Saturday, December 26, 2009
Potpourri: Be Afraid, Be Very Afraid Edition
The translucent von Pepe sent me some scary articles today. I am not in the warp and woof of the markets enough to say whether the below excerpts are 100% right, but they definitely express the foreboding that von Pepe and I share.
* This FT article talks about hedge funds betting on rising bond yields by buying deeply out of the money options. I loved this part (though see the following paragraphs on what happened to such investors in Japan):
* In this apocalyptic post, "Tyler Durden" argues that in 2010, demand for US fixed income assets has to rise elevenfold over the 2009 level or else we're all eating Ramen noodles.
* Another ZeroHedge post, breaking down the changing holdings of Primary Dealers. I'm not sure what the moral is, but I don't like it. (It's sorta like if you told me Tim Geithner was using a fake name to massively short Quaker Oats. What does it mean?! I don't know, but I don't like it.)
* I don't even know how to describe this one. Just skim it and then pick your jaw back up. Notice that when politicians run a region (Michigan) into the ground economically, they just double down. Stick a fork in the US economy. If and when the crisis erupts as I (and Tyler Durden) have been predicting, Obama & Friends aren't going to cut taxes and privatize federal assets. No, they're going to pass anti-gouging laws, void commodity ETF contracts, and start another war.
* To cheer you up, EPJ passes along season's greetings.
* This FT article talks about hedge funds betting on rising bond yields by buying deeply out of the money options. I loved this part (though see the following paragraphs on what happened to such investors in Japan):
Hedge fund managers, however, have been hesitant to engage in short sales of Treasury bonds to profit from the rising yields – and falling prices – because of the Federal Reserve’s heavy involvement in the market. This has led some to buy options – dubbed “high strike receivers” – that would enable them to profit from sharply higher Treasury yields, hedge fund managers say. These trades, which are relatively cheap to execute because they are so out of the money, are based on the thesis that yields could hit 7 or 8 per cent.
“If they are right, and the world ends, they will make a fortune,” said one fund manager who is sceptical of the idea. “If they are wrong, they haven’t lost much.”
* In this apocalyptic post, "Tyler Durden" argues that in 2010, demand for US fixed income assets has to rise elevenfold over the 2009 level or else we're all eating Ramen noodles.
* Another ZeroHedge post, breaking down the changing holdings of Primary Dealers. I'm not sure what the moral is, but I don't like it. (It's sorta like if you told me Tim Geithner was using a fake name to massively short Quaker Oats. What does it mean?! I don't know, but I don't like it.)
* I don't even know how to describe this one. Just skim it and then pick your jaw back up. Notice that when politicians run a region (Michigan) into the ground economically, they just double down. Stick a fork in the US economy. If and when the crisis erupts as I (and Tyler Durden) have been predicting, Obama & Friends aren't going to cut taxes and privatize federal assets. No, they're going to pass anti-gouging laws, void commodity ETF contracts, and start another war.
* To cheer you up, EPJ passes along season's greetings.
Comments:
From the second ZeroHedge article on Primary Dealers (PD):
"As the PDs can pledge any worthless asset to the Fed, for which they get a dollar equivalent of 100 cents on the dollar, the PDs can leverage whatever toxic residuals they have on their balance sheet massively without even using explicit leverage, merely thanks to the Fed's lax standards in accepting practically any collateral".
It is my hypothesis that this is the money that has driven up equity markets this year. It is printed money and it is inflating prices. the only question that remains in my mind is whether asset prices going up from the 'new money' count as inflation?
"As the PDs can pledge any worthless asset to the Fed, for which they get a dollar equivalent of 100 cents on the dollar, the PDs can leverage whatever toxic residuals they have on their balance sheet massively without even using explicit leverage, merely thanks to the Fed's lax standards in accepting practically any collateral".
It is my hypothesis that this is the money that has driven up equity markets this year. It is printed money and it is inflating prices. the only question that remains in my mind is whether asset prices going up from the 'new money' count as inflation?
# posted by 
: December 27, 2009 at 10:30 AM
: December 27, 2009 at 10:30 AM
The first ZeroHedge post was almost enough to make me go to Wal-Mart and pick up a rifle and a bunch of shells.
From a community banker perspective, I find the prospects for 2010 to be rather dim. The moment the Fed stops pushing down mortgage rates, through its drug-like crazed MBS buying spree, property values are going to drop like a rock and take down every weak and marginal financial institution down with it. Collateral values have been propped up by the mortgage rates that have hovered for most of the year at below 5%.
Rates and asset values do not reflect the inherent risk associated with the environment right now. They are distorted due to government meddling.
I seriously don't whether to buy a rifle and a bunch of shells at Wal-Mart tomorrow, or buy as much silver and gold as I can get my hands on.
Maybe if I read the 2nd ZH post I'll go and get the rifle before Wal-Mart closes tonight.
From a community banker perspective, I find the prospects for 2010 to be rather dim. The moment the Fed stops pushing down mortgage rates, through its drug-like crazed MBS buying spree, property values are going to drop like a rock and take down every weak and marginal financial institution down with it. Collateral values have been propped up by the mortgage rates that have hovered for most of the year at below 5%.
Rates and asset values do not reflect the inherent risk associated with the environment right now. They are distorted due to government meddling.
I seriously don't whether to buy a rifle and a bunch of shells at Wal-Mart tomorrow, or buy as much silver and gold as I can get my hands on.
Maybe if I read the 2nd ZH post I'll go and get the rifle before Wal-Mart closes tonight.
Bob,
What do the folks at Mises Institute think? Are bigwigs there calling for a 'real' meltdown this next year?
What do the folks at Mises Institute think? Are bigwigs there calling for a 'real' meltdown this next year?
Bob,
I was thinking more along the lines of actual probability of a big event occurring in the future, not necessarily handicapping a narrow time frame. Do they think (or see) an event is eventually coming along these lines? Has the backstage chatter at recent LvMI gatherings touched on anything resembling this?
My personal belief is that the eventual story of 2009 was only a delaying tactic to prevent the inevitable reckoning in 2010 or beyond. This ZH stuff you highlighted is frighteningly plausible.
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I was thinking more along the lines of actual probability of a big event occurring in the future, not necessarily handicapping a narrow time frame. Do they think (or see) an event is eventually coming along these lines? Has the backstage chatter at recent LvMI gatherings touched on anything resembling this?
My personal belief is that the eventual story of 2009 was only a delaying tactic to prevent the inevitable reckoning in 2010 or beyond. This ZH stuff you highlighted is frighteningly plausible.
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