I analyze the sharp drops in the markets in spite of the TARP announcements as the result of monetary delevering in the shadow banking system, specifically the highly levered hedge fund industry. At best, the hedge fund industry is an optimizer of financial allocation by taking many possible bets in the posible world, at worst is just another over-levered pork that will suffer a quick cutting back down to size amid the most violent credit contraction we have known in years. Heck according to some blog rumors, even money markets are feeling the pinch of panic.
Hedge funds are facing massive losses and radip redemptions. They try to freeze their customers assets! In any case, the Hedge Funds are facing a full blown run on their assets. They will be the first agent of massive and rapid delevering in the markets. So they have to sell their positions further depressing the markets. The TARP will help stabilize this as they now have authorization to buy all kinds of commercial paper out there. But in a industry that is probably $10T, the delevering will mean a new HF industry at $5T? $2T? a further dumping of $5T assets is quickly going to overflow the TARP paltry $700B. Marc Faber call for $5T maybe right on the money.
I think we need to delever. $5T is a big number. Price stability is going to be tough to keep in that environment.
This is a brutal destructive spiral on the valuations in markets. It will take out the liquidity so fast that many individual hedge funds will be caught dead in motion like the proverbial dinosaur caught in ice, the fly caught in amber, or the copulating couple taken in by the Vesuvio volcanic eruption. There is a certain "nature caught dead" or nature morte quality to it all, but the net result is unprecedented dumping on the markets and the resulting nose-dive.
And I don't think it is all over either it is just starting. The run on the shadow banking system is barely 6 weeks old? 5 weeks? ah geeze I am loosing track of time, it feels like an eternity.
I will call DOW 8500 again at 60% during 2008. DOW 7000 at 20. The rest could be volatility upside in the short term and the Buffet effect.
This kind of brutal monetary delevering will greatly depress assets and prices. Deflation?