Ten Points About the Markets
1) It is a wonderful thing to be the world’s reserve currency; we can milk the rest of the world until things change. There is some push from emerging markets to have a change, but the effectiveness of that push is questionable. Someone has to give the US an ultimatum, and no one is there yet.
2) With the decline in fixed income volatility, mortgage yields are falling. Good for mortgages, but the real question is what happens when the Treasury starts borrowing like a maniac.
3) Many hedge funds have raised the gates. Capital cannot easily exit. GIven the weak balance sheets that hedge funds have, this is normal for a bear market. The only surprise is that investors did not anticipate the troubles.
4) Perhaps the money to banks from the government is going only to relatively sound institutions. That is consistent with the idea of making some institutions sound, and letting them buy up marginal banks. Upshot: don’t expect an early increase in lending.
5) Analyze those that are on the other side of the table. If they have a reputation for being smart, be extra careful. Many municipalities and other entities lost money dealing with investment banks. No surprise.
6) Many do not understand mark-to-market accounting. First, GAAP is the least of the problems — collateral agreements require MTM. Regulators can ignore MTM as they please. Second, MTM is misapplied by auditors; it does not mean “last trade,” but an estimate of where a liquid market would trade.
7) Shut the barn door after the cow has escaped. Yes, loan underwriting standards have tightened, in the middle of a credit bust.
8 ) There is less cash flow to service; the financial sector should shrink.
9) S&P 500 at 600? Not impossible, and not likely, but if profit margins crush down, possible.
10) where could longs make money in October 2008? Nowhere. Real bear markets crush almost everyone.
In closing, I am not concerned about the victory of Obama. The new president will have little freedom, and will face significant unsolvable problems.
November 5th, 20085:48 pm at
What I would like to see at this point is a broad comparison of accruals v. cash flows for the past 8 quarters so we can see who is swimming naked.
Thank you for 7. I cringed every time a Congress-person (or even a few financial analysts) who doesn’t understand MTM or SFAS 157 (I think that’s the one) blamed accounting idioms for balance sheet problems.
Response to 10: “Real bear markets crush almost everyone.” The government crushes anyone who didn’t get crushed by the bear market (i.e., shorts and savers).