Wednesday, April 6, 2011

Liquidity trap is set...

What is funny is how nearly all of the funding trades end up as facilitated by the central banking cartel - busted. Nearly every trading desk that participates in carry trades needs to use excessive leverage and rely on market intervention when they are threatened with blowing up. What is interesting is that one would willingly go into such highly leveraged trades with risk that is absolutely not balanced versus the reward, unless of course you believe in the infinite exponential curve. This is a pattern that has occurred often in the arb and convertible arb world and is now spreading to many other markets where people are simply ignoring the relationship entirely. Risk and reward are not compatible when you most need them to be. The reason again, is the same one that enables banks and amature professionals  in most cases - bonuses and incentives are paid on past performance not future performance. Therefore, when  the position blows up, as in the Dollar/Yen (among others) carry trade, the big bank trading desks go crying to uncle central bank, who is only all to happy to transfer the burden to someone else for them.

The reality for me is clear, there is no easy way to make money, you get paid for taking risk not attempting to evade it...and that is why some of my aggressive allocations are up hundreds of percent in the last 7 months since I started trading them. The reality is that despite having friends like BURNanke, G-HEISTner and tRICHet...nothing is ever really free. Concepts like these carry trades are designed to capitalize on a theoretical way to make lots of money while simultaneously avoiding risk...and that's why these guys are net losers in the longer-term. And just like the nuclear energy issue, inconvenient truths are thrown out for someone else to deal with.

The irony about this situation is that the Fed has setup a few carry trades in its time for its buddies...none of them have ended well. And now we have another liquidity trap that is set to blow up, the Q/E (quantitative easing) trade. At this point the markets like bad news because there is hope of infinite new liquidity to drive higher prices and they hate good news because that liquidity may not be provided. The reality is that with each machination, people are letting capital stick to the markets in the hope that Q/E continue indefinitely...and while incompetence such as BURNanke's can continue for much longer than imaginable...our global situation is a direct reflection of that incompetence, just as G-HEISTner's letter to congress regarding the debt ceiling. These, idiots are now on a short leash. That leash will be sporting a choke collar with spike and electric shock capability when the real markets decide enough is enough. Till then, the bailout brethren will continue, heads in the clouds, with the confidence that anything that happens that is inconvenient will be cleaned up by a few good men in Washington. I strongly advise against that kind of assumption and believe that the next flash crash - which is imminent btw, will occur in large part with fuel provided by this misallocation of funds, malinvestment and convenient assumptions.

Keep in mind that this liquidity is now likely trapped and in a VERY unsafe place. The question will liquidity be called? And, if so, will the anticipated intervention show up in time or at all?

The irony, is the one who will be left holding the bag in the end will, as always, end up being the taxpayers of the world. Forever funding the foibles of the Central Banker engineered and coordinated scams.
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