patrick.net

There are over $400 Trillion in derivatives.

That is the total derivatives market, not the MBS and CDO derivatives. Many derivatives are stable and not worrisome. Many have liquid commodities or equities as underlyings.

Randy,

Any idea what percentage of the global derivatives trade is tied in some way to RE values? I have no idea, but I suspect it is probably still a huge number.

What will happen when a major counterparty fails? Anybody's guess. I doubt it will be the end of civilization as we know it, but it should create some great buying opportunities for savvy investors with sufficient liquidity. I predict that Warren Buffett will end up owning a big chunk of MBSs purchased at a significant discount to face value. Buffett wound up with some valuable utility assets after the Enron fiasco.

That is the total derivatives market, not the MBS and CDO derivatives. Many derivatives are stable and not worrisome. Many have liquid commodities or equities as underlyings.

But will they all become part of the chain reaction? Cascading Cross Default?

If/when there is a derivatives implosion, it would be hard to steer clear of it. Ironically, unleveraged real estate may turn out to be a pretty good store of value.

But will they all become part of the chain reaction? Cascading Cross Default?

If so, it could get scary. Is it just me, or does it occur to others that our federal government has recklessly guaranteed just about everything in our economy? Public and private pensions (PBGC), bank deposits (FDIC), mortgages ("implied" Fannie/Freddie guarantee), student loans (Guaranteed student loans), retirement (Social Security), medical care for the poor and elderly (Medicare), etc., etc...

Given the rapidly deteriorating federal finances, I suspect that the US gov't will need to repudiate at least some of this debt either explicitly (very politically unpopular and could worsen crisis) or implicitly (via inflation). My bet is on inflation.

There's no guarantee that RE would retain their nominal value (nevermind real value) outside of a hyperinflation scenario. High inflation would just push up the cost of things like food and gas, and seriously squeeze FBs stuck with ARMs. The high interest rates would also squeeze buyers out of the market.

Cash and commodities are probably the best place to be for the moment.

Not investment advice.

But will they all become part of the chain reaction? Cascading Cross Default?

Somewhat unlikely. At most I'd expect to see a lot of counterparty defaults resulting in increased settlements for virtual delivery of the underlyings, which would ultimately be settled in cash.

It could have the effect of chasing speculation out of the more esoteric derivatives for a long time to come.

More worrisome to me would be a cascade of failures of prime brokers triggered by hedge funds collapsing. If enough HFs fail, then unwinding their derivatives trades could crash those markets and leave prime brokers up a river and on the hook for settlements. But prime brokers have pretty deep pockets and a lot of Fed influence.

UK, AUS, USA - three very different RE markets, with different buying patterns, different financing structures, and different economies. The comparison is at best a distraction from the important considerations for evaluating our market.

In RE, Demography is Destiny...
How many people, at what ages, with what income distribution...

Everthing else is either temporary or a subtlety...

...and overpowered by demography.