When investors want to reduce or minimize their risk, the bond and fixed-income markets are where they turn. No one expects to "double their money" by owning AA-rated bonds or a money market fund, yet everyone does assume they won't lose money in those vehicles.
But these days it seems like almost no assumption is safe, especially when it comes to not losing money. "Subprime" mortgages have been sliced, diced and repacked into markets and vehicles that are supposed to be free of high-risk debt. No one has a clue about how much of the bad is mixed with the good – estimates between $100-to-$200 billion are common, but it could be much higher.
Media coverage of this debacle takes a day-by-day view: yesterday it was the Fed window, today it was a mortgage company bailout, tomorrow some hedge fund may go belly-up. Virtually no one looks ahead and describes how ugly the big picture will get.
Almost no one, that is. Bill Gross, long-time manager of the world's largest bond fund, had looked ahead – and he sees a big picture ahead that ain't pretty:
"The past few weeks have exposed a giant crack in modern financial architecture, created by youthful wizards and endorsed as a diversifying positive by central bankers present and past," says Gross. He also points out that even if the financial markets can be stabilized,
"...forecasters currently project over two million defaults before this current cycle is complete. The resultant impact on housing prices is likely to be close to -10%, an asset deflation in the U.S. never seen since the Great Depression. Granted, stock markets have periodically retreated by significantly more, but stocks have never been the savings nest egg for a majority of Americans. 70% of American households are homeowners, and now many of those that bought homes in 2005-2007 stand a good chance of resembling passengers on the Poseidon – upside down with negative equity. A 10% “hook” in national home prices is serious business indeed."
Yes, "serious business" is the least one can say – and while we respect Bill Gross, we note that even his voice-crying-in-the-wilderness could be underestimating the damage to come.
We at EWI have looked ahead as well, and our analysis of the future has been on record for a long time – nothing that has unfolded so far has caught our subscribers by surprise. You can see what we say about what's next, right now.
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