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Early Warning

September 1, 2009

Normally I do not offer market commentary or advice. But today I can’t resist. I have a hunch that we are on the cusp of witnessing a credit event that will shake markets. Witness the run up in Fannie Mae and Freddie Mac and other junk financials described by Bill Luby http://vixandmore.blogspot.com/2009/08/junkdex-tracks-speculative-frenzy-in.html that was described as suspicious by Brett Steenbarger in this post http://traderfeed.blogspot.com/2009/08/more-on-massive-trading-volumes-in.html. To me as a proponent of game theory I believe that these moves were created by Goldman Sachs via the US government to accomplish a possible variety of objectives: 1) to cash out foreign investors in those names at a better price under the radar 2) to restore public faith in the viability of those companies because of the massive taxpayer liability 3) to give the illusion that credit risk is no longer an issue 4) and most definitely possible– the government/Fed/Goldman are aware of a new developing credit event and they want to drive these prices on these junk financials as high as possible prior to the collapse to raise the floor on their prices. Personally I think all four are possible, and I think those that believe that a major credit event is no longer possible are horribly naiive and do not truly understand the nature of the situation that the credit markets are actually in. Banks have slowly increased their leverage and risk appetite over the last few months, and with their shadow assets (Level 3) now hidden from GAAP financial statements, no one knows what evil lurks in the background. In my opinion, banks should be deleveraging not re-leveraging because they were far too leveraged in the first place to weather any problems. Moves of the magnitude displayed in the junk financials reek of a desperation to cover something up. The VIX and the Yen recently made 20 day highs indicating that something bad could be amiss. I smell smoke, and when you smell smoke,  there could  be a fire.

2 Comments leave one →
  1. Joe Marc permalink
    September 2, 2009 8:13 am

    Thank you. Appreciate the warning.

  2. September 2, 2009 9:05 pm

    Agreed.

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