August 16, 2007

The Markets

This is basically a foreign policy blog (at least when it’s not being overrun by fevered polemics) and so not a finance blog, but permit me a very brief word on the markets, as its been a very instructive couple of weeks. I've been bearish for months (if not years), and it does look like the chickens are finally coming home to roost. We've gone from a broad market sentiment that the sub-prime mess was going to be relatively contained, and then with the events w/ BNP Paribas the specter of contagion suddenly became the prevailing mood. Now we're seeing pretty wide-spread hedge fund exposure, with encroachments into mutual funds. Meantime, the sub-prime mess is also increasingly impacting commercial paper:

The turbulence in subprime mortgages has now spread to the commercial paper market -- a $2.2 trillion market in the USA that is the working capital lifeblood for the corporate sector," David Rosenberg, North American economist at Merrill Lynch, wrote in a note to clients on Wednesday. "This is looking worse than just another credit cycle."

(see also more here).

In my view, this is just getting started, and things are going to get a lot worse before they get better (this isn’t to say there mightn’t be large rallies, I’m speaking of the overall trend-line over the next 3-6 months). And unlike Long Term Capital Management (a single fund, after all), this crisis is exponentially deeper, and so will take much longer to unwind. So don your seatbelts, as it's going to be a rocky few quarters....meantime, be sure to read Nouriel Roubini, who has a lot more on related topics.

P.S. Just to inject a note of humor, can you imagine how far Jim Cramer's jaw dropped today when he read this?

Posted by Gregory at August 16, 2007 04:09 AM