Thursday, August 14, 2008
importantly, he highlights the underestimated size of the corporate aspect of the credit bubble -- noting that better quality companies have merely borrowed less through the capital market than banks this time through, meaning that the bond market has a much higher concentration of weak issuers now than in previous downturns. that means default rates are going to surprise on the upside, and banks are in an even weaker position than widely thought.
but his assessment of the hedge fund model as the driver of volatility which has become an "busted" business model. as they pursue steady month-to-month returns to keep investors in a market of intensely crowded trades, huge volatility is going to destroy and shutter many as finance sloshes wildly from popular trade to popular trade. goldman expects massive redemptions from hedge fund investors to facilitate a systemic delevering.
he further notes that the TIPS spread which implies inflation has fallen to the lowest point seen recently. in combination with commodity price declines, goldman views the delevering which is now getting underway to be forcing a deflationary outcome.
this is a deeply frightening interview -- not because any of the points encompassed is histrionic, but because it is all so coldly probable.
UPDATE: cassandra reviews and concurs.