Reading the entrails

Eric Norlin takes a stab at the current economic situation and doesn’t like what he sees:

I’ve been doing some thinking about the contraction in the commercial paper market and the possible ripple effects on any economic recovery…diagnosis: all of the predictions for the Q3 turn around are wrong. It’ll be at least Q4 and maybe Q1 of 03 before this ship really turns. This, of course, means the stock market will tread water until at the very least April — and more likely June.

Eric’s thesis, briefly, is that massive debt overhang problems is about to hit a generation of managers raised to believe that debt (commercial paper) is cheap, which will create totally unexpected liquidity crises (cash shortfalls) and cause another rash of bankruptcies. This is consistent with my Finance II class: the main place (other than taxes) that the Modigliani-Miller theorem breaks down is in the frictions created by large amounts of debt in the capital structure.

BTW, Eric, your site navigation leads something to be desired. I had to work really hard to find a permalink to that article.