In its June 24th report, the Bank for International Settlements indicated its analyses had to allow for the forecast of a Global Financial Depression (their word), to be precipitated by a collapse of US Real Estate Markets. This evening, I received multiple unconfirmed reports from independent reliable sources indicating they had been informed that the positions of CMO’s and CDO’s held by US investment entities had been marked down by as much as 80 (EIGHTY) Percent on Short and Intermediate Term holdings. This will have to hit the hedge funds and Private Equity markets like a bullet if proven to be only partially true.
In it's report, the BIS used a controversial word “Depression” (and they avoid inflammatory words like the plague) to describe what they thought might happen if US Real Estate and related financial markets were to meltdown. It is not exactly rocket science to understand that such horrific mark downs of major portfolio holdings would trigger catastrophic margin calls on leveraged portfolios. In turn, this would meltdown all securities in the US and globally, in that they would have to be sold in a non-orderly manner on a massive scale to satisfy said margin calls. This process would be a never ending cascade of more calls triggering more calls.
In my previous Blog post, I compared the current US markets’ overall conditions as being very similar to the environment in Japan in the Mid-1980’s. After 9/11, and in the middle of a major bear market, the Federal Reserve made easy, low cost money very plentiful, and particularly in the period of 2002 to 2005, rates cratered to the lowest levels of 40 years. Literally trillions of dollars of mortgage and debt obligations were put out by US banks to help avoid a financial depression following the continuing collapse of markets post 9/11. In fact, some 30 mortgage money went out at prices as low as 5%, a level not seen since the 1950’s.
Today, Prime is at 7.5% and these financial assets if properly marked to market are hugely underwater.
Only time will tell, but we may see the impact of how a highly efficient information distribution paradigm could hit this market like a thousand foot tall Tsunami moving at the speed of sound.
I can’t come up with a forecast of anywhere to hide, unless the Fed goes into denial, and pulls a Japan Central Bank position out. Their options are limited to turning on the presses, or moving to Vanuatu for 50 years. Either position wrecks everything, irrespective of the choice.
We all need to say a prayer here, no matter what your religious beliefs.