Please let me know if I am wrong:
Markets with no liquidity at all (i.e. people may as well not go to work):
High Yield
Levered Loans
Housing (Hearing bad stories about lenders canceling mortgages)
Mortgages
Quant strategy hedge funds
Investment Banking
Investment Grade Bonds (People cannot buy or sell)
Markets with liquidity fully functioning:
Treasuries
Commodities
Equities (yet I think the Plunge Protection Team is on it)
This is so much worse than LTCM. It has to be. Markets are grinding to a halt. Gold is the only currency (besides silver, platinum and rock salt)
MK
High Yield
Levered Loans
Housing (Hearing bad stories about lenders canceling mortgages)
Mortgages
Quant strategy hedge funds
Investment Banking
Investment Grade Bonds (People cannot buy or sell)
Markets with liquidity fully functioning:
Treasuries
Commodities
Equities (yet I think the Plunge Protection Team is on it)
This is so much worse than LTCM. It has to be. Markets are grinding to a halt. Gold is the only currency (besides silver, platinum and rock salt)
MK
posted by MattKelly54 at
8:42 AM
10 Comments:
I was going to write that we are in a second Great Depression, but I thought that would haunt me for the rest of my life.
Seriously someone describe to me what is going to happen in Mortgage Financing. What is going to happen? I truelly do not know. Things are changing so rapidly, and everyone simply assumes that we are going to bounce back because we always have. We are complacent, and we are not seeing the big picture. Mortgages do not have a bidder, because the assets that they are backed by are fucking worth 0.50 cents on the dollar unless inflation is a major factor.
Construction and Finance jobs are going to bite it obviously without question. This will cause a multiplier effect throughout the economy.
Things are fucking horrific. Yet, gold has not moved, the equity market has not moved, and everyone is fat and happy.
Now is the time to take action. Buy calls on gold. Long term calls. The kind that will have you looking like Rocafella and driving around like the Jim Grant cartoon. The political will is not there to not lower rates. It is not there. Speculation has driven everything in this economy and it is going to fail.
Paul you definitely beat me to this, but I now consider both Fannie and Freddie to be bankrupt.
Turn on the presses.
Do you think that I can get my company to pay me in rock salt?
Well, since you asked Matt, in 1998 the credit markets also ceased to function. There was no liquidity. Zippo. I cannot give first hand accounts of the debt side since I was working on the equity side as I am now but I can share what the banter was with the people I reported to. You had a whole country default on bonds, which even though it was Russia, was kind of a big deal. I seem to recall that German banks owned like $600 billion in Russian debt. Businesses dependent on debt financing blew up, my favorite being Harnishfiger (now Joy Global) whose new headquarters at the time is now occupied by Stark - I love the potential irony. Additionally, in 1998, Asia was caught in a nasty recession (if not depression), Latin America was about to follow, and Europe was in a funk. Japanese banks had somewhere between $500b and $1 trillion in nonperforming loans on their balance sheets. Thailand imposed capital controls, Indonesia basically collapsed. Korea seriously was seriously hurting with its major industries near collapse. I think Daeywoo (sp?), one of their major industrial chaebols (sp?), collapsed.
So 1/2 of the world was in recession or economic stagnation with deflation running rampant. US stocks declined 20% in 3 months - we're at 8-9% now. Anything manufacturing or commodity driven got destroyed. Nucor off 40%+, Boeing 40%, SLB 40%+, and these are blue chip examples. Value stocks were taken out and shot. For a reference, look at the Heartland Value fund in 1998. It was not unique among value funds. Oil was at $10 a barrel and gas at the pump was $0.90. Good for consumers but consider the falloff in global demand necessary to get that type of overcapacity. In fact, I would argue that if it werent for the tech cycle and loose money, we would have gone into recession right there and then rather than waiting 2 1/2 more years.
So, my conclusion is that things in 1998 were a hell of a lot worse than people remember because the house of cards did not collapse for another 3 years and the "crisis" ocurred over a relatively short period of time. Long-term Capital was, in a sense, a side show to some of the bigger issues and only fundamentally relevant because it had the potential to be a tipping point with the banking system. I have no idea if things will collapse this time but my point is I dont believe this type of environment is unprecedented. And the Fed will lower rates if economic growth looks in peril or if it looks like a major banks is going to fail.
Yours Truly,
El Cid, Historian Extraordinaire
I am pretty certain that I talked myself into investing in gold today. Cid may have sealed it.
El Cid, to your point that you're not sure if this could be worse than the tech bubble, reflect that the amount of leverage employed on household balance sheets is way greater in the latest housing bubble.
The stock market lost $1 billion of "value" in 2000-2001. Does anyone know the value of the housing market and mortgage markets? I think sub prime alone was $6 trillion or something.
Definitely time to go short gold if both Fresh and I are getting in.
The best part of owning a massive position of Gold is that you are rooting for the Fed to be the hero. It is much more fun that way.
El Oro,
You might want to check your figures on the amount of value lost in the stock market from 2000-2002. The S&P 500 was off from peak to low almost 50%. I dont know what the total market cap of the S&P 500 was in early 2000 but I'll take a stab and guess $15 trillion. In that case, the market lost $7 trillion in value. That doesnt include internet stocks not included in the S&P 500. I might be overshooting on the market value but it still a big number and comparable to what you cited in subprimes. Also note, houses have tangible value. Strip it for its materials if nothing else. The mortgage holders will recoup something. May of the stocks in 2000 were just pieces of paper.
Since we are comparing things to the tech bubble, two things stand out from 2000. First, in summer of 2000, a lot of companies started coming in light on earnings but said orders would pick up in Q3 or Q4. By the time December came along, there was a steady stream of big layoffs being announced, banks writing off bad debts (I seem to recall BofA writing off $3billion but dont hold me to the number), and finally in preannouncement season outlooks fell apart and the phrase "no visibility" became part of the vernacular. The bank issues are well known and when I get an inkling of the latter two, then I get really concerned fall into Kelly's camp. Until then, I wait.
Cid, I love you. Your historical perspective is amazing. There is no doubt that there was a stock bubble in 1999-2000. And absolutely no doubt that there was a housing bubble in 2006.
Someone just stuck a knife into the American dream today.
The Naz is still down 50% from 2001.
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