Thank goodness all the subprime/credit crunch issues are now behind us!
That seemed to be the message on the network (Adam's term) yesterday thanks to a day that was a touch less volatile. From the no-one-wants-to-get-blindsided department I doubt this is the last of the subprime news in the short run or the longer run. Even if the selling is done for now (not saying it is), it is a good bet there will be something else in the next few months.
I personally don't try to trade short term around these things, I spelled out over the weekend how I positioned myself and when, but I don't want to be totally unprepared if there is another shoe to drop.
If we are done selling down for now and then another 6% hit comes from this sometime in the next six months you hopefully won't be caught off guard. Big picture this whole thing is about messing with access to capital. When this happens it can take a long time to unfold. This became an immediate market threat only a few months ago. While I don't yet have a great feel for how serious this is, it could take more than a year to fully unwind.
Unfortunately most media accounts focus on the wrong thing. As I have mentioned a few times, the default rate is not going to be the thing. The default rate will remain low, this is good for consumers but the market risk is to the pools of capital that invest in the mortgages. There is less investment demand, another round of potential liquidations with fewer buyers is coming soon and a widening of spreads which all hurt the holders of this paper.
A mortgage pool going from 99 cents on the dollar down to 89 cents on the dollar doesn't effect the person who borrows the money to buy the house--hence the default rate has nothing to do with it. But own one of the bonds leveraged two, three or four to one and a 10 cents on the dollar (just an example I am making up), well you can do the math for yourself.
Whatever this will turn out to be, I doubt it is unprecedented in terms of fundamental impact and market impact. It take some amount of time, the market will endure some magnitude and then move on. Moving on will take longer than Kudlow thinks but less time than Roubini thinks.
Wikinvest Wire
8 comments:
Wait a minute, there won't be catastrophic defaults? But housing is the biggest bubble of all time! People were stupid and they were tricked into taking loans they couldn't afford by evil and greedy lenders. The end is nigh! Don't you listen to Jim Rogers and Jeremy Grantham?
Seriously, thanks for adding a bit of sanity to this circus.
The end is nigh. That saying is a real hoot.
The sky will not fall.
That does not mean this will not be much more unpleasant than you currently think.
Was starting to absorb the negative impact of shrinking credit but what about the latest report that a money market fund has stopped redemptions? CNBC reported that Sentinel Management Group has asked permission from the CFTC to halt money market redemptions. What's your feeling on this latest development?
The SEC will let them halt redemptions, otherwise they will essentially allow people selling today to steal money from people who hang on, by spreading the losses across everyone. If there's no sales, there will be only small losses, if any. Just like the guy who bought the mortgage pool at 99 (without leverage) and is going to hold until maturity, doesn't care that the price today is 89.
Matthew's answer is logical to me, I don't know if it will be right with this but it does make sense.
missedit, there is nothing that is unprecedented about the Sentinel story, not that it doesn;t add fuel to the fire but the market has been through this before.
I think it's a bit naive to assume that we have seen the last of subprime spillover. I know for a fact from various sources within major investment banks that ABS and commercial paper markets are blowing up as we speak. The word on the street is that various commercial paper facilities are starting to amortize!
Sentinel could be just the beginning.
Not to worry. It's just a wee chunk of ice off our bow.
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