Image courtesy of Wikimedia Commons

The (in)famous Credit Default Swap (CDS) market provides the market’s best guess that an issuer will default on its debt. A low spread is good. A high spread is bad.

Check this out.

Campbell Soups’ (no relation!) CDS is less than the U.S. government CDS. This means that the market believes there is a greater chance of the U.S. government defaulting than Campbell Soup.

The 5-year CDS for U.S. government is 70 basis points. Campbell Soups’ is 65 basis points!

This portrays a very pessimistic outlook for the consumer. There will be a high demand for soup – perhaps from the soup kitchens?

Given this grim assessment, it is naïve to think that the consumer will lead us out of this recession.

Here are the reasons why.

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A Duke Clinical Research Institute team including Kevin Schulman, director of Fuqua’s Health Sector Management Program, and Fuqua alumni Larry Diener and Ana Valverde, has some interesting findings on the effects of government policy on funding for health care ventures. Here’s a nice overview from the journal Health Affairs.

Federal public policies can have an important impact on the flow of venture capital that helps fuel innovation in biotech, pharmaceuticals, medical devices, and other health care sectors, according to an article by Duke University’s Clay Ackerly and coauthors published today on the Health Affairs Web site.

When Ackerly’s team surveyed twenty venture capital fund managers, they found evidence that changes in the level of regulatory and reimbursement risk have “a major impact on the investment strategies of venture capital funds. Approximately two-thirds of respondents said that increases in risk would lead them to shift investments within or across health care sectors or to reduce health care investments altogether,” the researchers report. “Therefore, given venture capital’s important contributions to innovation in health care, policymakers should make a concerted effort to better understand the link between their policy levers and the venture capital industry,” they add.

In case you haven’t noticed, we are in a deflation. Over the past four months, the U.S. CPI is running at negative 7% on an annualized basis.

While it is true that much of that decrease is a direct result of oil plummeting from $140 per barrel to $50, deflation is a huge impediment to recovery. Essentially, in a deflationary environment, consumers do not spend – they wait – because they know the price of goods will be cheaper in the future.

“… suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed’s policy instrument–the federal funds rate–were to fall to zero. What then?”

These are the words of Federal Reserve Governor Ben Bernanke on November 21, 2002.

We are very close to this situation with the effective Federal Funds rate at about 50bp and widespread expectations that the Fed will slash the current 1% rate – perhaps to zero. The Chairman today said that further interest rates cuts are “certainly feasible.”

It is worth reflecting on the options detailed in this speech which explicitly mentions the “helicopter drop” of money.

Image courtesy of flickr/Michael M.

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