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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: C.K. Houston who wrote (2026)	8/8/1999 5:24:00 PM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 3536

Cheryl, That certainly is one possible trigger event. And it is of the type I'm thinking of. Fwiw my owm impression is that the hedge funds are not a particular risk at the moment. Most of the hedge funds I'm aware of have been fairly quiet and are less exposed than last year. Last year there were rumours about hedge funds in trouble for weeks before the speculation became public. We haven't seen the same this year. So I suspect the current round of rumours is a bit of last years news and they are just rounding up the usual suspects. And even if the rumour is true the numbers in the article are small potatoes compared to last year. There is also no indication in the market that the Fed is holding off tightening to keep someone afloat. This could all of course change quickly but currently the market is not acting like there are particular stresses. Yes spreads are widening but that could be for other reasons. Liquidity remains plentiful. My own suspicion is that it the event will be prompted by emerging market weakness again. We've already seen some wobble in Argentina ahead of this falls elections. And there are a lot of hedge funds taking an interest in the political tension between China and Taiwan. But the specifics of the trigger are almost irrelevant. And the end result of what portion of the system (hedge funds, banks, insurance cos etc) is also not all that important. By the time it gets that specific you're a step behind imo. The simple dynamic is the the US is the only really vibrant economy right now and much of the world is pretty shaky and depending on US demand to help pull them through. If the US starts to slow, wether intentionally or not, it is just a matter of time until something creaks somewhere. If you look for something specifc in one area you might miss the one that actually hits. Btw there is one other thing I disagree with in that article. The market for swaps, complex interest-rate derivatives which are widely used by hedge funds and the proprietary trading desks of the big investment banks to fund their high-risk trading strategies is, say traders, showing the same signs of distress that was seen after the Russian bond default last August. Not true. The levels may be out as far but the market is not in distress. Distress is signaled more by an evaporation in liquidity which hasn't happened. It should be remembered that swap spreads aren't exclusively a measure of credit risk. They also reflect supply demand relationships. Swap spreads have been widening for a couple of years and began widening before the emerging market crisis. I believe this is due to the changing supply demand relationship between corporate and government debt. I have been positioned for a widening in spreads for a few years. I put this spread on not because of credit concerns but because of the budget surplus. It was my opinion that the strong economy would have two results, a government budget surplus and increased corporate borrowing demand. To put it simply this would mean more corporate debt and less government debt. I felt that this change in the supply demand equation would cause the spread to widen. So yes credit concerns can cause spikes in the spread but I believe the underlying trend has had a large supply demand component. Henry