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Politics : Welcome to Slider's Dugout

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To: SliderOnTheBlack who wrote (5844)	8/7/2007 12:16:22 AM
From: jim_p	Read Replies (1) of 50482

Slider, I agree with most of what you are saying, but I think we differ on the timing. It's taken the credit markets 6-7 years to get to where we are today and much of it will get unwound in a relatively short time period. Wells Fargo jump in interest rates for jumbo loans is just the start of what to expect. As the losses are beginning to get recognized from the credit binge that we’ve been on it will become harder and more expensive for us to fund all of our credit needs going forward, not just with mortgage debt. The initial stage will be mostly voluntary as investors re-price risk, but as we have seen in the past the pendulum always swings too far in both directions and I believe the pendulum has already made an irreversible change in direction. At some point early in the reversal, the voluntary investment decisions will become involuntary for many as the banks become more nervous and we begin to see more and more calls for additional collateral. This will result in an acceleration of the unwinding of the carry trade. The carry trade only works in times of stability. It doesn’t take much to wipe out a hedge fund leveraged 10 to 1 once volatility increases with both the collateral and the currency markets on both sides of the transaction at the same time. The exit window will get smaller and smaller, especially with the leverage of a lot of these hedge funds. With the USD declining and the Yen increasing at the same time the that value of the underlining investments are decreasing it won't take much to start a panic to the exits. I suspect we will see a lot more action like we saw today with the price of oil making a dramatic one day decline along with other speculative investments and commodities (including gold) over the short term. Keep your eye on the currency markets for a clue as to which way the market is headed. Jim

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