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Thread: weekend commentary - investors in a Coma re risk ?!

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    Banned Melonie's Avatar
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    Default weekend commentary - investors in a Coma re risk ?!

    (snip)"[this week] A hedge fund registered the largest single loss in history - $6 billion, more than twice the loss of Long Term Capital Management. In Mexico, millions protested the presidential elections and teachers in Oaxaca threatened revolution. Thailand's elected government was replaced in a military coup. In Hungary, citizens rioted. Hugo Chavez told the UN that the United States of America was run by the 'devil.' This same US of A is now widely thought to be preparing a military strike against Iran. In the homeland, housing registered the first nationwide decline in 11 years. And for the first time in 90 years, America ceased being a net-capitalist nation; now it pays more to foreign creditors than it receives from its overseas investments.

    Yet, these remarkable events in the last few days have been greeted by the market, not with shock and awe, but with such a coma-like indifference that we feel like holding a mirror under its nose and taking its pulse.

    Venezuela may be run by a fox or a fool, depending on your point of view, but what kind of investor buys its bonds at only 2.3% over U.S. Treasuries? And Thailand may be a nice place to lie on the beach, but investors who lend money to the Thai government for barely a single percentage point more than lending to the U.S. government may have had too much sun.

    It is as if someone has put lithium in the Manhattan water supply. And now, the Zen-like calm threatens the entire world financial system.

    Markets make opinions. Even sober institutional analysts are enjoying a tranquility normally available only to the brain dead: "The results suggest that the important drivers of volatility reduction seem to be structural, and may therefore have a permanent effect on volatility... "says a study sponsored by the Bank of International Settlements. After a long period of serenity, investors begin to expect it. They forget that the winds can howl... and the seas can suddenly well up... sink boats and knock down whole cities.

    But opinions make markets too. Seeing no menace, investors reach for yield... stretching... grasping... standing on tippy toes... and piling on debt. Not only do they become more exposed to risks... they actually hasten the danger towards them, practically reaching out to grab it. As they do, storm insurance becomes a greater and greater bargain.

    Today's lack of panic is not limited to sovereign debt. On the 14th of September, the Ford Motor Company announced that it would lose $9 billion making automobiles in 2006. There was a time when a loss like that would have caused investors to race for the exits... or at least, the bathroom. But on the 15th of September, trading in Ford debt continued as normal. Investors seemed not to notice - or care.

    Nor do investors seem to care that Goldman Sachs, already the biggest 'hedge fund' in the world, is exposing itself to far greater risk than its closest competitors; value-at-risk, the measure by which the security industry calculates its exposure, has gone up 48% for the entire industry, since 2001. But for Goldman, the increase is almost triple that -136%. Another important measure, assets-to-equity, rose 29% for the industry, while it went up 49% for Goldman. Still, in mid-September, Goldman lenders stood willing and able to front the company $1.5 billion, at a rate only 1% point greater than a 10-year loan to the U.S. Treasury.

    There is a difference between lending to Thailand or to Goldman Sachs, and lending to the U.S. Treasury. And it is not merely a difference of degree. Thailand may squeeze its citizens. Goldman may swindle its customers. But only the U.S. Treasury has the power to do both.

    That is why U.S. Treasuries are regarded as such safe credits. In a storm, it is Treasuries you will probably want to own... not Goldman or Baht bonds. In what circumstances, then, should you run after the meager extra yield? Only when you think storms are a long way away.

    Of course, we don't know anymore than anyone else what the future holds. We only note, today, the perverse tendency of our species. When seas are calm, we load up our boats so heavily that even a stone thrown in the water would swamp them."(snip)

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    Veteran Member StuartL's Avatar
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    Default Re: weekend commentary - investors in a Coma re risk ?!

    It is amazing isn't it. If you are an investor in the market the risk levels are massive these days and mostly not understood.

    If ever there was a time for tangibles, now is it.

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