Some thoughts on the current market crisis in both subprime and overall markets:
- In and of itself, the subprime problem is a moderate problem, but not a huge problem. That said, not a lot of analysts know exactly to what degree many hedge funds are levered, and, if there are large losses from subprime loans, if they can meet their commitments -- and this is what is scaring investors. In other words, we would not be having these problems if funds were not highly leveraged. If I recall correctly, in the Long Term Capital Management crisis of 98, the main problem, was that the result of the 80 or so to 1 leverage to equity could cause a string of bank failures. Unfortunately we didn't learn from that crisis to pass laws that would limit leverage of hedge funds.
- The domestic Chinese market is oblivious to the liquidity problems here: (Shanghai) http://finance.yahoo.com/q/bc?s=000001.SS&t=6m&l=on&z=m&q=l&c=
But India is down a modest amount (but 4% today meaning 4/16) http://finance.yahoo.com/q/bc?s=%5EBSESN&t=6m
The reason I believe is that the Indian Rupee trades while the Chinese Renminbi is non-convertible -- so US and EU based funds can't withdraw money from the domestic Chinese market. This underscores that this crisis (and I think we are in crisis mode now) is a liquidity problem.
- Fundamentally, China and India are in good shape (I think) but the US, is certainly slowing, but to what extent, is difficult to ascertain. Personally, I have made sure to get rid of financial stocks, and retail, and of course housing related stocks, and actually opened some short positions -- might as well over this next month while the market doesn't have much upside but possibly -- and would venture to say probably -- some more downside as of 8/16/07.
- A clarification is needed, the Central Bank's "pumping in money" is not really sending in money into the banks without questions asked, but rather repurchase agreement sales -- so the central banks (Fed and other Central Banks) are buying mortgages for cash, in which the central banks expect to be paid back. So it is really trying to get the markets running again. A description is here: http://www.voxeu.org/index.php?q=node/466
So what the Central Banks are doing is completely appropriate. This seems to be misunderstood by the many members of the media.