More Sub Prime Meltdown
From Jim Jubak's latest The Pyramid Could Crumble
"this time it's not the economy, stupid... the biggest potential danger isn't from a slowdown in the U.S. or Chinese economies.
It's from the pyramid of leverage in the debt markets created by traders and speculators using cheap money from around the globe, and in particular from Japan."
$1.8 trillion in world market value was erased last week as just about every asset sold off. While everything else, except for safe U.S. Treasurys, fell, the Japanese yen rallied by about 2%.
"traders and speculators who had borrowed in Japan at 0.5% interest rates to invest in everything from New Zealand bonds to U.S. stocks were selling those assets in local currencies and then buying yen to repay their loans."
"About $100 billion in derivatives, four times typical volume, traded on Feb. 27 and Feb. 28, and premiums to insure junk bonds against loss for five years climbed by about $80,000 in just two days."
"The prices of the actual junk bonds fell much less than the premiums rose: Investors weren't selling the risky asset, just buying more insurance."
"This sets up a swift collapse of the subprime market if the bet starts to go against the sellers of insurance and either a big seller of insurance can't honor its derivatives or enough sellers of derivative insurance pull out, putting a halt to sub prime lending."
"this time it's not the economy, stupid... the biggest potential danger isn't from a slowdown in the U.S. or Chinese economies.
It's from the pyramid of leverage in the debt markets created by traders and speculators using cheap money from around the globe, and in particular from Japan."
$1.8 trillion in world market value was erased last week as just about every asset sold off. While everything else, except for safe U.S. Treasurys, fell, the Japanese yen rallied by about 2%.
"traders and speculators who had borrowed in Japan at 0.5% interest rates to invest in everything from New Zealand bonds to U.S. stocks were selling those assets in local currencies and then buying yen to repay their loans."
"About $100 billion in derivatives, four times typical volume, traded on Feb. 27 and Feb. 28, and premiums to insure junk bonds against loss for five years climbed by about $80,000 in just two days."
"The prices of the actual junk bonds fell much less than the premiums rose: Investors weren't selling the risky asset, just buying more insurance."
"This sets up a swift collapse of the subprime market if the bet starts to go against the sellers of insurance and either a big seller of insurance can't honor its derivatives or enough sellers of derivative insurance pull out, putting a halt to sub prime lending."
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