San Carlos Train Station – Built in 1888
What is going on with the financial markets…
What is going on?
Based on a conference call this week with PIMCO’s Bill Gross (the world’s largest bond manger), we are continuing to see the “deleveraging” process by financial firms to reduce their risk. As a result, stock market volatility and risk premiums have skyrocketed and the prices of almost all assets are dropping (real estate, commodities, debt instruments, stocks). Mr. Gross feels this process will continue until financial firms have raised sufficient capital for their operations.
With such a long and pronounced upward trend in real estate a correction back to the long term trend was inevitable but what was not clear is how major institutions had used leverage to create “investments of mass destruction”. Firms like Lehman Brothers and Bear Sterns took already questionable sub-prime mortgages and other debt instruments and in some cases borrowed as much as thirty times their “perceived” value to basically gamble on the underlying trends. Eventually the correction in real estate began to catch up with these “IMD’s” and the rest we all wish was history…
If real estate was the genesis of the credit crunch than housing will need to begin to stabilize before the economy can fully recover and a sustainable bull market in stocks can begin.
