The FT has an interview
with UBS CEO Peter Wuffli today, in which he intones gravely
about the dangers facing credit markets:
Mr Wuffli is also keenly aware rosy conditions will not go on indefinitely:
“What is not here to stay is the absence of default, the absence of
inflation over a longer period of time, and of essentially flat yield and
credit curves,” he says.
The Wuffli comes in the wake of Steven Rattner’s equally grave
in the WSJ:
To think that corporate recessions — and the attendant collateral damage
of bankruptcies among overextended companies — have been outlawed would be
as foolhardy as believing that mortgages should be issued to home buyers with
no down payments and no verification of financial status.
All of which is perfectly sensible. But I have to ask, who are these
people of whom Rattner speaks so disparagingly when he says that "the current
ahistorical performance of high-yield markets has led seers and prognosticators
to proclaim yet another new paradigm"? Are there really people so enamored
with the idea of a Great Moderation that they believe that defaults are a thing
of the past?
The markets these days seem to be full of eminence grise types who
mutter darkly about how all this modern spread tightening can’t go on for ever,
you know. (Bill Rhodes of Citigroup has been doing it pretty
much all decade long.) But of course if you’re a pundit, it’s much easier to
be a bear than a bull. If the market tanks, a bull is proved wrong immediately.
But if it goes up, bears just nod sagely and say "just you wait".
Eventually, of course, they’re proved right – although it’s worth noting
that even at the bottom of the dot-com stock-market crash, prices were still
well above their levels when Alan Greenspan gave his famous "irrational
exuberance" speech.
What I’d dearly love to see from some of these people is something they’ll
never provide: call it falsifiability, in a nod to Karl Popper.
Ask yourself if there’s any conceivable state of affairs which would prove these
people wrong. If the answer’s no, then frankly their warnings are pretty meaningless.