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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: russwinter who wrote (50617)1/21/2006 5:08:47 PM
From: Ramsey Su  Read Replies (1) of 110194
 
In hind sight, it is not GREBB but GCREBB, Greenspan credit and real estate bubble.

I am not certain if the market loves risk or do they actually think that they have perfectly hedged their risk via fancy derivatives?

In either case, the consequences of error is pretty high. Take FBR as an example. Nothing big blew up on them and yet they have to take a $100M - ish charge for that error. What would be the damage if it really went against them. FBR is a relatively small potato. Who are the LTCMs of today?

So much of this credit is tied to real estate. Which is the chicken and which is the egg?

What if real estate bubble bursts first? The defaults are going to trigger a round of risk repricing that renders the Fed funds irrelevant. The rate is going to be determined by cost of funds plus the new level of loss severity, which is minimal during the last couple of years.

What if the credit bubble bursts first? Lack of financing is going to send real estate down the toilet in this nothing down era.

Ironically, if we can duplicate what Japan did and hang in there for 5 -10 years to allow everything to deflate slowing, it may be the best outcome. Unfortunately, we have discussed it ad nauseam here that so much would be required for that scenario to happen.
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