Are hedge funds turning into wimps or, in this case, Wimpys?
Our depression-era hero was famous for saying "I will gladly pay you Tuesday for a hamburger today" and that seems to be the game plan of hedge funds who are telling all the rich folks to please, please, please not panic as they clamor for withdrawals.
The problem is (aside from the fact that these funds’ performance have pretty much gone down the tubes) that there is not enough ACUTAL money in the world to pay these rich people what they thing they’re worth. That’s what a liquidity crisis is, not enough actual cash to back up our phony-baloney asset prices.
I wrote about this problem back in March, but no one listens to me. At the time I warned: "We have taken a couple of Trillion dollars of discretionary income out of the hands of average Americans and put it into the hands of wealthy people who put it into the hands of brokers who put it into the hands of oil companies who buy back their own stock and employ no additional workers and produce nothing new other than better balance sheets! This is not a platform for long-term economic growth!"
In short - nobody EARNED those dollars your portfolio is stuffed with. No goods and services were created, we simply decided that a $200,000 home was "worth" $500,000 and that a $45 barrel of oil was "worth" $70 while simultaneously telling employees that their contributions were worth less. That was OK(ish) as long as employees had the illusion of wealth because their primary asset, their homes, was increasing in value and low rates let them borrow against them (in $Trillion$) but now it turns out those fully leveraged homes may NOT be worth $500,000 which puts both the consumer AND the lender in a bit of a bind.
When the banks phony-baloney balance sheets are full of assets that are backed by securities that may be overvalued by 15-20% and some joker says "show me the money" - well, funny story actually… There isn’t any!
Or at least there’s a lot less than you thought there was. As George Bailey tries to explain to the worried townsfolk: "You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house…right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?…Now wait…now listen…now listen to me. I beg of you not to do this thing!"
That all sounds wonderful when delivered by a great actor like Jimmy Stewart but how would the townsfolks have felt if they knew Mrs. Macklin had bought a 3 bedroom home for $750,000 that had actually cost just $180,000 to build on a $80,000 plot of land just 7 years earlier? What if they knew that Mrs. Macklin’s piano lessons only gave her an income of $5,000 a month so it would take over 12 years of her entire salary to pay for the house but she qualified for the loan by putting up her life savings of $75,000 as a deposit and keeping her payments down to just $2,329.56 a month by taking a 1.5% ARM loan?
Why would Mr. Macklin do such a terrible thing? Well because Uncle Billy (the mortgage broker) told her it was the best house she could afford and Mr.
