Monday, October 27, 2008

Black Monday is here

There are a lot of people who think it is a technical situation, it is a liquidity situation. Don't believe them. It is a pure and simple solvency situation. Equity prices can go -ve.

How?

There is a difference between enterprise value and equity value. It is called debt. So while EV can't go negative, equity value can, depending on the debt. That is why debt deflation is so dangerous.

But will never see negative prices on screen. So isn't my statement wrong?

To which I will say, look at UBS. Its market cap is $37bn. It has raised close to $32bn in equity so far over the last year. And then they just moved $60bn of assets to the Swiss govt. So last year, before this crises began, UBS's equity value was negative. The only reason we didnt see it negative was because of repeated capital injections in the bank.

This is also going to happen in a lot of other industries and companies. Repeated capital injections.

We have gone into a huge -ve feedback loop.

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