Bank of America delivered a report last week highlighting the current losses of the "Credit Crisis". According to the report, the meltdown in the U.S. subprime real estate market has led to a global loss of $7.7 trillion in stock market value since October.
Quoting Bank of America chief market strategist Joseph Quinlan ,"The crisis, which has spread beyond U.S. shores to banks and other sectors worldwide, is one of the most vicious in financial history".
In his report, Joseph Quinlan states that the losses are worse than any in the past few decades, including Wall Street's Black Monday of 1987, the 1999 Brazilian real currency crisis, and the collapse of hedge fund Long Term Capital Management (LTCM) in 1998. Quinlan quantifies the current credit crisis by determining that world market capitalisation is currently down 14.7 per cent three months after a peak in late October. He has compared this with similar losses three months down the road of 13.2 per cent after the LTCM crisis, 9.8 per cent for Black Monday and 6.1 per cent after the Brazil crisis. The losses were also greater than those suffered after the September 11, 2001 terror attacks, the Asian financial crisis starting in 1997, Argentina's default on its debt in 2001, and the 1994 Mexican peso crisis.
A report last week by Standard & Poors ratings agency showed global stock markets were devastated with a collective loss of $5.2 trillion in the month of January alone. This does not take into account all the further repercussions. Banks have been tightening their standards. Lack of counterparty integrity is a common occurrence.
So many are asking where the next surprise will come from. Or possibly one could even argue that it is not a surprise any more. Swiss bank UBS shocked markets on Thursday with tens of billions of dollars of new exposure to risky U.S. mortgages, leveraged finance and complex securities. It used to be that banks did not trust hedge funds, and now hedge funds are afraid of the banks.
One of the biggest problems is that it seems no one knows how to quantify the losses, or what is the true value of paper or derivatives that so many banks and institutions are holding. Using this a basis of thought, how could one expect the "Credit Crisis" to be solved in the near future. In comparison, (at least hopefully so), the Depression of the late 1920s to late 1930s lasted longer than anyone expected. There were rallies then as well as severe down drafts. One can also look at Japan: In 1989, the Japanese stock market was 39,000 and today it is at 13,600.
In the end, the current financial crisis could be one for the record books. One more possibly ominous thought, it's not over yet! Even Ben Graham, the father of Value Investing, encountered drawdowns that took him years to recover.
