What to Make of the Credit Cycle (Part 2)

In Sunday’s “What to Make of the Credit Cycle (Part 1),” we noted various takes on the credit cycle by Moody’s, Fitch, Guggenheim Partners and Frank K. Martin. In his letter to shareholders, JPMorgan ($JPM) CEO Jamie Dimon chimes in and offers a similar conclusion to that of Guggenheim Partners’ Scott Minerd. That is: there’s a good chance that interest rates will go up faster than expected. And that will have ramifications. Here’s what he had to say,

“Since QE has never been done on this scale and we don’t completely know the myriad effects it has had on asset prices, confidence, capital expenditures and other factors, we cannot possibly know all of the effects of its reversal. We have to deal with the possibility that at one point, the Federal Reserve and other central banks may have to take more drastic action than they currently anticipate – reacting to the markets, not guiding the markets. A simple scenario under which this could happen is if inflation and wages grow more than people expect. I believe that many people underestimate the possibility of higher inflation and wages, which means they might be underestimating the chance that the Federal Reserve may have to raise rates faster than we all think.”

He continues,

“If growth in America is accelerating, which it seems to be, and any remaining slack in the labor markets is disappearing – and wages start going up, as do commodity prices – then it is not an unreasonable possibility that inflation could go higher than people might expect. As a result, the Federal Reserve will also need to raise rates faster and higher than people might expect. In this case, markets will get more volatile as all asset prices adjust to a new and maybe not-so-positive environment.”

There’s a whole industry of restructuring professionals…gulp…hoping that he’s correct. There are a number of funds raising cash right now hoping that he’s correct.

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Still, it’s a question of how much how fast. Wells Fargo ($WFC) yesterday indicated that a 300 bps increase in LIBOR would not immediately pressure most issuer’s capital structures. Also:

So. Yeah.