I have lunch from time to time with the inventor of an important class of financial product who currently runs a rather large hedge fund (assets well over $1 billion). He also started out as a Fed economist.
It’s important as a trader to have a point of view, but not to get one’s ego invested in it. His comments on real estate and market worries:
The best numbers I see continue to estimate eventual losses at $100 – $200 billion. That amount would be between 30% and 50% of the S and L bash up, at a time when the capital available to bear the risk is about triple what it was then. These figures are not particularly alarming, unless you happen to be in the real estate business, in which case they’re a disaster. All of this should take 1% to 2% from GDP for the year starting last September. There are several things that still can go wrong. It would help if the people at the Fed lowered the funds rate, but my best guess is they are staying put until unemployment gets over 5%.
All of this leaves me without much idea of how to fulfill my responsibility to my investors. For the time being I’m a spectator. I recently noticed that between 1952 and 1968, the last prolonged period of low inflation, there were only 2 years in which the equity markets did not suffer at least one decline of 7 pct. or more, even though equity prices tripled in the 16 years. By those standards the latest panic attack is hardly remarkable and probably has farther to go.
