As the hell of October in the markets comes to a close this week, the world is wondering what November will bring, and most investors aren't going to like the answer. This week is already shaping up to be a disaster, the
Nikkei has now hit a 26-year low, Euro markets are down 4-6% at this hour, and US futures are pointing to another big loss.
Stocks tumbled, extending the MSCI World Index's biggest monthly drop on record, as concern grew that government efforts to stabilize financial markets won't avert a global recession. Treasuries rose as investors sought the safety of government bonds. U.S. index futures slid, indicating the market's worst monthly slump in 70 years may deepen. Hong Kong's Hang Seng Index sank as much as 15 percent, the most since the 1989 Tiananmen Square crackdown, as money-market rates rose. Hungary's BUX Index lost 10 percent after the International Monetary Fund said it will give the country ``a substantial financing package.''
``We've gone from financial worries to economic worries,'' said Roland Lescure, who manages the equivalent of $128 billion as chief investment officer of Groupama Asset Management in Paris. ``We're looking for direction for the economy. The problem is stock market declines lead to more declines. It's linked to forced selling.''
The new downward pressure on the markets are coming from the death spiral of hedge funds and emerging markets. As both groups continue to collapse, they are dragging the rest of the economy down with them.
The damage to the global financial system is too pervasive and too widespread to stop. High-flying hedge funds are having to sell off huge blocks of stock to raise cash...lowering the prices of stocks worldwide, causing them to have to sell more stock to raise more cash to continue to operate as the rest of their stock assets decrease in value. This classic death spiral is close to claiming trillions in hedge fund assets now as investors continue to pull their money out. A worldwide system of margin calls -- banks demanding loans used to buy stock be repaid now that the stock has collapsed -- is about to wreck the entire house of cards, for the only way to pay these loans back is to sell stock and force more margin calls. We're trapped in tailspin, and there's no way out until we hit the bottom. Hedge funds will be the next casualty...and the one that kills the system.
All these funds operated with virtually no regulatory oversight -- because they accepted funds only from wealthy investors, not the general public. They then "leveraged" this capital, borrowing billions more that they invested exotically, often "hedging" their bets by making investments set up to pay off when stocks and other assets lost value.No one benefited more from all this hedging legerdemain than hedge fund managers themselves. They became the planet's highest-paid power-suits. In 2002, 25 hedge fund managers pulled in over $30 million each. In 2006, reports the trade journal Alpha, the top 25 hedge fund managers each made at least $230 million. Last year, 43 of them walked off with at least that many millions.
But now the hedge fund bubble is bursting. High-leverage strategies don't work when banks aren't lending. And new regulations have put a crimp on "short selling," the betting on assets to fall in value. The result? Last month ended up as the hedge fund industry's second-worst year on record.
So far this year, the industry's top index has dropped 13.9 percent. Some analysts are predicting that as many as half the world's hedge funds may shut down before the current crisis ends.
That has wealthy investors spooked. In September alone, investors yanked $43 billion out of U.S. hedge funds, shifting their cash to investments less risky. Hedge fund managers have become so alarmed they're offering to slash their standard -- and exorbitantly high -- fees if investors agree not to ask the funds to redeem their investments.
And the largest investors in hedge funds?
You got it in one. 401(k) funds and pension plans.
We're past the event horizon, past the point where the black hole is now pulling us in despite anything we try. Global emerging markets in Europe, Asia, and South America are near collapse. Hong Kong's Hang Seng index has gone from 32,000 to 11,000 in the last 12 months. Ukraine and Hungary have become the latest countries to ask for IMF loans to keep them out of bankruptcy. South Korea cuts its central bank rate by 75 BP, but to no avail as the South Korean currency, the Won, continues to fall apart.
``More aggressive cuts are on the way,'' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul, who expects Korea's key rate will be slashed to around 3 percent by the first half of 2009. ``The government would need to expand tax cuts and increase fiscal spending to support the economy.'
South Korea last week said it will spend as much as 8 trillion won ($5.5 billion) helping the construction industry, including buying unsold homes and land. The central bank said Oct. 24 it will inject 2 trillion won into the financial system through repurchase-agreement operations.
South Korea's total external debt was $420 billion as of June, according to the finance ministry. Of that, $176 billion was short-term debt due to mature within a year.
It's not banks that are needing bailouts now...it's
entire countries.
And November will be much, much worse, folks. We're talking entire countries on the edge of economic obliteration. Wednesday's Fed meeting and subsequent rate cut won't matter a bit.
The global financial system continues to break down, one day at a time.
Be prepared.