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Opinion

Inside investment: Winners and losers in the great deleveraging

Financial markets must adjust to an environment where credit is no longer cheap and abundant.

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Having predicted both the end of the debt binge and the unravelling of the toxic structured credit products it spawned, only one thing surprised me about the financial crisis of 2007 – how long the money-for-nothing junkies remained in denial. As the storm clouds gathered in July we were told it would be a one-quarter event. That soon became two quarters. We were then reassured that the problems were contained in such obscure backwaters as sub-prime, CDOs and SIVs.

But as the poison spread, it paralysed the entire banking system, precipitated an unparalleled loss of trust, $119 billion and counting of write-downs, tarnished reputations, tattered balance sheets, and multiple rescue rights issues that dare not speak their name. So much for the past. What does the future hold?

There is still a surprising ostrich-like mentality at large. The "one-quarter snafu" true believers of last summer now expect the Federal Reserve to steer the US away from a recession and the rest of world to decouple from that slowdown and continue to post above-trend growth rates. They have still failed to grasp the magnitude of the crisis. Stock markets, for example, have barely begun to play catch-up.

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