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Politics : Welcome to Slider's Dugout
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To: jim_p who wrote (6068)8/19/2007 2:38:52 PM
From: jim_p  Read Replies (4) of 50535
 
The most important point to keep in mind with investing in the markets going forward is that liquidity was the driving force in the record long bull market we have all witnessed. Going forward liquidity will decrease for a number of reasons all of which will have a negative impact on the markets for a long time to come. This past credit cycle lasted over seven years and went to extremes for lots of reasons. The golden rule of cycles are the longer the up cycle, the longer the down cycle and the more severe the up cycle the more severe the down cycle. A few of the events that we are already witnessing are:

1. The unwinding of the carry trade. As the Yen increases in value the losses increase for those who have yet to unwind their positions and the exit window becomes smaller and smaller.

2. The re-pricing of risk in the markets in general.

3. The uncertainty in the value of the collateral of certain mortgage securities

4. The unfunded LBO commitments on the banks books will reduce the bank’s ability (and also their desire) to make normal business loans.

5. Customers like CFC will draw down on their CP lines of credit due to the uncertainty in the CP markets during the credit crunch we are entering. As with #4, this will leave less credit available for normal business loans.

6. Leverage will become a dirty word in the banking community as the banks incur losses from some of their more leveraged customers and the pendulum will swing from excess leverage to below normal leverage. As we have seen in past credit cycles, reckless lending standards always lead to standards that are too tight. Banks never learn from experience. In order to grow profits banks become more aggressive which causes their completion to have to become more aggressive and this cycle continues until the banks begin to incur losses which is where we are in the cycle today. At this point in time they always go too far in the opposite direction.

7. The unwinding of the housing, commodity and credit bubbles.

Anyone think of any others?

Jim
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