Wednesday, May 11, 2011

One GIANT Margin Call

In defence of Warren Buffett, what would you do if you were at risk of a margin call? Most likely you would try to talk yourself and anyone else that would listen into all the reasons that your position was bonafide and the trade worth the risk. The reality is that the markets are now in a GIANT margin call funded by dollar short carry tradesand the fed - both of which are exhausted. The dollar daily chart looks far from done and as the margin call extends the collapse in liquidity will also. Many funds that were down 20% as of last week and now likely down 30% as a result of trying to defend their trades and fight the dollar.

The reality is that if Mr. Buffett can not see that the biggest risk to the recovery (if there were actually one) is structural and that its not a risk - its a certainty that the structure will be unstable if not totally collapse - then I would be astonished. But then again many things in the world lately are astonishing...the Fukushima news black out...the scientific community refusing to get within hundreds (even thousands) of miles of the accident for marine projects, the every increasing and violent social unrest, the curious timing of the Osama Obama-rama...and the stupendously pyramided trades and transactions that are supposed to be able to support our markets and economic mechanisims. This is why for me the more money I can get out of the leveraged financial system the better I feel. The trick that most people have not figured out is that allocation is everything. So, many are significantly over-leveraged...they have also not figured out how to trade with less than 10% of their liquidity and generate a good return on their net worth.

Tomorrow could provide more unwinding of this fruitcake system of over leveraged and overvalued securities. I do not think it will be pretty. Everyone and their mother has been supporting investments with carry assumptions on the dollar...too many over leveraged firms with drawdowns are approaching levels at which the business viability comes into question are in these carry trades based on short dollar positions...this effectively doubles their leverage and will be the source of many fund closures and liquidations in the near future.
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