Will we have another August 2007?

Markets are like bacteria, they will adapt to new realities; i.e. - terrorism, war, etc. It seems as though the volatility will continue in the markets for at least the next six months. I see the end of January as an extremely volatile point in the markets. More on this later. But a major issue in the economy today is the short term paper markets. And the danger has been the spread created within these markets, which have caused the freeze creating the issues of systematic risk.

The Chart illustrates the development of tensions in the credit market using credit default swaps for investment and high yield European corporate bonds as measured by the iTraxx Europe and iTraxx Europe crossover indices. As in the money markets, tensions peaked in summer (with high yield CDS spreads reaching 463bp on July 30) and subsequently eased off. However, spreads have widened again since mid-October.