Tuesday, July 31, 2007

Mark to Market: A ticking bomb for the hedge funds

It just feels like we are 4 to 12 weeks away from a "big financial event." This is the result of the increasing "risk premium" being seen in all financial markets. Quite frankly, the current system is set up for a negligible risk premium. That risk premium (or risk aversion) will only grow over the next few weeks.

Head over to calculated risk as they talk about the 3rd Bear Stearns hedge fund to halt disbursements. We all know what was left from the first two... This is going to

A link for the only good "Hedge fund implode-o-meter" I know of:
http://wasatchecon.blogspot.com/2007/06/hedge-fund-failometer.html

I just cannot imagine "the rich" doing without their jets, clothes, vacations, etc. So when liquidity becomes precious, they'll rush towards it. I still remember a friend's glee as he tracked the sultan of Brunei's cash flow issues post Gulf war I. ;) Can we say "high end fire sale?"

I am predicting that the meltdown in subprime will really start to hurt real estate closings in September. This is probably not enough... but the slow down in the LBO market might be...

Either way, I'm thinking J6P gets his wake up call in September or October. No later.

I've also decided to completely shut up about finance at work or with friends. I'm tired of being Mr. Doom. Its too late to save them; at this point I'll only give them something to hate me for. I know people who left our work to seek employment with yacht builders; maybe not the best time in the economic cycle for such a decision?

If you haven't read "The Hungry Years," consider it. Its very depressing. But it does a good job of describing how jobs were shed in the great depression. Ouch.

Thankfully the one coworker who did listen just entered escrow on selling his home! He's dutifully cut his asking price 5% every couple of weeks (he couldn't quite make himself do it every week). He actually ended up with a *tiny* bidding war. (Two buyers, one just out did the other. 1st buyer refused to increase the bid.

Its too late to stop this. I don't think the crash will occur in August...

But the Nikkei, Hang Seng, and Jakarta composite aren't exactly doing hot tonight.
http://finance.yahoo.com/intlindices?e=asia

Got popcorn?
Neil

5 comments:

sandman said...

Either way, I'm thinking J6P gets his wake up call in September or October. No later.

Can you define what happens when he gets his wake up call?

I've also slowed my talk at work. Out of 4 coworkers with houses (all mid 20's), 1 is already underwater (and is moving out of state - bought around a year ago). Another complains about his high mortgage payments to no end. I don't want to know what'll happen when he falls underwater. The others are in better shape.

The kicker is, another guy is giddy as anything to buy a new 1200 sqft townhome for $200k. He's willing to stand in line (a'la 2004) for a chance at one. Ugh...

On a lighter note, I'm going to predict that we hit desperation 1-2 months before your predictions. This appears to be moving very fast right now, much more so than I would have thought. We'll see who's right.

wannabuy said...

Can you define what happens when he gets his wake up call?
The beer is taken out of his hand. ;)

I agree that this downturn is about to kick into high gear. However, my time-line already assumed that! Its certainly interesting as to how it will progress. Hopefully we're not congratulating each other in the bread line... ;)

Got popcorn?
Neil

tj & the bear said...

Did I just read the "D" word?

tj & the bear said...

Neil,

Seems like the good old days of mortgage lending are returning with a vengeance. Methinks you & your whif will have yourselves a large oceanfront villa in two years provided no move to Houston.

Keep your fingers crossed. If housing prices crash far enough fast enough they'll be no reason for them to relocate.

wannabuy said...

Keep your fingers crossed. If housing prices crash far enough fast enough they'll be no reason for them to relocate.

One hopes. I really do love Southern California. But I work for a company that must please the stockholders. Cest la vie. That also means retaining talent. I alternate daily on my desire to actually go to Houston. Today its "NO, I don't want to dissolve in the humidity."

The good old days of mortgage lending will be here quick.

Anyone else expecting to hear politicians announce that "prosperity is just around the corner?" ;)

I'm still thinking this will *only* be the "great recession," not a depression. But we'll see... I have to laugh as states commit $5 million here and there to stop this multi-trillion dollar implosion.

I read in the comments of another blog this morning that sub-prime has already destroyed over $3 Trillion dollars of world wide equity (stocks, bonds, home value declines from some arbitrary peak date).

Last I looked the world economy is a $72 Trillion/year. So if we the future losses in 2007 are only another $3 Trillion, we've destroyed one's month worth of labor. My thinking is that one month of 2007 and two months of 2008 will be worked just to pay back for the false "growth" due to the loose credit bubble. Cest la vie.

If we do hit a depression, I see no reason that world stock and bond markets wouldn't lose over one year's worth of world GNP in "equity." However, I still predict a recession.

I SWAG that the net equity losses in stocks, bonds, & homes will be done by year end 2008. (Ok, not homes, but in 2009 stocks and bonds will produce more wealth than homes destroy.)

Pretty dark days ahead...

Got popcorn?
Neil