Is it all over? By the middle of this week the equity markets at least appeared to think so. There was talk of major mergers in the US – E*Trade and TD Ameritrade, for example – and the Dow had been rising for five straight days. We are “returning to a regular market environment”, one trader told Bloomberg. Yet at the same time, Accredited Home Lending was saying that it was to fire 1,600 people; Capital One Financial was closing its mortgage unit and dumping 1,900 workers in the process; the papers were full of miserable stories of foreclosures; more money-market funds and hedge funds were coming out to admit to subprime related losses all the time; the carry trade was continuing to unwind at speed, and the flight to the safety of Treasuries saw yields on three-month bonds rise 1.2% in just one day.
Here in the UK we have the prospect of our own housing problem to worry about (subprime rates are rising fast); our retail banks starting to suffer (HBOS has just been forced to lend £310m to afilliate firm Grampian to cover funding difficulties in the commercial paper market); and even the bravest bargain hunters are refusing to go near shares in Northern Rock, which is strongly suspected – despite its denials – of having been over-exposed to the US subprime market.
The standard line from the average analyst at the moment is that the markets will be volatile for a few weeks and then things will be back to normal. But is it really possible that by the end of the summer Ferrari sales will be soaring again, that the sale of every London house will go to sealed bids, and that you’ll be able to get a self-certification mortgage worth six times your salary? That what has happened in the credit market will never hit the real economy? It seems unlikely.
“In order to believe that (easy money will soon be back),” says CLSA’s Dr Jim Walker, “you have to believe that the US subprime market will settle down and the CDO issuance associated with it will resume as if nothing has happened after the dust has settled. You also have to believe that structured finance products are readily modelled and valued and are not subject to market gyrations or risk changes. You also have to believe that all the people who have already been burned (hedge-fund clients, pension funds, Asian and European banks, ordinary investors and so on) will be willing to take on the next set of issues at the same price as they did before. You have to believe all this because systems built on easy money demand more and more of it every year.”
And if you’re willing to believe all this? Then “you should buy on the dips”, says Walker, “because in my view the person who is selling to you deserves the money more than you”. Commodities aside, that pretty much sums up my view. Some of our roundtable members would disagree – they see numerous buying opportunities.