I caught a piece yesterday on pom pom TV which is one of the first times I have seen a discussion about what the real underlying problem is with the credit crisis. The fact that home prices got way out of whack with incomes and until that changes, either incomes rise to a level commensurate or home prices fall back. Take your pick. My money is on home prices regressing to the mean so to speak !
I was reading about the MF Global disaster where 1 prop trader cost the firm big money. I understand that MF removed the safeguards on this trading account so he could trade quicker. He proceeded to put a trade on he could never ever ever afford to meet. This got me to thinking about the global multinational investment and commercial banks. They are no different than this cat at MF. They, and by they I mean the ENTIRE INDUSTRY, took the other side of derivative trades that they IN NO WAY, SHAPE OR FORM CAN EVER MEET. I have read reports that there are approximately 1 trillion in derivative swaps on GM and yet GM has a market cap of about 13 billion. How do you hedge, GM bonds? Good luck. So you hedge with another investment bank hence the exponential growth. This is an unfolding disaster of epic proportion.
Will we get through it?
ABSOLUTELY, no question about it !
But as we do, the pain will be extraordinary, the likes of which none of this generation has experienced. We have to face it, in many cases kicking and screaming. We as humans naturally would prefer to avoid any pain. We had a Fed compliments of Alan Greenspan who was all to happy to oblige our wishes. No more recessions, no more economic pain. A repeal of the traditional business cycle of ups and downs. Well it is now time to pay the piper and we unfortunately are going to have to pay for these past excesses, lump sum, balloon payment, here and now.
What is unfolding is going to annihilate financially, the many who are unprepared. Hopefully we will not be among them. Oh and by the way, the deals and bargains that will be available when we have settled this bill will be the stuff dreams are made of.
Good speculating to you all.
Long 6 units Currencyshares Japanese Yen ticker FXY @ $88.55 stop at $91.40
Long 1 unit Ultrashort China25 ticker FXP @ $84.55 stop at $84.85
Long 4 units Ultrashort Dow 30 ticker DXD @ $58.00 stop at $53.10
Long 2 units Ultrashort Real Estate ticker SRS @ $92.85 stop at $89.65
Long 2 units Ultrashort Financials ticker SKF @ $102.20 stop at $98.70
Short 3 units of Deutsche Bank ticker DB @ $117.15 stop at $119.40
Short 2 units Citigroup ticker C @ $23.45 stop at $25.40
Short 2 units AGCO ticker AG @ $61.00 stop $62.75