Last week’s big economic news was that two Bear Stearns hedge funds worth $20 billion are teetering near collapse. These two Collateralized Debt Obligation (CDO) funds–ironically named the “Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund” and the “High Grade Structured Credit Strategies Fund”–are in trouble because of their heavy exposure to sub-prime mortgages. A well-publicized rescue plan involving Merrill Lynch fell apart. At one point Merrill Lynch–one of Bear’s credit backers–said that they planned to seize about $850 million worth of collateral assets from Bear Stearns and sell them on the open market. Reuters reported Bear Stearns injected $1.5 billion of cash into the troubled CDO funds. Meanwhile we read that the head of the European Central Bank, Federal Reserve Chairman Ben Bernanke, and about 250 other international banking executives planned to meet at a “Financial Stability Forum” on June 23 & 24 at BIS headquarters in Bale, Switzerland. Much of their conversation will surely center on the derivatives traders, especially the Bear Stearns hedge funds. The results of the BIS meeting? Uncertain. The bottom line: Be ready. Minimize your exposure to market fluctuations. Diversify into precious metals. Minimize you exposure to U.S. dollars. Any U.S. dollar-denominated investment should be specially selected to be resistant to inflation. For example, see the next blog entry about Treasury Inflation-Protected Securities (TIPS.)
I’ve been warning SurvivalBlog readers about derivatives trading in general, and hedge funds in particular, for more than a year. Ditto for the US residential real estate, especially on the coasts. The hedge fund crisis will likely widen. Collateralized Debt Obligations will plummet as their underlying assets lose value. The macroeconomic consequences of this nascent collapse are enormous. The ride may get very bumpy. Fasten your seat belts, folks.