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September 25, 1998
First the routine stuff, then a few teensy little surprises, confusion for clients, and then... what is this "hedge fund" stuff?
Routine... Japan stalls on bank bailout, Japanese ten-year bond yield sets new record low for government bonds anywhere ever: 0.67%... The new Russian economic team learned its trade working for Gorbachev; ruble at 20/US$ and falling, was 6/US$ four weeks ago, new Moscow thriller: "Lumpy Suits At The Central Bank Printing Press"... Greenspan: "It is just not credible that the United States can remain an oasis of prosperity...", rate cut likely Tuesday, size unknown.
Funny Little Surprises... August durable goods orders up 1.6%, triple forecast; August personal income and spending show largest increase this year; if the US is not an oasis, it ain't bad... Oil prices up $4/bbl to $16/bbl; gold to six-month high, $294/oz... Brazil and other Latin American panics reverse, markets stable...
Clients don't want to know, but... A whole new panic (see below) has mortgages back down to the 6.75% low set during maximum Clinton panic, but mortgage rates are not crashing down through record after record, like Treasurys, to which the whole world is fleeing for safety. News media a fountain of misinformation.
NEW PANIC! RUN FOR YOUR LIVES!! THE HEDGES ARE COMING!!! Or going. In normal financial parlance, a "hedge" is a risk-limiting counter trade. A half-dozen years ago, euphemizing thieves on Wall Street (redundant -- sorry) put together the riskiest large investment funds ever seen, and called them "hedge funds". Yesterday, Long Term Capital had to have its $3.5 billion in capital replaced, as it had lost it all (new name: "Wait Long No Capital") by borrowing its way into $90 billion worth of trades, all gone bad since August. LTC investors were big boys (smaller today): the minimum investment was $10 million; and LTC's $90 billion borrowing had been arranged by the cream of Western capitalism. The New York Federal Reserve called a meeting of those financiers, the largest American household names, and informed them that no, they were not going to call their loans due; in fact they were going to cough up their own capital, $250 million apiece, to raise a new $3.5 billion and stabilize LTC's markets. In one respect this new panic is justified. The LTC disaster was a larger (about the size of Indonesia's dwindling GDP), and a more foolish gamble than any yet discovered in Asia; and enabled, coached, and joined by the best bankers in the West. What's next?
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