5 replies to this topic

[ogm]

Ok, so the CLO, CDO, CMO... markets have practicaly shut down. Thats bad. But over the past 3 years they were a huge sponge for liquidity. Now a lot of that liquidity is destroyed via repricing of these ILLIQUID instruments. But you're a bank, and insurance company, a pension fund, asset manager.... you have to invest somewhere. You can't just sit on low yielding cash. And you're for the time being cautious about buying another illiquid investment of suspect quality. But you have to do something with the money. So what do you buy ? I think there are 3 major alternatives at this point... 1. Government bonds (Treasuries, foreign debt and so on) .. they are liquid, but yields aren't great. 2. You go back to high yield market to pick the pieces from the wreck. You buy High yield funds. Which are starting to look rather attractive again, since the spreads widened so dramaticaly, and corporate default rates are still low. 3. Stocks. Liquid investment. The only problem is you want more dividend to boost total return. I think there will be pressure on corporations to shell out more dividends, since they are having decent profits. But stocks seem to be viable investment at this stage of the game. What am I missing ? What will the banks invest into ? Where will liquidity go ?

[arbman]

Where did they invest during 2001-2003 declines? Not that it is the same environment, but I don't think they care, they will just continue to time average into the stocks and bonds. Most of them are not getting paid for their performance...

[kaiser soze]

I think some of it will go into gold. I think defensive sectors such as pharma, select biotech and HMOs will receive a handful since they have been lagging and have secular demographic trends to support them. If the problem is local to the US and global commodity demand remains strong, emerging market sovereign bonds may firm up too.

[ogm]

I think some of it will go into gold.

I think defensive sectors such as pharma, select biotech and HMOs will receive a handful since they have been lagging and have secular demographic trends to support them.

If the problem is local to the US and global commodity demand remains strong, emerging market sovereign bonds may firm up too.

Gold unfortunately isn't a good investment, IMO.

Its doesn't pay income, it has limited production demand, and its subject to geopolitical and currency influences more then anything. Just a trading/speculative vehicle.

Besides, I think we're in a deflationary environment here, rather inflationary. A lot of money being simply destroyed in Subprime mortgages and housing. Poof to money heaven. Like it never existed. All those CDO's are now worth anywhere from 5 to 90 cents on the dollar and even then there is very little market for them. And housing asset values keep declining. Thats deflation.

[Drano]

ogm, thanks for all the great stuff you post. In the mighty inflation vs. deflation debate, the other option is being ignored -- stagflation. I don't think the consumer is going to be seeing prices of food, energy, etc going down any time soon, and the cost of U.S. imports from other countries is going to continue being affected by increased shipping costs and the beginnings of wage inflation in other countries (notably India, where some companies have stopped outsourcing technical work because of quickly rising wages, and China, where wages seem to be increasing in some of the factories that don't use slave labor). How would stagflation affect your analysis?

[ogm]

ogm, thanks for all the great stuff you post.

In the mighty inflation vs. deflation debate, the other option is being ignored -- stagflation. I don't think the consumer is going to be seeing prices of food, energy, etc going down any time soon, and the cost of U.S. imports from other countries is going to continue being affected by increased shipping costs and the beginnings of wage inflation in other countries (notably India, where some companies have stopped outsourcing technical work because of quickly rising wages, and China, where wages seem to be increasing in some of the factories that don't use slave labor). How would stagflation affect your analysis?

Here is a good read.... I'm thinking along with this guy for the time being. I agree with him that we'll probably see profit squeeze on corporations as a result.

http://globaleconomi...price-wars.html


to add to it, I don't agree with evertything he says, and think that deflationary environment is only temporary. And I don't like Gold The main reason is simple.. it pays no income. I like income. And I'd trade something like AGD (thanks johngeorge for that one) for gold anyday.

I think the drop in housing prices is extremely deflationary. But, there is a great support for consumer in demographics. The number of retiring babyboomers is far greater then the number of of mid 30-40's people in the workforce. That will provide great wages support over the next few decades, as there will be shortages of skilled labor. So consumer will have money. And ultimately the housing and spending will be supported by those wages. I haven't seen that point brought up anywhere, and I may be completely wrong here. But I think I'm not. Overall the inflation should be pretty mild.

What we're going through, IMO is globalization, where the standards of living over the world are leveling off. In china they are rising, and here they are declining. But they will reach equilibrium at some point where both US and China will be competitive. I think its the RISE of standards of living in China that will prove benefitial to the US in the long run. Rather then the drop in standards here.

But temporarily we are in deflationary environment as a lot of money being destroyed in CDO's.

But the world changes everyday, time will tell

Edited by ogm, 27 July 2007 - 08:25 AM.