Sep. 18th, 2008

peterbirks: (Default)
Just because people are saying it's only a crisis of confidence, that doesn't mean that there isn't a systemic problem. Contrariwise, just because everyone suddenly realizes that there IS a systemic problem, that doesn't mean that there isn't a crisis of confidence.

Or, in other words, we have now reached the stage where all of the people who last year were muttering about liquidity hitches and short-term problems, are now talking about the end of capitalism. As with currency markets, these things have a tendency to overshoot.

Once again, the important thing to do is to step back and ask yourself "how big is the real damage"? That means, how much money has been lent to people that is not going to be paid back? If we knew the absolute answer to that, life would be so much simpler.

The most disturbing piece of news this morning was that Morgan Stanley might be merging with Wachovia. The latter, you may or may not be aware, was a few weeks ago one of the favourites for the title of "the biggest regional bank in the firing line". If a basket case has to come to the rescue of a basket case, then these are worrying times. Because what you may end up with is a bigger basket case.

Sometimes it's annoying not actually working in the markets, because these are no times for an amateur to try to make money, even though it looks as if it would be a piece of piss so to do. Your internet connection for online trading tends to go down, and the phone doesn't get answered by the trading desk. You can find yourself getting in at the right time for your planned short-term trade, and then being unable to get out of it an hour later.

So, let's take a longer-term view. At some point in the future there are going to be some absolutely blinding bargains in the equity markets -- possibly in the banking sector where the short-term traders will take a position too far, possibly elsewhere in areas touched by 'contagion', where in fact the business is sound and the lack of confidence can be ridden out. Over the next two or three days it might even be best to put money into something that, long-term, I consider to be dust -- good old gilts. And gold, of course, which could hit $1100 in a week if the panic continues at this rate.

Looks as if Macquarie in Australia is the next in line to be facing funding difficulties. Australia has been spared any of the crisis thus far -- odd, really , given that it had its own housing boom a few years ago. If we assume that banks in countries which have had a housing boom and bust cycle are the most likely to be under threat, then surely it can't be long before attention turns to Ireland and Spain?

And all this way in without a mention of HBoS? Alex Salmond can blame speculators and short-selling 'spivs' to his heart's content. There's an older-fashioned root cause. The company lent long and borrowed short. It can't pay interest with three bricks of a house. This is not a complex business. The thirty-somethings in charge just assumed that 'the money is always there if you need it'. Now it isn't. So, HBoS was on the verge of going cash-broke. If Salmond thinks the short-sellers are wrong, he should set up a leveraged long-only fund and see how far it gets him.


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August 2023

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