Wall Street firms have been getting clobbered for months by credit default swaps – bets that the companies will fail. Indeed, that is a large part of why Bear Stearns, AIG, Lehman and other giant companies failed.
Now, the CDS vultures are turning their focus on Main Street.
As Markit analyst Paul Davies wrote yesterday:
“Credit derivative markets turned their attention away from financial armageddon towards plain old recession on Wednesday morning, pushing up the costs of protection on the main indices for the first time this week.”
(Markit is the leading analyst of European derivatives).
And Markit analyst Gavan Nolan wrote today:
“A recessionary mood is setting in, with the number of widening credits [i.e. increasing bets that companies will fail] in the Markit iTraxx Europe index outnumbering tightening names by 5 to 1 . . . Supermarket chains – often thought of as defensive names – were among the worst performers. The move was indicative of the negative sentiment affecting the market. More illustrious companies, such as luxury goods firm LVMH, also widened sharply.”
In other words, the bet-makers think that the economic crisis has trickled down from Wall Street to Main Street, and are starting to wager real money that supermarkets and other Main Street businesses will fail. This, in turn, will make it more expensive for Main Street to do business, increasing the damage done by the financial crisis.