Storm Clouds on the Horizon
I’ve just got back from a short leave in Asturias, the weather wasn’t perfect but certainly better than it has been back home. Nevertheless, all that fresh air and beautiful landscape was the tonic I needed.
I returned to find the weather top of the agenda in the news both here and in the US with California in flames and parts of Yorkshire under water. Not entirely to my surprise the press was blaming global warming as is usual these days in spite of the fact that in both cases global climate change had little to do with these events but failures in land management and spreading urbanisation implicate authorities in a way that the press are now reluctant to do.
My first day back in the office and I got a call from a head-hunter looking to fill a position at Bear Stearns, obviously he doesn’t read the financial press.
The group [Lombard Street Research] said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.
“Excess liquidity in the global system will be slashed,” it said. “Banks’ capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing.”
It certainly sounds bad when they use phrases like “subprime Chernobyl” but will it really affect the average person in the street?
What this signals is the begining of a sudden end to market liquidity and the end of cheap credit so as long as you are not overstretched on your borrowing you will be alright for now but as this will have a severe knock-on effect on hedge-funds we will be seeing the effects on private pensions in the near-term.
What is most worrying is this could come at a bad time in the development cycle for China which is very exposed to stressful financial conditions.
This could be the start of a very nasty “perfect storm”.
…so as long as you are not overstretched on your borrowing you will be alright for now…
Ah but that’s precisely what people are just now.
For now being the operative word James. As I think you’ve spotted, there isn’t really any upside to this news and it looks very grim. Not unexpected, in fact I’ve been predicting it for a while but that doesn’t make it any better.
Ordinary folks are unlikely to notice anything is really wrong until the end of the summer, the major institutions should be able to bury it until everyone gets back from their holidays. Markets are traditionally volatile then anyway. The bad weather throughout Europe (insurance payouts) are going to make matters a lot worse too.
I’ve given up trying to figure out when the unavoidable crunch is going to happen. The experience of the last few years is that the Masters of the Universe have been able to keep the plates spinning for a lot longer than many would have thought possible, or rational. The bubble will be popped sure enough but only when it suits them. However, I do agree that it does seem like it’s going to happen sooner rather than later
You’re not the only one. I was down the pub recently with our global head of risk, he admitted that he had expected the debt bubble to burst a few years ago too. Even for him our analysis is little more than going through the motions while politely ignoring the 500lb gorilla in the room. I suspect that the current war in the ME has a lot more to do with incentivising the retaining of US government bonds etc than geopolitics. Its all like a sweaty game of poker while we wait to see who blinks first.