Entering phase two of the credit crunch, buy gold and silver

The real credit losses for global banks may just be starting as defaults emerge on credit cards, car loans and corporate loans. This will be the stage two of the global credit crunch as markets move out of the eye of the storm and back into crisis mode.

As The Daily Telegraph reports today ‘the cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.’

The increase in the cost of borrowing is what the Fed thought it had solved back in March but this seems to have been a false dawn. There are even worries that the Fed itself is running low on credit with $300 billion swapped for dodgy mortgage debt and $130 billion put up for Term Auction Credit.

Indeed, as this Blog cautioned a few weeks ago the capital markets have been passing through the eye of the storm. This is a period of false calm before the real consequences of recent events become apparent.

Corporate bankruptcies are a later cycle phenomenon and naturally try to remain hidden until the last moment. For likely candidates look to the oil-price hit airlines or financial institutions with perilously weak balance sheets or property developers hit by falling prices.

The problem is that panic is the natural response by capital markets to such events. The question is then who comes next? What are equities really worth if profits are falling? How low can share prices go?

For anybody who still insists on holding US equities in this financial crisis how much more of a warning to sell do you need? Buy precious metals for a safe haven.