14 September 2009

Conversations with HFM

December 2008–July 2009

Excerpted from Issue 8.

DEFAULT?

n+1: What’s going to happen?

HFM: We’ll probably see more unemployment, we’ll certainly see more bankruptcies. We know damage has been inflicted by the credit heart attack; we know damage has been inflicted by the drop in demand, the drop in commodity prices. You know what it’s like? It’s like somebody drops a depth charge onto a submarine, and you hear a big explosion, but you don’t know what’s happening. Like, a little while later bodies start to bob up? We’re waiting for the bodies to bob up.

In the financial markets, the epicenter of this crisis was financials, banks, hedge funds, and the corporate credit market. I think what you’re going to see is collateral damage in other markets. So you’re starting to see that the commercial real estate market, and commercial real estate-backed loans, are really starting to have some problems. The other thing you’re seeing is the effect on budgets of municipalities and states, some of which were very dependent on profits from the financial industry, some of which were very dependent on profits from economic activity like construction. They’re starting to have problems.

Meanwhile the US government has extended so much aid to various other sectors of the economy, and it’s expected to have to do more, that now people are worried about US credit. To buy credit protection on US government debt now costs you more than to buy credit protection on Campbell’s Soup! But buying credit protection on the US, it’s sort of a mind-bending concept. The US only issues in dollars, it only issues in its own currency. More to the point, from whom are you going to buy protection on the US government’s credit? If the US government defaults, what bank is going to be able to make good on that contract? Who are you going to buy that contract from, the Martians?

Sometimes I think it would be great if this Mars Lander actually discovered life on Mars—we could start trading with them. Somebody finally would be uncorrelated enough, we could buy protection from them on the US government and feel like they could actually pay it back. LGM Capital Management, Little Green Men Capital Management, a perfectly good counterparty.

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