Who’s scared of the big, bad subprime credit wolf?

We all should be. The main reason is not because it could wipe out our investments, but because many others are getting scared and their jittery actions could rock the boat thereby affecting everyone else.

Imagine a big room full of nervous people running for the exit all at the same time. Think of the confusion during such a pandemonium. People can get hurt whether or not the stampede is running away from a tiny mouse or a huge elephant. That’s how a financial market turmoil can feel like.

On Monday, fears about the US subprime problem triggered losses in markets across the globe. What does that mean for individual Filipino investors? Let me see if I can keep satisfying one reader, who said she reads MoneySmarts because doing so helps her understand business without getting dizzy.

If you are a “prime” borrower, banks run after you to lend you money. You have never missed payments, you have a good job and everything just looks peachy. Sub-prime borrowers are your opposite. In the Philippines, one bounced check and a botched credit card history gives you a permanent scar that’s all but impossible to erase. In the US mortgage market, lenders flush with money coming in from different parts of the world said, “Why not lend to the sub-prime market even if they are risky?” They could charge higher interest from these borrowers and earn more!

Unfortunately, good things sometimes come to an end. The sub-prime mortgage market started to unravel. Borrowers started defaulting on payments and lenders got squeezed. Other financial institutions that invested in assets riding on these subprime mortgage loans understandably started wobbling. In the past few weeks, the ripple of effects of this continued unraveling reached overseas markets. The US equities market seesawed from all-time highs to bloodbath levels in a few days.

Asian central banks tried to insulate the region’s markets by injecting money or sending a signal that they are ready to use their war chest of reserves to support the markets. Japan released $5.1 billion into the country’s banking system on Tuesday, South Korea and Malaysia stood ready with their cash. More central banks are expected to inject liquidity into the staggering markets. As a result, the peso and the won recovered but remained uneasy, oil prices were up and Bangko Sentral ng Pilipinas governor Amando “Say” Tetangco met with reporters to say the local banking sector is not directly exposed to the US’ subprime problems.

The Economist says these “Frankenstein-finance” vehicles have caused panic to grip the market. CNNMoney wonders out loud if Fed Chair Ben Bernanke will save the day? However, MarketWatch’s market snapshot quotes economists who say new retail sales figures indicate that Americans are out there shopping and are not having a credit crunch – just about the only upbeat article I have seen so far.

BusinessWeek paints a gloomy picture with words like “around the world, small-time investors take a beating.” Bloomberg says Bernanke was wrong in saying the US government has contained its sub-prime market woes. “It’s spreading,” says Bloomberg.

I caught Nouriel Roubini on Bloomberg TV last weekend. Much of what he said and more are in his blog over at RGE Global Economics. He is saying this could be the worst credit crunch in US history and that liquidity injections from central banks will lead to moral hazards, meaning reckless investors will expect to be bailed out.

What does this all mean for the Filipino individual investor?

Jose Arnulfo “Wick” Veloso, HSBC treasurer and head of global markets (and one of the most experienced bank treasurer in the market today) told MoneySmarts that the first thing investors should do is not to panic. He noted however that although Asia has decoupled a bit from US markets, it might get worse even here before it gets better. Translation: brace yourself because the ride will get bumpy.

“If you are invested in dollar-denominated assets, talk to your private bankers immediately to determine whether the credit spreads you got at the time you invested can withstand the volatility,” he said.

He advises staying with short-term cash instruments while markets are still volatile. “It’s a lot better to be spectators while all of these volatility is going on,” Veloso said. Likewise, the Wall Street Journal, Barrons, Nouriel Roubini are all saying go for safer investments while the American economy tries to avoid a hard landing. Ron Nathan thinks so too.

Veloso observed that some recommend buying while markets are down. These include Jeremy Siegel, who has been nicknamed the Wizard of Wharton and a well-known market commentator and Bill Barker of the Motley Fool, who says this might be the best buying opportunity in the past 12 years

“There’s no such thing as a one-way market. There are profits to be made left and right, so you can make quick guerilla moves to try and make profit from the uncertainty. But remember that even those whose job from eight to five is watching the market still lose money,” Veloso said.

In short, experts are saying your choices are to stay low and liquid, or stay invested but be prepared to ride out the market volatility, which might stretch for nobody knows how long. If you’re going to shift, remember that a cheap stock is not necessarily a good buy.

I know what you’re wishing. A crystal ball that will tell you what will happen to the big bad wolf – and how long you have to wait for it to happen. Me, too. What I know for sure, though, is this. Crises come and go. Bubbles build up and burst. Then markets pick up again. Along the way, people either get hurt or benefit from it. That’s what it all comes down to, doesn’t it? I know what Pinoy Investor will say. Magtayo na lang kasi tayo ng negosyo! Hehe.

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