Another mighty blast from Doug Noland in The Credit Bubble Bulletin: This one's on the end game (and he sends a well-aimed Scud at our buddy "No Fear" McTeer)....
prudentbear.com
It is critical to recognize that the unfolding financial and economic crisis made a decisive move forward this week. Today, in particular, came the market’s first recognition of the acute vulnerability for the entire financial sector to unfolding events. I am surprised that it has taken this long. But, as is often the case, these types of situations take much longer to develop than one would expect. But when they do “take hold,” they then tend to unfold with ferocious rapidity. Right now, this is developing similar to 1998. In the Spring of that year problems began to fester in the market for Russian debt instruments. And while this development garnered little attention (apparent only by watching widening spreads), it was a festering problem for the highly exposed leveraged speculating community. Finally, a full-fledged crisis occurred as Russia defaulted and the dominos began to fall. Stung in Russia, the hedge funds and securities firms were forced rein in risk, dumping securities in various markets around the world. The dilemma, of course, is that highly speculative and leveraged financial systems are acutely vulnerable to any move toward liquidation. When the major leveraged players become sellers, there are no buyers.
Today, instead of Russian debt, it is telecom and other high-yielding securities. Here we find what may prove a critical difference from 1998: There are severe domestic credit issues. In fact, we cannot imagine a more fragile financial structure and imbalanced economy than those existing today. Vulnerability abounds, be it the banks, the Wall Street firms, or the hedge funds that supposedly now have assets of $475 billion and God only knows the size of their positions. Perhaps the weakness in the financial stocks today was indicating that the leveraged speculators have been hurt and that a liquidation of positions is in the works. If this is the case, all eyes on the asset-backed and agency markets. And with extraordinary tumult in global equity, junk bond and currency markets, there have certainly been casualties within the ranks of the speculators. Wild swings in U.S. swaps market are also indicative of trouble for the leveraged players as well. As was the case in 1998, dislocation can quickly develop throughout global derivatives markets. We would not be surprised if something like this is in process.
Have a good weekend, all! |
