OldVet on the Pessimist View of the US Economy

This one is by long time reader OldVet

————————————————————–

While neither an alarmist nor a pessimist by outlook when it comes to the US economy, I’ve been reading a whole host of warnings lately. (Disclosure: There are many places to turn for opinions and you can always find some that agree with your beliefs. I’m frankly very concerned and very “short” all equity markets for now.) These warnings either focus on (1) how the changed nature of mortgage lending in the last several years is leading to a mortgage market contraction, (2) to warnings that risk generally has become mis-priced by investors in broader markets. I’ve been disturbed to note that some $57 billion was quietly flung into the financial markets by the Fed and the Treasury Department in the last two days of last week through short term lending operations. These lendings are made to the 21 “primary” broker/dealers who feed money to lower tier banks and brokers. Some of the sources of my own disquiet are as follows:

1. Treasury’s short term operational reports and short term Fed operations.

2. Steven Roach, head economist at Morgan Stanley – a normal pessimist turned optimist last Spring, now returned to the pessimist fold.

3. Jim Rogers, former founder with George Soros of Quantum Investors, and often times cheerleader for a boom in world markets especially commodities (“Top Investor Sees US Property Crash”)

4. An academic examination of the market for mortgages and mortgage based financial securities that are widely sold to investors:

5. A frank statement by a private equity operator on 3/14/2007: Steven Rattner, former Lazard co-hort of Felix Rohatyn, now chief buyout man at his own outfit, Quadrangle, spoke to Bloomberg News in an interview and said: “there may be a change, that this gushing well of liquidity that we’ve all enjoyed for the past several years now is coming to an end. Our view for some time has been that we are in a credit bubble and that there is money being lent and that we’re happily borrowers of it on the private equity side at rates and on terms that really frankly don’t make a great deal of sense from the standpoint of the lenders…but we’re the borrowers, and we’re happy to take advantage of that, and so as long as we can continue to finance our deals with that money, we will continue to do it.”

6. A running count of mortgage lending institutions who are bankrupt or in trouble, at the ”Implodeometer”.

7. PIMCO’s Paul McCulley (a very large bond dealer and fund manager) cites Hyman Minsky on the evolution of financial markets.

Question: Are people crying “Wolf!” about a relatively healthy economy, or talking about a big lesson coming in how to price risk in financial markets? What should you do about it, if anything?

Comments (0) | |