That seemed to be the message on the network (Adam's term) yesterday thanks to a day that was a touch less volatile. From the no-one-wants-to-get-blindsided department, I doubt this is the last of the subprime news in the short run or the longer run. Even if the selling is done for now (not saying it is), it is a good bet there will be something else in the next few months.
I personally don't try to trade short term around these things, I spelled out over the weekend how I positioned myself and when, but I don't want to be totally unprepared if there is another shoe to drop.
If we are done selling done for now and then another 6% hit comes from this sometime in the next six months you hopefully won't be caught off guard. Big picture, this whole thing is about messing with access to capital. When this happens it can take a long time to unfold. This became an immediate market threat only a few months ago. While I don't yet have a great feel for how serious this is, it could take more than a year to fully unwind.
Unfortunately most media accounts focus on the wrong thing. As I have mentioned a few times, the default rate is not going to be the thing. The default rate will remain low, this is good for consumers but the market risk is to the pools of capital that invest in the mortgages. There is less investment demand, another round of potential liquidations with fewer buyers is coming soon and a widening of spreads which all hurt the holders of this paper.
A mortgage pool going from 99 cents on the dollar down to 89 cents on the dollar doesn't effect the person who borrows the money to buy the house--hence the default rate has nothing to do with it. But own one of the bonds leveraged two, three or four to one and a 10 cents on the dollar (just an example I am making up), well you can do the math for yourself.
Whatever this will turn out to be, I doubt it is unprecedented in terms of fundamental impact and market impact. It take some amount of time, the market will endure some magnitude and then move on. Moving on will take longer than Kudlow thinks but less time than Roubini thinks.