http://www.forbes.com/opinions/2007/08/20/croesus-chronicles-liquidity-oped-cz_rl_0820croesus.html?partner=moreover?partner=moreoversnip>
On Thursday, Aug. 16, Christopher Wood, emerging markets analyst at CLSA (an affiliate of Crédit Lyonnais), predicted that "the world is nowhere yet near the peak of the fear that will be generated by the unwinding of the credit bubble."
Mark well the shocking events that led to a panic in credit markets that triggered a panic in the stock market. Bear Stearns (nyse: BSC - news - people ) hedge funds froze up. Goldman Sachs (nyse: GS - news - people ) had to inject $2 billion of its own money into its hedge fund to maintain solvency. BNP Paribas (other-otc: BNPQY - news - people ), the sixth-largest bank in the world, refused to honor obligations because it could not properly value its holdings.
And so on. In just several trading sessions, shares of the Powers That Be of Higher Finance--Morgan Stanley (nyse: MS - news - people ), JPMorgan Chase (nyse: JPM - news - people ), Citigroup (nyse: C - news - people ), Goldman Sachs, Merrill Lynch (nyse: MER - news - people ) and Lehman Brothers (nyse: LEH - news - people )--lost over 20% of their value in the stock market. Until Friday's partial bailout, that's a bear market in financial stocks by any definition.
But beware: The repricing of risk is not finished.
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Watch the debt markets for signs of what to expect in the stock market. The debt markets are twice as large as global equity markets, over $100 trillion, compared with $50 trillion. They are an early warning sign of troubles ahead.
If de-leveraging in the credit markets has a long way to go--and I believe it does--then expect more downdrafts in the equity markets. The Bernanke reprieve may be a way to lighten up exposure if the updraft continues.
Today the so-called TED spread, between three-month Treasuries and the London Interbank Offered Rate, soared to 300 basis points, up from its usual 20 basis points. This is an indication that the market is still worried about the financial condition of the world’s largest banks (see chart below).
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