Posted on 07/01/2007 9:44:31 PM PDT by bruinbirdman
That's "DUMAS..."
Not "Dumb Ass..."
Some folks at the B.I.S., and for that matter, Ambrose Evans-Pritchard, sound like Austrians here.
To quote Howard Ruff (Ruffly): "The margin call. The only unqualified piece of advice you will ever receive from your broker."
ping
Thanks for your thoughtful analysis- minus tinfoil:)
This cycle...of multiple banking entities running loose led to the banking consolidation of the 1930’s, the S&L consolidation of the 1980’s...and, IMHO, is designed to lead to an international banking consolidation this decade that will be the runner-up to a world currency....
Your posts are a prime example of the best part of FR - experts talking about what they know. Thank you.
Wonderful analysis. Making the complex understandable for the financial dim bulbs such as myself.
Thanks
Many 401k’s are in stock funds,some bonds, foreign funds.
What’s a relatively safe place to put your money to ride out the possible fall?
Mattress? Bank ‘Passbook’ savings? :)
I appreciate your compliment, but I must make it quite clear to all here: I am NOT an expert on these matters. I’m not a professional in finance. Do not take anything I say as actionable financial advice.
I’m a hay farmer in central Nevada, who used to be a EE in Silly Valley. That’s it. I’ve forgotten more math (as a EE) than most finance people have every known, but the secret of modern finance is that finance “professionals” seem to get into more trouble the more math they know. The Black-Scholes option model is just one example — the academics thought they’d use the Gaussian distribution to make the math easier, and they assumed the underlying security price movement was like Brownian motion, when in fact the way that option pricing breaks down at the margins is anything but Gaussian and the movement of underlying securities prices is often anything but Brownian.
But hey, these eggheads (and a bunch of professionals like them) created these hedge fund models based on these academic notions of mathematics, and when human nature rears it’s ugly head in excesses, these models break down. Engineers can tell you that, because half of engineering is about “what can go wrong?”
Financial professionals only worry about the expected normal case, and how much money that they’ll make in these cases. Not how much they’re gonna lose when the statistical minority event blows up in their face. Go read up on Long Term Capital Management in 1998 for a wonderful display of how financial “professionals” with PhD’s act when their assumptions go wrong.
Never, ever in my worst nightmares did I ever think I would have to know crap like this CDO/CDO-squared/margin/hedge fund crap. Never. I’m just a dumb ol’ EE who wanted to be a farmer. That’s it. I’d much rather bale hay than deal with investment crap.
However, events transpired that necessitated me learning a great deal about finance because I make it one of my mottos in life that I’m never fooled twice in the same way. A financial “professional” fooled me once. Now I handle all our investments and retirements myself.
My only unsolicited advice for anyone dealing with a financial “professional” is to keep your hand firmly wrapped around your wallet if you’re ever being pitched ideas, products and services. There is nothing they do that you can’t do, if you have a little math background (as in, you could pass 8th grade math tests), a healthy dose of skeptical inquiry and a functional idea of your tolerance for risk vs. how much reward you want for taking that risk. That’s the real secret of America’s financial “experts” — they’ve been selling you, the investing public, a sack of organic fertilizer for years, trying to convince you that you MUST obtain “professional” advice, that you’re too stupid to do this stuff on your own.
You’re not. Matter of fact, 99% of the common public would not have done what the financial wizard “professionals” did with these CDO’s — either in creating them or buying them. Most of us non-professionals, the “ignorant masses,” would have demanded “hey, what is in this CDO thingie? Why can’t I just buy the investment-grade bonds directly? Why do they need to be wrapped up with all this other crap inside this ‘CDO’ shell? I don’t need that crap, just give be the AA-rated mortgage backed bonds and shut the hell up!”
That’s what you or I would have said if we were seeking to buy those tranches of debt. Why? Because we’re simple people, who want things broken down into stuff we can understand.
Financial “professionals” running billions of other people’s money bought into these CDO’s and CDO-squared without having much of any clue just how much risk they were buying, in what ways the risk would manifest itself, or gave a thought to the consequences of buying an illiquid investment asset.
That is very, very true.
No less a legendary investor than Jesse Livermore thought the same thing — that the margin call was his stop-loss. Livermore was trading/flipping stocks back in the day when you could get 10:1 margin on stocks, so as soon as you were down 10%, the broke would make a margin call.
Most all traders follow a firm rule: never meet a margin call. Let them sell you out. Meeting a call is essentially doubling up on a loss.
Schwarzman is legendary for knowing how to spot a top.
So the cynic in me says “Why take Blackstone public right now?” and then answers “Because Schwarzman knows this is a top, and he’s not going to get as good a valuation on the fund as he’s going to get now, so he’ll go public now, and when the fund’s share prices go down, he’ll buy them back at bargain basement prices.”
Yes, I think they’re timing this to maximize their return on a cash-out.
Well, one of the reasons why no one foresaw the Great Depression was that the Depression wasn’t caused by the stock market crash of ‘29. That kicked off a liquidity crisis and precipitated a great number of very stupid actions on the part of FDR, the Congress and the Fed.
The economy can survive stupidity by any one of those three; at worst, we’ll have a recession as a result.
But all three acting in concert at the same time? No economy is strong enough to survive a hat trick of stupidity.
In other words, too much money (at least on paper), too little real value.
>>I’m not a financial pro, but I can translate some of what is in that article. What would you like to know first?<<
What should a typical middle-aged American working man (renter; middle-of-the-road, DJ30-stocks-investor) do (assuming that whatever this article says is to be believed)?
Let me guess: Divest stocks and switch to physical gold?
No, right now you should keep an eye on what the market thinks of the situation.
If you see the market start to collapse under a cascade of hedge funds failing due to margin calls, and then investment banks who loaned money to hedge funds being stiffed for the margin loan because the hedge fund assets, when sold, brought pennies on the dollar — then I’d start getting defensive.
Until then, the situation bears watching by the small investor — possibly every day.
A Secret Life of Bill Clinton bump for Mr. Pritchard-Evans
Carolyn
Wow, all investment portfolios. Sounds scary!
Deflation, putting the De in Depression. Yeah, that's what we need. LOL!
Gold.
LOL!
In her vital and fascinating new book, "The Forgotten Man: A New History of the Great Depression," Amity Shlaes tells a story about national icon President Franklin Delano Roosevelt. Shortly after FDR took office, Shlaes explains, he began arbitrarily tinkering with the price of gold. "One day he would move the price up several cents; another, a few more," writes Shlaes.
One particular morning, Shlaes relates, FDR informed his "brain trust" that he was considering raising the price of gold by 21 cents. His advisers asked why 21 cents was the appropriate figure. "It's a lucky number," stated Roosevelt, "because it's three times seven." Henry Morgenthau, a member of the "brain trust," later wrote: "If anybody knew how we really set the gold price through a combination of lucky numbers, etc., I think they would be frightened."
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