Thursday, July 26, 2007

The unwinding continues

While we were sleeping the Asian markets, after an encouraging first half of their day, fell apart. Every major European market is now down over 1% as we ponder whether another cup of coffee is a good idea. In a few hours yesterday's detritus may look like a lost foundation. That's the way it feels right now.

The credit markets have become unhinged for the moment. Sure, the U.S. residential real estate market is readjusting and related financing is being stressed but there is a bigger more all encompassing issue. The marginal financing markets for higher risk financings and carry trade speculation are shutting down. It may just be a needed adjustment that will reach a new equilibrium quickly or it may be a shake out that is extended. At points like these you never know which it is.

The immediate impact is ugly. From this perspective, the components have been: the stress on securities markets from the U.S. mortgage market issues; the beginnings of a new religion among reserve rich countries regarding asset allocation and return; the cyclical stretching of the financing market's rates, terms and conditions to a point at which end buyers balk; the loss of confidence in the dollar and the resulting unwinding of speculative trades financed by the yen that is occuring right now; and the fact that these events are putting stress on the world's leading financial institution's balance sheets and also removing the take out premiums from stock markets.

If recent history is any guide there will be a turning point at which market players are reminded of the reassuring facts: global growth; reasonable inflation; historically rational p/e ratios in most markets; and the sound foundations of the financial system today. Just at this moment we don't know when, noon or next month?

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