Edit: Welcome FDIC! They just read this post. (They’re the people that insure your deposits at the bank for up to $100k) I’ve been on a mad rant for the last 3 years about how the housing market would crash and bring down the entire economy. So now I bring you the same point of view but from someone being interviewed on Marketwatch. Keep in mind that this guy is considered an optimist by many who don’t think the global economy can weather a drop in US consumption…
Even if this isn’t a credit bust and everybody manages to keep paying their mortgages, the drop in home equity and associated spending would be enough to bring down our 70% consumer spending based economy. But of course people aren’t paying their mortgages as evidenced by the following graph of foreclosures. 
So on top of the missing equity we’re going to see a banking crisis. Don’t take my word for it. This is from a memo sent to insiders, the kind of thing the general public doesn’t see unless leaked (from the Calculated Risk comments section via Lehman Asset Management)
Investment Conclusion
As market conditions have calmed, the performance of equity market neutral
managers has become more challenged. We believe performance of most factors,
particularly value factors, have turned perverse in a dramatic fashion. It is
unclear how long current situation will persist, but stability will be
facilitated by understanding that underperformance is systematic, not due to
individual model misspecification, in our view.
Summary
* July 2007 saw returns to quant factors increase dramatically, with
volatility at 2 to 3 times normal levels. In July, the misperformance of the
factors was driven primarily on the long side.
* Factor returns for the first 5 trading days in August have been roughly of
the same magnitude for what we experienced for all of July, however, now
model misbehavior has primarily been the results of shorts outperforming.
* Factor performance does not appear to have notable sector biases so we
discount the possibility of sector rotation being responsible for observed
dynamics.
Over the past few days, most quantitative fund managers have experienced
significant abnormal performance in their returns. It is not just that most
factors are not working but rather they are working in a perverse manner, in
our view. The names that are short are outperforming, often notably, while
the names that are long are underperforming, although less severely.
Moreover, there appears to be very little news coming out surrounding these
names and all of this is occurring against the backdrop of the general
markets appearing to calm down. This has led to our fielding a large number
of calls from our quantitative asset management clients, trying to understand
what is occurring in our market.
It is impossible to know for sure what was the catalyst for this situation.
In our opinion, the most reasonable scenario is that a few large multi-
strategy quantitative managers may have experienced significant losses in
their credit or fixed income portfolios. In an attempt to lower the risks in
their portfolios and being afraid to “mark to market” their illiquid credit
portfolios, these managers probably sought to raise cash and de-lever in the
most liquid market – the U.S. equity market.
As these managers unwound significant factor based portfolios, these factors
started to behave in unexpected and potentially troubling ways. Short names
started to rally and long names started to fall as these trades started to
hit the market. As most quantitative managers use similar quantitative
factors, this abnormal factor phenomenon was not confined to a few funds.
Rather, a large number of quantitative managers have seen their models begin
to behave in unexpected ways. Again, it is no longer only the multi-strategy
managers, but now pure quantitative equity managers who have started to see
their portfolios “misbehave”, both U.S. domestic and global fund managers.
To be absolutely clear, when we are discussing misbehavior, it is not simply
that model returns are flat (or not working) but specifically that the models
(ours included) are behaving in the opposite way we would predict and have
seen and tested for over very long time periods (45+ years). Additionally,
the magnitude (or volatility) of the returns in July increased substantially
with the factor returns being on the order of 1 to 4 times what we have
traditionally seen. Those returns look placid relative to what we have seen
in the first six trading days of August. As for what has been transpiring in
August, we have been able to document daily returns of this magnitude
occurring before only at the height of the bursting of the Internet Bubble
and in the late 1960s. This appears to be an event with little precedent.
This breakdown in traditional factor returns is, of course, not limited to
the return (or alpha) side but also is now extending to traditional risk
models – that is, managers are finding their risk models are now
miscalibrated for the current market environment. Again, this is not limited
to any one model but overall to all factor based (or structural) risk models.
This has led to further concerns within a number of asset management
organizations we have been speaking to, with risk-managers facilitating
further de-leveraging as they seek to better understand the situation.
Emphasis mine. Sucks to be starting a business in the midst of this ugly inevitability.
I posted this in The Big Picture comments but it exceeded my 100 word maximum so I had to repost it here.
Hello family and friends, I made a funky little video of the reunion which you can play by clicking below. It’s a bit long but you can use the scroll bar at the bottom to jump around. 
