Bloodbath aftermath
Posted by Harry Stotle on October 16, 2008
A quieter week was wrongly expected after the interbank pacemaker was put into place and before October 21st, the day when the general public discovers the meaning of the three letters C.D.S.
Leveraged investors are now forced to sell and the professional wishful thinkers (e.g. your account managers) are losing drive, leading markets to nervously slide down to the levels reached 6 years ago (2002). This is much steeper than the 87 crash, the oldest memory of most traders, and the main obstacle to their comprehension of current events. As they were raised to believe that stock markets downturns are short-lived, they took immediate comfort in a ready-made solution: just wait for recovery while only the panicking fools are selling. These ideas led them to ignore 2 important facts: thresholds can be reached beyond which situations do not repeat themselves; and this crash has causes (uncontrolled financial leverage on a giant scale) that the 87 crash did not have. Even the optimist is now aware of the recession to come (it has hardly started yet), under the impact of the inevitable crunch of consumers’ markets which shall follow mechanically a universal loss of net worth, leverage and employment The only debate is how deep? How long?
This depends on various factors, such as the intensity with which leveraged real estate shall blowup, the magnitude if the CDS blast and the capacity of governments, which are already drained of blood, to ‘reflate’ the economy. Concerning real estate, prices have not yet declined in percentages anywhere close to those of the early 80s. Thus the risk is high in many places, including Europe and emerging countries, where a 50% decline is not unrealistic at all. For the CDS, better not talk about them until October 21, where we shall know the proportion of net exposure in the due $410 billion for Lehman only (i.e. 0.6% of the total), who are the main victims and if they can survive. As to what’s left of the capability of governments to compensate all the losses, no one has the slightest idea at this time.
Let’s fasten our seat belts (before tightening our own belts)
This is how the world goes
