Sunday, November 25, 2007

Raising Rates to Worsen Sub-Prime Mess

This is the TITLE of a featured story in the weekend edition of the WSJ. The article states that due to resets on current sub prime mortgages, interest payments are set to rise by 362 billion dollars in 2008. This is not good news especially when coupled with a slowing economy both here in the the states and globally. What does this all mean? I think to assume that this situation will confine itself to just the U.S. is quite naive. I remember back in 1997. Thailand was under tremendous pressure to devalue it's currency in the wake of an extremely slowing economy. Hedge Funds were attacking the region (buying large quantities of dollars) attempting to get the governments to give up on currency pegs, and managed floats which the region had been using to mange its currencies for many years.

Thailand was the first to be attacked, it was seen as the weakest and easiest to break. It was eventually broken but not before inflicting its own punishment. One day in May 1997 the Central Bank raised rates to 1500% (Yes 1500%) on Thaibaut short balances. This was to hurt any speculators who would be so bold as to short their currency. It hurt, quite a lot to be honest. I lost more money on that day then I had ever lost before. Actually I lost more on that day then anyone at my institution had ever lost before. I remember sitting at my desk and being called by the head of Global Markets. He asked what I thought was going to happen next, I said it would get worse before it got better, and that Thailand was just the first to go, the rest of the region would go down one by one, like a stack of dominoes. I am not so sure he agreed with me, but he didn't fire me nor did he take away any trading responsibility for losing all that money. Rather he allowed me to trade my view. Over the next couple of days weeks thing got worse, alot worse, and I began shorting the other currencies of the region. As I predicted ever currency over the next few years went down, one by one. It also spilled over to other regions. Brazil and Argentina eventually broke it's pegs and Russia defaulted on it's debt. It was actually one of the best things to ever happen to me. I was a part of a devistating situation and turned it into a huge opportunity. Now I do not think that the current Sub Prime story is any where near the situation described above, but I do tink we will have some similarites. Spillover to other regions....Yes. Slowing of the Global Economy....Yes.

How far these situations go is up in the air and only time will tell.

Good Luck and Good Forex Trading.



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