November 12, Asian stock markets took another beating, on fears
that the credit squeeze which began in the United States will
continue to worsen in the months ahead. Every index from Tokyo
to Sidney fell sharply continuing the "self-reinforcing" cycle
of losses started last week on Wall Street.
The Nikkei 225 average fell 3.3 per cent, India's Sensex 2.9 per
cent, Taiwan's 3.5 per cent, and Hong Kong's Hang Seng slumped
4.5 per cent. The subprime tsunami is presently headed towards
downtown Manhattan, where nervous traders are already hunkered-down
in the trenches - ashen and wide-eyed.
deluge of bad news over last weekend; one story towers above all
the others. The yen gained 1.5 per cent against the dollar (9
per cent year-over-year). That means that Wall Street's biggest
swindle, the carry trade, is finally unwinding. The over-levered
hedge funds will now be forced to sell their positions quickly
before the interest-rate window shuts and they're stuck with humongous
bets they cannot cover.
The faltering yen is the grease that lubricates the guillotine.
US$1 trillion in low interest loans - which keeps the trading
whirring along in US markets - is about to get a haircut. Cheap
Japanese credit is the hidden flywheel in Hedgistan's main-cylinder.
Once it is removed, the industry will seize up and clank to a
halt. Fund managers can forget about the vacation rental in the
Hamptons. It'll be sloppy Joes and Schlitz Malt-liquor on Coney
Island from here on out.
weekend Deutsche Bank announced that losses from "securitized"
subprime mortgages were likely to reach $400 billion. The news
sparked a sell-off in the Asian markets where investors have become
increasingly eager to pare down their holdings of US equities
and dollar-backed assets. Overnight, the greenback has become
the leper at the birthday party; everyone is steering clear for
fear of contagion.
central banks are looking for any opportunity to dump their
stockpiles of dollars in a manner that doesn't disrupt their
economies or the global financial system... When word gets
out that the banking system is underwater; there'll be a
run on the dollar.
central banks are looking for any opportunity to dump their stockpiles
of dollars in a manner that doesn't disrupt their economies or
the global financial system. Their intentions may be prudent -
even honorable - but it won't forestall the inevitable blow-off
of US dollars that is likely to commence as soon as the financial
giants reveal the real size of their losses. New regulations have
been put in place that will require the banks to provide "market
prices" for their assets. This will expose the degree to which
they are under-capitalized. When word gets out that the banking
system is underwater; there'll be a run on the dollar.
the AFP reported that the Group of Seven richest nations (G7)
is considering direct "intervention" in the dollar's decline to
prevent a "disorderly correction".
"It is not
too early contemplating the risk of coordinated interventions
by the G7," said Stephen Jen and Charles St-Arnaud of investment
bank Morgan Stanley. "History shows that multilateral, coordinated
interventions have been key in establishing turning points in
multi-year trends in major currencies in the past three decades."
On November 8, Treasury Secretary Hank Paulson, full fathom five
under the waves on the poop deck of the Titanic communicated through
speaker tube the news that "A strong dollar is in our nation's
interest and should be based on economic fundamentals."
to Bloomberg News: "More than $350 billion of collateralized debt
obligations comprising asset-backed securities may become 'distressed'
because of credit rating downgrades."
multi-trillion dollar derivatives industry - which has never
been tested in down-market conditions - is now moving sideways.
No one really knows what this means except that the most
opaque and volatile debt-instruments are now threatening
clear is that the situation is getting worse, not better. Honesty
must at least be considered as one of many options, although the
Treasury Dept avoids that choice like the plague. Eventually,
the public will have to be told about what is going on.
The previous week, the Financial Times reported:
"In recent days, investors have been presented with a stream of
high-profile signs that sentiment in the financial world is deteriorating.
However, deep in one esoteric corner of finance, another, little-known
set of numbers is provoking growing concern.
" So-called correlation - a concept that shows how slices
of complex pools of credit derivatives trade relative to each
other - has been moving in unusual ways 'What we are seeing in
the synthetic [derivative] markets is that there is a serious
fear of systemic risk,' says Michael Hampden-Turner, credit strategist
at Citigroup. 'This is not just about price correlation within
the collateralized debt obligation market, but about a potential
rise in default correlation and asset correlation.'
"Until recently, traders often tended to assume that there
was relatively little correlation between different chunks of
debt, because they thought that the biggest risk to the world
was idiosyncratic in nature - meaning that while one company,
say, might suddenly default, it was unlikely that numerous companies
would default at the same time. However, some regulators have
been warning for some time that in times of stress correlation
does not always behave as traders might expect."
dollar derivatives industry - which has never been tested in down-market
conditions - is now moving sideways. No one really knows what
this means except that the most opaque and volatile debt-instruments
are now threatening to unravel, triggering a cascade of unanticipated
defaults and a colossal loss of market capitalization.
only thing looking up are oil futures. And they'll be denominated
in euros soon enough.
swaps (CDS) are rarely thrashed out in market commentary. They
are counterparty options which provide hedging against the prospect
of default. They are, in fact, a financial equivalent of the San
Andreas faultline which is quivering menacingly as foreclosures
mount and mortgage-backed bonds continue to implode. As the Financial
Times suggests, the shock waves should be sweeping through the
Wall Street trading pits in the very near future.
also new developments on the sale of "marked to model" CDOs -
the red-haired stepchild of the new structured finance paradigm.
"The trustee of a $1.5 billion collateralized debt obligation
managed by State Street Global Advisors has started selling assets,
apparently starting a process of liquidation," Standard and Poor's
said. The sale is a red flag for the other holders of $1.5 trillion
of CDOs who've been waiting for market conditions to change before
they try to sell their mortgage-backed bonds.
The liquidation will assign a "market price" to these complex
structured investment vehicles. If the price at auction is mere
pennies on the dollar, then the banks, pension funds, and insurance
companies will have to write down their losses or add to their
reserves to cover their weakening assets. Simply put, the State
Street sale could turn out to be doomsday for a number of under-capitalized
investment banks. Their revenues are already down; this would
be the last stake to the heart.
Greg Noland, at Prudent Bear.com reports on the "looming disaster"
at Fannie Mae where, the best-known Government Sponsored Entity
(GSE) has entered into the current housing slump with a "Book
of Business of mortgages, MBS and other credit guarantees of $2.7
trillion" which is backed by a measly "$39.9 billion of Shareholder's
concludes, "A devastating housing bust will bankrupt the mortgage
insurers, while the solvency of their derivatives counterparties
going forward will be in doubt in any number of scenarios. The
GSEs are now integrally linked to what I expect to be Credit insurance's
and 'structured finance's' astonishing downfall."
thing looking up are oil futures. And they'll be denominated in
euros soon enough.
Mike Whitney is a well respected freelance writer living in Washington
state, interested in politics and economics from a libertarian
perspective. He can be reached at [email protected].
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