Wasn't That A Mighty Storm
Eric Von Schmidt used to sing a traditional song about the Galveston Flood of 1900.
Wasn’t that a mighty storm
Wasn’t that a mighty storm in the morning, well
Wasn’t that a mighty storm
That blew all the people away
I thought about those lyrics this morning while on a phone call with a friend who had just spent a few hours with one of our country’s most successful hedge fund managers. Though the TV images of yesterday’s Galveston hurricane damage played silently in the background, the words of my friend were bringing to mind not a hurricane but a financial storm of epic proportions.
The hedge fund manager believes we are now past the point that we could ever have a “soft landing” for the economy and that we are maybe only 40% into the crash that is slowly unfolding. He believes that the bill for the writedowns of mortgage backed securities will be more than a trillion and that at least 50% of the more than $400 billion in mortgage bonds will default. He also thinks there is a high probability that more than 40% of the securitization of credit card loans will default. Lehman Brothers and Washington Mutual are “dead men walking”, but can perhaps be acquired at bargain basement prices.
Overall we are entering a period of profound contraction and consolidation. In nine months there will be many fewer banks and the small hedge funds that levered their $2 billion of capital to $30 billion in securities will be gone, because if you lose 10% with that kind of leverage, you’re out of the game. The notion that there is any decoupling between the world’s economies is dead. Instead, countries are in a “global race to the bottom”, to complete the process of creative destruction and delevering. In some ways the U.S. is leading the pack and may finish the gut-wrenching process sooner than China, Germany or the U.K. But make no mistake, the recession/depression will be global.
Ironically what is part of the disruption is weekends like this. The manager said there have been “six weekend interventions” by the Fed or the Treasury this year (bailouts, emergency rate changes, etc) and so managers leave work on Fridays never knowing if the world may change over the weekend. The market hates uncertainty, so this is adding to volatility. Of course the big hedge funds are creating self-fulfilling prophesies by shorting stocks like Lehman and WaMu.
Early in the year I wrote a post called “Savage Capitalism” and wondered if the deregulatory fervor that seized our government in 1980 had not unleashed a cancer that could consume the very system the Laissez Faire crowd was trying to support. I’ve been saying the storm is coming for a long time here, but now we better start thinking about how we want to rebuild when the storm finally clears.
You have fantastic conversations happening here….
Keeping my comment short and sweet, I’ll just share a few books that I’m reading in tandem I think apropos:
The Power of Unreasonable People – How Social Entrepreneurs Create Markets That Change The World by John Elkington and Pamela Hartigan
The Plot To Save The Planet – How Visionary Entrepreneurs And Corporate Titans Are Creating Real Solutions To Global Warming by Brian Dumaine
Cradle To Cradle – Remaking The Way We Make Things by William McDonough and Michael Braungart
You have fantastic conversations happening here….
Keeping my comment short and sweet, I’ll just share a few books that I’m reading in tandem I think apropos:
The Power of Unreasonable People – How Social Entrepreneurs Create Markets That Change The World by John Elkington and Pamela Hartigan
The Plot To Save The Planet – How Visionary Entrepreneurs And Corporate Titans Are Creating Real Solutions To Global Warming by Brian Dumaine
Cradle To Cradle – Remaking The Way We Make Things by William McDonough and Michael Braungart
In the 70′s and 80′s tax policy created a commercial real estate bubble . Savings and loans were providing moneyfor the purchase of cmmercial real estate based on appraisels inflated by demand for the property. Their was money to be made based on accelerated depreciation allowed by the IRS.
In 86′ Tefra changed the deductability, value for see through buildings plummeted. Savings and loans failed billions of tax payers money was lost.
After that commercial property went back to being valued based on its ability to make real money instead of Pie in the sky.
This can be traced directly to government screwing around where they don’t belong.
Sound familiar?
In the 70′s and 80′s tax policy created a commercial real estate bubble . Savings and loans were providing moneyfor the purchase of cmmercial real estate based on appraisels inflated by demand for the property. Their was money to be made based on accelerated depreciation allowed by the IRS.
In 86′ Tefra changed the deductability, value for see through buildings plummeted. Savings and loans failed billions of tax payers money was lost.
After that commercial property went back to being valued based on its ability to make real money instead of Pie in the sky.
This can be traced directly to government screwing around where they don’t belong.
Sound familiar?
But in the end Jon, it’s only money. The hedge fund managers made the mistake in believing that the returns they compiled were based on something tangible. That something was the inflated American Dream were everything was cheap, especially money and that the way to prosperity was to leverage consumers.
When 70% of your economy is based on consumers buying power and when those consumers are spending cheap borrowed money it doesn’t take much to bring down the economy. It’s not how far the bottom is, it’s how clueless Wall Street and Washington still is that they believe all that is wrong is a ‘few’ loans here and there.
But in the end Jon, it’s only money. The hedge fund managers made the mistake in believing that the returns they compiled were based on something tangible. That something was the inflated American Dream were everything was cheap, especially money and that the way to prosperity was to leverage consumers.
When 70% of your economy is based on consumers buying power and when those consumers are spending cheap borrowed money it doesn’t take much to bring down the economy. It’s not how far the bottom is, it’s how clueless Wall Street and Washington still is that they believe all that is wrong is a ‘few’ loans here and there.
It’s the wonderful feature of modern capitalist democracy, wherein executives are encouraged to make financial decisions on the basis of short term returns, and politicians are similarly encouraged to make economic policy decisions with a short term view toward election cycles.
I’m not opposing either capitalism or democracy, but we do need to find some way to reintegrate long term strategic decision making into the system, or we’ll be stuck with this kind of boom and bust economics (and much more besides) forever.
It’s the wonderful feature of modern capitalist democracy, wherein executives are encouraged to make financial decisions on the basis of short term returns, and politicians are similarly encouraged to make economic policy decisions with a short term view toward election cycles.
I’m not opposing either capitalism or democracy, but we do need to find some way to reintegrate long term strategic decision making into the system, or we’ll be stuck with this kind of boom and bust economics (and much more besides) forever.
I still have a hard time getting hard and fast numbers on the REAL returns of hedge fund managers vs. the market. I’ve heard only 1/10 managers are now getting performance fees and many are shutting down seeded or incubated funds due to un-marketable performance.
I believe that all of this will end in more demand in hedge funds not less. There will be less faith in equities, less faith in traditional investments and the risks and trading desks of investment banks of ages past will shift to hedge fund portfolios.
- Richard
http://richard-wilson.blogspot.com
I still have a hard time getting hard and fast numbers on the REAL returns of hedge fund managers vs. the market. I’ve heard only 1/10 managers are now getting performance fees and many are shutting down seeded or incubated funds due to un-marketable performance.
I believe that all of this will end in more demand in hedge funds not less. There will be less faith in equities, less faith in traditional investments and the risks and trading desks of investment banks of ages past will shift to hedge fund portfolios.
- Richard
http://richard-wilson.blogspot.com