Heavier hitters than myself are slowly lining up to put out estimates of the total losses from the credit crisis more in line with my thinking. Welcome aboard!
Using far more “off the cuff” methods than Nouriel Roubini, the IMF, Jeremy Grantham, John Hussman, UBS, John Paulson or Goldman Sachs, I have been expecting the starting point for discussion should be something around 1.2 trillion, with significant risk to the upside on that number. That was across the system.
Now, in addition to that rather prominent band of bears comes Bridgewater, one of my favorite reads, who estimate that financial institutions alone will see losses of 1.6 Trillion. This comes courtesy of Paul Kedrosky who translated the leaked report:
Explosive Study: The banking crisis will be much worse
Westport (USA) – The expected losses from the financial crisis will reach $1600 billion. To-date financial institutions have so far announced only $400 billion. The pessimistic forecast comes from a confidential study by Bridgewater Associates, the second largest hedge fund in the world.
“We are facing an avalanche of bad assets,” says the study. The biggest losses were the U.S. credit banks before. “We have big doubts that the financial institutions will be able to have enough new capital in order to cover the losses,” the authors write.
Bridgewater Associates in financial circles enjoy a first-class reputation, several central banks are among its customers. “Bridgewater are on the pessimistic side,” says George Magnus, Senior Economic Adviser at UBS in London, “but they have absolutely right.”
I don’t know if this hitting the blog world explains the sickening reversal in the market today, but if it doesn’t it probably should.
Off the cuff ? What do I mean?
Simple, sometimes when you start adding up something that is really huge it doesn’t really matter or help to know exactly how much risk there is, or where all the damage will come from, it is bigger than a breadbox, or in this instance, bigger than a piano falling from 10 stories up. At some point it pays to just get out of the way. I remember telling clients who kept asking me when would be a good time to invest in the Nasdaq (especially QQQ’s) during the last bear market that I had no idea, and frankly didn’t see the point in trying to figure it out. I wasn’t even going to look at it until it was below 1500. The usual response was a blank stare and incredulous statements about how it “couldn’t go that low!”
Same here. Once the losses start going past the trillion point get back to me, I may bother to put a more precise estimate on it, though by then you probably will not care.
Or, to put it the way I put it in response to a discussion of what we were going to do based on our outlook for the market and how bad that outlook should really be:
It seems to me that debating whether a building you are about to fall off of is 30 or 60 stories high is a bit irrelevant, the answer is still “step away from the ledge.” I don’t think it changes what we should be doing now to know exactly how bad it is going to get.
Is this priced into the market? No, a thousand times no. On a related note, Barry Ritholtz looks at what happens after big one month sell-offs. In the past a rebound, but he asks good questions for those tempted to trade this for a bounce.
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