The weekend has brought us events that can only be described in large, over-the-top terms. The Fed agreeing to take equity on its balance sheet? How bad can things really be? Clearly much worse than most people thought last Friday. Moral Hazard has been re-introduced as Lehman is allowed to go down. I will admit to being surprised. I thought Paulson and Bernanke would put it in the too big too fail category. I think they did the right thing by refusing taxpayer money for a bailout, but it is clearly going to roil the credit markets for weeks and months. It will be interesting to see how long it lasts.
I am in La Jolla today, working with my partners at Altegris, and looking over their shoulders while they monitor the performance of some of our managers. Interesting times. But I have had the time to read two short but very interesting commentaries on the current crisis. I will have more to say on Friday, but for now let's read old friends (to Outside the Box readers) Michael Lewitt of Hegemony Capital Management (www.hcmmarketletter.com) and Barry Ritholtz of Fusion IQ (www.fusioniqrank.com).
As I send this, credit default swaps spreads are simply blowing out. I have been writing about how we would see significant problems in the CDS markets for almost two years. This is something that you could see coming yet nothing was done. I know we are now in crisis, but let's hope that the authorities learn some lessons and put in place some sensible regulations of the CDS market soon. And for the love of Pete (insert your favorite expletive here) put these (more expletives) things on a regulated exchange.
And I agree with Michael below. This is not a time to try and catch a falling knife. That time will come, but not yet. And remember things will get better and we will get through this. As I just said to Barry, "We do live in interesting times."
Who should we blame for the problems in the credit markets? This week in Outside the Box my good friend Barry Ritholtz takes on the task of pointing his prodigious finger at the guilty parties. As he notes, there is plenty of guilt to go around. This is a problem that is going to stay with us more than a few weeks. As I wrote last week, it is not a problem of liquidity. It is a problem of credibility. Until investors of all types feel safe getting back into the structured finance market water, US mortgages and all sorts of consumer finance are going to be severely hobbled. There is plenty of money on the sidelines, but it is going to take some work to make investors feel comfortable.
Part of that process is to figure out what went wrong and how do we avoid getting into this mess yet again? How do we restore credibility? I offer a few quick thoughts on this at the end of Barry's work. And if you have the time, you should click on some of the links Barry has to various research, especially the first link which shows that housing prices could easily drop 15% (or more in some of the bubble areas!).
Finally, I should note that I am going to be speaking yet again at the New Orleans Investment Conference (October 21-25, 2007). This is always one of the great investment conferences of the year. You can click here to learn more.
This week in a very special Outside the Box we have an investment outlook tour de force. My friend and South African business partner Dr. Prieur du Plessis gathered a group of some of the more interesting investment managers in the industry, along with your humble analyst, and let us have the opportunity to opine on what is driving various markets and their respective implications.
We begin with the U.S. economy, addressing the underlying implications of the real estate market, interest rates, liquidity, and the ever precipitously depreciating dollar, procuring an assessment of these collective market drivers and their respective effects on the U.S. economy, the stock market, bond market, and commodities market.
Thereafter, we incorporate macroeconomic drivers that will impact our respective outlooks be they the influence of the Asian Tiger economies, Yen Carry Trade, and the ample liquidity derived from vast foreign currency reserves on account of currency manipulation, and the respective consumption patterns of the developing countries on the global economy.
We conclude with an assessment of the risks to domestic and global economies from the market drivers and offer advice we have humbly been forcefully taught throughout the years by the always hard task-master, the market.