Reminds me way too much of the Savings & Loan crisis years back. A few hints here and
there and next thing you know a groundswell of bad vibes resulting in a $150B tsunami.
I'm 95% cash at this point...

Subprime is just the tip-of the-iceberg. As the FDIC and other auditors dig deeper they
will realize that most of the Alt-A loans are in danger of default as well. This is a
much larger portion of the mortgage market.

CDSs are already increasing in price as the higher risk is recognized. As more CDOs fall
apart, larger financial institutions will take major hits to earnings. If the problem
runs out of control in the derivatives market we could see the failure of hedge funds or
even a large financial institution. Mortgage backed securities are much more risky than
the market has priced in so far.

A lot of the old-time money managers who have done this for a long time think that things
aren't looking too great. That kinda makes me think that things will get worse.

I have to agree with that. Although I don't think subprimes themselves are a big deal at
all, will credit standards eventual tighten? I'd have to think that they would. How much?
I really don't know... but I believe they will. Enough to "kill" the American consumer?
No. But if we stop receiving financial inflows at the same point in time that credit
standards are tightening, I think we could be in for a major, major shock.

In the end, I think it just supports diversification. Short-term bonds will be bid down
regardless of what long rates do, so having good exposure there would prolly prove to be a
good move.

Hey Mr. Altucher, thanks a lot for commenting on this. That was really cool. I especially
liked the following insight:
"If the latter is the case then there's potential for disaster. I even know of one hedge
funds that has a highly levered bet in the billions that one of the major banks will
completely fail as a result of this. They are calling it "the doomsday trade". For the
past 12 months they were down about 0.5% per month but then this month they are up about
30% and in February they were up big as well."

Very interesting.

Should we be watching the CDO market?

http://www.reuters.com/articlePrint?articleId=USL1470530620070314

Jim Rogers also thinks it will be bad. Real estate and emerging markets will crash.

From an investor's point of view, it's a tough choice. Do I bet on a crash, or a dramatic
expansion of the subprime problems? I believe that's very possible. Or, do I bet on the
Fed's predictable reponse to such problems, flooding the system with money?

The moral hazard associated with an actively managed central bank makes investing more
difficult.

It'll make for some good deals on houses for the rest of us. Come to think of it, my house
was a foreclosure. Got a pretty good deal, not to mention a 4.75% 30 year fixed rate.

I'm not so concerned about banks having problems with these loans. GS is already talking
about how they're repacking them with higer yields, selling them and making a lot of money
doing it. I'm concerned about the families that won't have houses anymore and no longer
have access to home equity lines of credit, which would put a damper on spending.

I've always wanted to ask, what does the %u2019 mean?

Bernanke is more in touch with what's going on with the economy. I'm sure he sees a lot
more data than Greenspan sees. I wish Greenspan would keep his mouth shut, but I do
understand he's trying to get his audiences' attention when he makes all of the
presentations. They said on CNBC yesterday that as time goes by they'll pay less and less
attention to what Greenspan says.

I think it's important to remember that neither Greenspan nor his predecessor were
geniuses. And, the news media simply plays by the maxim of, "The fear of loss is greater
than the desire for gain." I've been through mid teen mortgages and 24% auto loans. In
a historical context, the consumer, who continues to get the majority of the credit for
our economy, has remained willing to pay as long as he has been allowed to finance. Thus,
the fear of an increase in interest rates in not nearly as formidable as the prospect of
raising credit standards. Bad loans have ways of working their way through the system.
Bankruptcies get absorbed. But, raise the qualifier for a tiered auto loan from a 580 to
a 620 credit score and China can buy sand with their reserves for all the difference it
will make. Credit availability, not affordability, is the greater issue. As long as we
are allowed to continue moving goods and services through the economy WHILE paying the
piper...

Last edited on: 03-16-2007 07:47 am