The financial landscape is being reshaped almost daily, but there is a few "knowns" from here forward:
The conversion of GS & MS to banks means their leverage will be reduced from 40-50 to 1 to 10 to 1. This is major LIQUIDITY ISSUE, as most hedge funds use Investment banks for prime brokerage. This forces the leverage down for hedge funds - first derivative being excess volatility as seen lately in t-bonds, crude and eurusd. Long-term it will decimate the "population" of hedge fund AND their return (less leverage - less ability to outperform)
CDS market is in total disarray - relevant? Absolutely - this is a 70 trillion US Dollar market according to BIS - there are NO RULES, and all CDS will have to be closed with issuer (Imagine where the bids are for closing out? Guess? Real bid minus 50%?) ---- this has extreme issue on ALL MAJOR BANKS in the world. If Mark-to-Market on those bids it will erode capital reserves(if any left) even further - solvency still major issue for financials
The 1987 crash happened mainly due to illiquidity in hedging (among other things the program trading..) - we have signs the CDS market could take us close to the brink, most likely around Mid-Oct..
My sources expect at least 10% redemptions from hedge funds (main index down > 5% this month alone) --- equal to 200 bln. US Dollar.. IF this happens we will see more selling of in US dollars, EMG, stocks........
The week-end plan takes US' Debt-to-GDP Italy's level - and its VERY likely US Government debt can trade below Corporate Debt (Yes, it has happened before in US history!)
I see 780 S&P - 8/10% US yield (next 18 month) --- US dollar will fall 25% from here (Note Singapore have publicly stated they will stop investment in overseas market and invest more in Asia - as per my note from Singapore)
There is major liquidity crisis in many money markets - the Swedish money market almost at standstill this morning.......
Most credit, swap and CDS spreads back to at or above pre-plan level - not good sign.....
Biggest risk now: is serious recession and that retail investors have finally realise the havoc caused.
All in all - there was plenty of "hope" but as least so far it has not helped the market......
I am officially advising being "defensively aggresive" - scaling positions to volatility, and from risk point of view, we need to keep alertness especially on spill-over effects from CDS and money-markets. The biggest risk remains in my opinion illiquidity of forward swap as single risk - but so far... everything ok there... relatively..
Best wishes,
Med Venlig Hilsen Yours Sincerely Steen Jakobsen, Chief Investment Officer, Saxo Fund Management Saxo Bank A/S -London
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