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It’s the 10th anniversary of the onset of the Asian crisis this week and the world has turned almost full circle, says CLSA’s Christopher Wood in his latest Greed & Fear client newsletter. In his usual neat way of putting things, Wood notes that a decade ago, “Asia was collapsing and America kept growing”. Now the consensus is almost the reverse: “namely that the US economy has a bit of a problem in its housing market, but the world economy will be fine because of the growth coming out of Asia”.

The real issue, though, is that “nonsensical leveraged games played by the debt floggers in the world of fixed income again threaten a systemic crisis”.

He’s not always right but Wood is right often enough to take his warnings on board. In this case, anybody in the field of securitisation should take note. The present global credit bubble will end in a financial crisis which will be deflationary in nature and will have its epicentres in New York and London, he says. “The upshot of the crisis will be an aggressive return to regulation of matters related to credit including, quite possibly, the outlawing of securitisation.”

The question, however, is whether the current rumblings of distress in the market for collateralised debt obligations are the trigger for the full-scale financial crisis, which Wood assumes “will one day be inevitable”. G&F is not yet convinced about this but there is certainly the potential that they could be. “Investors who dismiss this prospect out of hand delude themselves”.

The last has not been heard of CDOs, and the wholesale downgrading of these structured credits “will occur before the end of the year”, he predicts. “This will more than justify the spread widening that has already taken place. The simple reason is that the US housing market will continue to weaken.

The longer the US housing downturn goes on, the harder it will become to conceal that the edifice of debt collateralised by mortgages is not worth what its holders claim it to be, Wood says. This is also why the Federal Reserve will be cutting interest rates before the end of the year, he adds.

The “flawed business model of securitisation run amok”, meanwhile, has also been applied to two other areas that are not yet perceived as problems, “but which inevitably will become problems”: The two areas are the leveraged loans driving the LBO mania, and securitised non-recourse financing of commercial real estate.

The growing focus on the problems in the mortgage-related area means that shorting mortgage-related paper or related CDOs is not as good a trade as it was a few months ago or even a few weeks ago. The best credits to short now are those funding the LBOs and the commercial real estate precisely because the market is not really focusing yet on the obvious risks.

In Asia, a full-scale credit blowup would “probably cause a decline of at least one third in the MSCI Asia ex-Japan index with higher-beta markets declining by more,” notes Wood . “This is because leveraged investors would have to sell profitable investments to cover losses elsewhere. Still, this would simply be collateral damage from a crisis that did not originate in Asia.”

Such a selloff in Asia would be a massive buying opportunity since the region is in a long-term bull market. It would also probably serve as a positive catalyst for Asia to pursue a more domestic-demand-driven growth model in line with the Billion Boomers theme.

Well, it certainly couldn’t hurt to take note.