Wow, That Was Quick

 

Wow, that was quick. Very gratifying.

On Friday, I predicted a massive multi-market meltdown as a direct result of the downgrading of the monolines. (Or, as I poetically put it, "if you ARE into economic meltdowns,  this is going to be the World Cup Final of economic meltdowns, and Brazil are about to walk out onto the pitch...") On the next trading day (today, Monday),  markets collapsed all over the world.

Or as the New York Times put it, with their usual blissful ignorance of what actually drives markets,

"Fears that the United States is in a recession reverberated around the world on Monday, sending stock markets from Bombay to Frankfurt into a tailspin and puncturing the hopes of many investors that Europe and Asia will be able to sidestep an American downturn. "

Isn't that beautiful? All the world's stock markets except the ones in the USA keel over (US markets are closed for Martin Luther King's birthday), and the New York Times report starts with the words "Fears that the United States..." and end with the words "...an American downturn." Everything has to be about them. Sigh...

Well, they captured about 40% of the truth (about the NYT average for any story that isn't about baseball or a quaint, family-owned deli that's celebrating its fiftieth anniversary by going out of business). Today's market collapses are, in certain respects, about the coming US recession. But they're more about the fact that on Friday, a ratings agency (Fitch) downgraded a monoline insurance company (Ambac) from AAA to AA, and put them on watch for further downgrades. For why that blew everything out of the water, see my previous post. 

Why would that shake world markets enough to cause an avalanche of panic? Because there's only roughly half-a-dozen decent-sized monolines, and between them they insure between three and four trillion dollars worth of bonds. Call it three and a half. That's $3,500,000,000,000. Count the zeroes... Ambac was the oldest monoline (born 1971) and the second biggest, and downgrading it automatically meant downgrading over 100,000 different bond issues, with a total value of roughly half a trillion dollars (or five hundred billion, if you're into mere billions.) Bonds issued to build libraries in Stuttgart, or a bridge in Seattle. Bonds issued to fund corporate buyouts in Tokyo. And, recently, bonds stuffed with dodgy mortgages from who knows where... Bonds owned by everyone from investment banks to your dad's pension fund.

 Ambac's  slogan? "Financial peace of mind". And what prestigious award did it win one month ago? Global Monoline of the Year. Ah, I love the modern world, but it makes life hard for satirists.

Let's have a quote from a respected market insider, so you don't think I'm exaggerating the carnage(God forbid). This is John Authers, the unflappable, seen-it-all Investment Editor of the splendid Financial Times:

"On days like Monday, there is little to do but wait for the casualty count at the end. Even with the US on holiday, the sell-off was the worst single day for global equity markets since the terrorist attacks of September 11 2001."

The Financial Times' coverage of this ongoing credit debacle has been superb, before and during. Sigh. It's so superior to the Wall Street Journal that the continued existence of the Wall Street Journal seems to me evidence that there is no God. Or that he just doesn't care.

 And the US markets open again tomorrow... That'll be interesting...

 

OK, my next prediction (these are going rather well): the collapse of the Chinese stock market, leading to widespread protests and social unrest in China. Timescale... Hmmm. Let me be conservative (I tend to be hasty and assume if something is obvious, it will happen right away). Well, over the next year and a half, almost definitely. But probably a lot (a LOT) sooner. 

 Much more than cut in half from its peak. Could go down to a third or even lower. There you go. More hostages to fortune...

Of course, a totalitarian state has powers of intervention undreamt of in the West, so it'll be interesting to see what the Chinese government will do in response to serious falls (which could well have begun, it's already slipped from its peak). 

What larks!