Bridgewater Associates: Total Writedowns Could Be $1.6T

[Admiral Valdemar]

The Stock Market Correction and the Global Financial Crisis

By: Marc Courtenay Tuesday, July 08, 2008 1:51 PM
Sectors: Finance
Symbols: FNM, FRE

The global financial crisis is only 25% complete, says a recent study by one of the world’s biggest hedge funds. A study by Bridgewater Associates estimates that total credit crisis losses will amount to $1.6 trillion worldwide… a far cry from the nearly $400 billion lost already.

Does this indicate that the future write-downs of bad debt and foolish loans will be 4 times as great as we have experienced so far? The people at Agora Financial certainly seem to think so and that is reportedly what Bridgewater Associates seem to be predicting.

"The fund’s call was based in a particularly simple reality… bean counters at Bridgewater estimate financials handle around $26.6 trillion in debt-based assets. If such assets were valued at today’s market rates, around $1.6 trillion would be instantly lost. Et voila… Bridgewater thinks we’re only a quarter of the way through."

Thus, we’ll join with Agora Financial to tack on another prediction onto their “write-down rundown.” This thing is starting to look pretty ugly and as the chart below indicates the bottom looks nowhere in sight: Our thanks to Agora (www.AgoraFinancial.com ) for letting us share their chart below.



As this monetary meltdown and credit crunch continues, we will all learn which of these "estimates" were close to being correct. The problem for the stock market is that with each unpleasant surprise and nasty announcement comes some mean sell-offs.

That is part of what rocked Fannie Mae's (NYSE:FNM) world on Monday. The stock tanked down over 16% after a Federal Reserve official warned housing market problems would likely extend into next year and an analyst said accounting changes could leave Fannie Mae and Freddie Mac (NYSE:FRE) woefully short of necessary capital reserves.

Freddie Mac took the worse shelacking of the two, down almost 18% in Monday's session on almost 7 times normal volume. To my way of thinking this put in big nail in the stock markets "upside box" when it comes producing any near-term, bear market rallies.

“We could see a capitulation bottom in the market very soon,” predicts Dan Amoss who writes the Strategic Short Report for Agora. We’ve yet to see that “turn off the computer and hide under the covers” sort of sell-off. According to Dan, it might be around the corner.

“The market action last week was a continuation of the past months’ decline… with one surprise: Only the financial stocks weren’t punished, for a change. The leading gainers in the market thus far in 2008 -- in the steel, coal and fertilizer sectors -- fell extremely hard.

“Too many hedge funds are operating with too much leverage. When these hedge funds receive redemption requests -- as many are -- they’re forced to sell winning long positions and buy to cover winning short positions to raise cash. Last Wednesday was one of those days.

“At certain times, rational decision-making takes a back seat to emotion. That’s where we are today. The health of the banking system is still weak, and now we’re seeing waves of funds exiting winning positions… we could see a capitulation bottom in the market very soon.”

Such a sell-off probably would line the pockets of Dan’s Strategic Short Report readers. Sometimes a good short strategy makes good sense, and this certainly smells like one of those times. It isn't easy to do, but if you have the stomach for it you can make money in a bear market.

We recently learned you can "short" just about any of the markets or exchanges using ProShares ETFs like Short QQQ ProShares (AMEX:PSQ), the Short DOW 30 ProShares (AMEX:DOG) and the ominous sounding Short S&P 500 ProShares (AMEX:SH). Boy, the symbols "DOG-SH" is enough to make you want to watch where you're walking.

So, once again, we yell "Watch Out Below" although we admit we have no idea how far the stock markets will fall or when they will reverse and head back north once again.

The only thing we are sure of is that these are unprecedented times with huge amounts of fear and uncertainty among both investors and consumers. Short-term, that might make for some smelly results (like stepping in DOG-SH...) but in the long-term it will most likely set the stage for another epic buying opportunity.

So that's RBS, Fortis Bank, Barclays and Morgan Stanley and now Bridgewater sounding a fairly major alarm. Yet, the news this evening was all about Britain maybe going into a recession for a year or so. Something doesn't quite add up. I refuse to believe that the MSM economics editors are that stupid, and the Beeb is typically independent, so maybe they do know and don't want to really raise such an alarm. Panic doesn't help anyone, though nor does handwaving this away as being just a recurrence of 1990.

[Col. Crackpot]

Many of my colleagues (at the aformentioned RBS US Subsidiary Citizens) agree that fund managers are a lot like weather forcasters. Yes, Meterology itself is a science, but forcasters season that science with bullshit and call it the weather report. Just as fund managers season their forcasts with politics and agenda (cough: market manipulation).