Sitting in airport lounge on Iceland for the 7Th straight hour courtesy of Icelandair, probably the only airline with less service than Ryanair, made me think about this leverage game.
I engaged friend of mine in New York, who is not only far smarter than me but also more level headed, but the gist and conclusion was the following:
The CDO/leverage credit will cost about 100 bln. USD (his number and he is more in the know than me). Is this isolated or not that's the question?
Being a simple man I think following could play out:
The world is clearly asynchronous. The US is left behind the rest of the world. Private Equity and outsourcing to India has made sure there is not a single real job left in the US, unless you count the bean counters and the Wall Streeters as real jobs?
The world being asynchronous is OK as long as the US leads, as saving surplus is being regenerated back into to the US to pay for the excess consumption, but when the tides goes out;
The foreigners, which the US does not like anyway, stops sending more money ......The sovereign wealth funds have realised that in order to pay for ageing populations long term they need to find better places than the US place their money.
Let's not forget that investors have seen negative return adjusted for currency risk for several years in the US now, so they increase their equity weightings and start doing so closer to home.
The cyclical saving surplus of the Middle East and Asia has reached toppish level, as total currency account surplus' have stabilised, the main beneficiaries been private equity and other highly leveraged entities.
At the same time, probably randomly, the worlds central banks are getting upset about being used as carry vehicles. The Taiwanese, Indian, Swiss, Brazilian and New Zealand central banks have all changed their appetite for "more of the same" indicating this is NOT a one-way street.
Equipped with conspiracy genes, which would make me guaranteed CIA material had I been American I am beginning to see pattern:
1. The US is losing growth....if nothing else relatively....
2. The SWF's wants more for there money
3. Central banks does not like the feeling of being "used"...
4. Interest rate trend broken lines going all the way back to 1989 and the Berlin Wall.
5. Yield curve is steepning faster than most people like
6. Major banks Chiefs on the wire warning about credit: Wulfi of UBS, BoA's Prez....!!
7. Complacency is so big that good friends, who are not only much smarter than me, but have better intelligence tells me; This is going to continue for years!
So.......the CIA material in me.... says.. hang on a minute...... if everyone agrees this 100 bln. US dollar can be contained and without influence on the "game" as a whole either I am too sceptical or..... they are refusing to see the truth ? Could this mean a full blown US dollar crisis and the breakdown of Bretton Wood II, the floated currency regimes in Asia?
Anyway... this is quick-and-dirty thoughts written on the go, but....I got feeling this is VERY DIFFERENT, I do not like the increased media focus on potential issues in credit in the US, and I certainly don't like the fact that 500 bln. US dollar of flexible mortgages in the US needs to be adjusted to much higher levels...
So... being in the country who started the leverage game in earnest, being early leaders, Iceland, could be random, but it could also be sign.... (or should I just join the CIA?)
Equities: Short S&P, DAX
Fixed income: long Euribor, looking to add Europe FI...
Commodities. Missed silver dump - looking to sell Gold.....still like crude.
FX: Short US dollar - considering increasing vol and cash positions based on above.
In closing can I please ask you to read Andy Kessler's classic piece on Blackstone called: Blackstones world of cash. I have admired Andy's writing since his first book and his points are to the point and fresh.... http://www.andykessler.com/
10 Tuesday AM Reads - My two-for-Tuesday morning train reads: • Japan’s Back, Baby (Institutional Investor) • The Crash of ’87, From the Wall Street Players Who Lived It (Bloo...
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