economy versus stockmarket correction, page-21

kacy, in all due respect I don't think you quite understand the situation.

Risk is being priced back into debt securities and the fear is it may trigger the unwinding of the largest credit boom in history. The corporate debt market appears to be currently frozen or completely illiquid and the banks that fought so hard to finance $100s of billions of Leveraged Buy Outs (LBOs) are going to be left holding the bag. Only 3 of the 40 larget LBOs in the pipeline have exit clauses for the banks. Estimates coming through for the losses on Subprime Collateralised Debt Obligations (CDOs) are as high as $350 Billion, which compares with US commercial banks capital of $875 Billion. The banks on sell CDO’s to investors mainly hedge funds, but there is currently no demand for them, leaving the market illiquid and lenders unwilling to lend (as they don’t want them on their balance sheet) and the one’s holding going broke. Thus, we have a complete frozen debt market with no further liquidity. The so called “credit crunch” is underway. You can kiss private equity and LBOs goodbye.

There are also fears of negative ramifications arising from a falling USD, namely further unwinding and involuntary liquidations of the Japanese Yen carry trade. This along with along with other significant problems of lowering interest rates and a lower dollar put the Fed in a major dilemma zone. In fact I think the responsible thing for the Fed to do is to hold and let excesses in asset bubbles sort themselves out. Cutting will create more problems down the track IMO.

We have had an unprecedented boom in all asset classes and it has always just been a matter of time before they just start deflating.