Wednesday, November 9, 2011

With three wishes they could be rich… long as they can put off paying for the Hamburgers until Tuesday.

The interesting thing about our markets is that this is the EXACT condition that is going on throughout the financial system. People are using short-term financing (usually through overnight repos) to pay for longer-term obligations and further their accounting control frauds - what’s more - they think that they can get rich doing it. The reality is that the managers who collect the bonuses or over-committed books, often do get rich, but their firms often also go broke and have the added benefit of making sure tax payers end up paying the bill - the result is that economy and financial system suffers. These are the exact conditions that brought down ponzi schemes like Bear Stearns and Lehman among a fair list of alternatives - short term credit covering huge losses has disappeared. Its gone. Financial managers usually seek to arb their risk…in my opinion any derivative/tertiary risk is actually greater than the source/natural risk since new risks are introduced that have not been accounted for. We are dealing with that now.

Banks and large investment firms have financed leveraged and losing positions in many asset classes through many techniques from their illustrious carry trades to the most common Repo trades. The window on these short cuts is now sealed and broken…yet they still hold the assets they are seeking to get rich with…but can not afford. Its not too far from the Wimpy situation - wanting to have a hamburger today and pay for it on Tuesday - only to be out gunned by sorcerers who think they can make money of a money losing deal if they can get their magic wishes…which they ironically don’t even know what to do with.

The other irony is that people who are embedded in the mix, are all clamoring to get into gold now that they feel like they can’t trust leveraged cash or assorted assets…the problem is they are really acting based on their three wishes and of course you can’t eat gold…nor may you be able to easily pay to eat with gold for some time to come…it just another asset the global overleveraged ponzi schemers will be required to sell before they implode. I see no good outcome for quite some time for any asset whose price was levitated by access to cheap short-term (or even long-term) credit based capital.

Good luck market…this is not going to go well…Ben, Tim and Trich and most of the big players are in some deep doodoo.
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