We are not much for the whole "doom and gloom" crowd, but we did take notice when the folks at Bridgewater Associates jump wholeheartedly into the crash camp. Peter Brimelow at Marketwatch.com summarizes the recent comments in the Bridgewater Daily Observations newsletter.

In short they view the chances of a LTCM-type hedge fund blow-up as a real possibility. Given their research showing the extreme nature of hedge fund crowding a wholesale rush to the exits could cause a widespread financial market accident.

What we found interesting in this was the note that the hedge fund complex was vulnerable to: "tight credit, widening credit spreads, and falling equity markets." In a Lex piece over at the FT.com they note research showing the current market environment has been characterized by high correlations among previously disparate asset classes.

The risk they note is a coincident move down in the stock market and rising credit spreads – the same risk noted by Bridgewater. This market has been driven in part by easy credit and historicallly low credit spreads. A substantial reversal would have widespread effects across the financial markets including hedge funds, private equity, and M&A.

Historically it has not paid to predict a financial cataclysm. However investors would be wise to keep track of credit spreads as the stock market undergoes this most recent correction.