitting continuous news highs above 1000. One story notes that The World Bank was once skeptical about the practice, but, more recently, the approach has been fully embraced. “The results are hard to argue with, the bank says it has a 99 percent repayment rate,” says the Associated Press. “Since Yunus gave out his first loans in 1974, microcredit schemes have spread throughout the developing world and are now considered a key approach to alleviating poverty.” Microcredit’s bull market lifespan and its inclusionary dynamics – the funds employ “mutual, morally binding group guarantees” in place of collateral – suggest a deep connection with the long rise in social mood. The Nobel committee’s recognition of the concept and the sudden belief in poverty busting potential also suggest a nearby peak.
Another indicator of a reversal is visible in this headline from October 5 issue of the Financial Press in Bangladesh:
Micro-credit Under Scrutiny
A new law makes it mandatory for all micro-finance institutions to be licensed by the newly formed Micro-credit Regulatory Authority. Prior to the laws passage earlier this year, micro-credit institutions in Bangladesh operated without any regulatory oversight. “If the idea was to complement and support the efforts of the existing institutions in delivering the required services, then it is obvious that things went too far,” says the Financial Press. “The MRA is expected to help micro-financiers through extensive monitoring and supervision of their activities.” As The Elliott Wave Financial Forecast has noted many times, regulators typically make the scene when the bull market is ending or over. Revelations and recriminations about bull market accounting gimmicks in 2002 illustrated this bear market principle. As Pioneering Studies in Socionomics explains, “A bear market often reveals the worst excesses of a bull market. Everything that was revered on the upside is a target in a bear market.” As the Nobel awakens the world to the bull market potential of micro-loans, the Bangladeshi reforms signal the onset of a new more bearish reality. In a world that’s breaking apart instead of flying together, the “mutual, morally binding group guarantees” of micro-finance will not hold. |
