David Einhorn Increasingly Concerned About Dollar Crisis, Hoarding Gold

The head of renowned hedge fund Green Light Capital has some interesting thoughts on the markets and strategy going forward. He is increasingly concerned about a dollar crisis and has been hoarding gold and gold related assets.

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Comments

[West Coast ...:]

Here is a great commentary on his move: www.marketwatch.com/st...

Oct 20 04:16 PM

[Tollsforthee:]

That Einhorn speech is well worth the time to read.

Oct 21 01:33 AM

[Doc 224899:]

If the rising price of gold were based on lost faith in Obamanomics, as Einhorn postulates, it would have to be higher than it is now, even with the bleeting herd of human sheep being led around by their nose-rings.

Oct 21 05:39 AM

[Tom Armistead:]

Einhorn compares CDS to asbestos. Noting that he predicted/precipitated the fall of Lehman which has become a watershed moment in the financial history of our times, his remarks on the topic have considerable credibility.

Einhorn considers CDS anti-social. They create large, correlated and asymmetric risks. Like asbestos, CDS cannot be made safe. On the topic of CDS, Einhorn rhetorically asks: "How many real businesses have to fail before authorities simply ban them ?"

There is quite a bit of other material worth reading in Einhorn's speech.

Oct 21 05:59 AM

[CaptainJJack:]

For the life of me, I do not see where a regulated market, similar to the markets for options and futures, would not solve 95%+ of the problem.

I understand that there are some situations where the standard contract would not work well, but that often happens in futures markets, and most of the time, the basis risk is far less than the risk you are trying to hedge.

With a regulated market, the contracts "settle" each day, in cash, and leverage, while high, is controlled by contract.

I can see why many do not want to have even the margin money tied up, and that, I think, is the primary appeal of the current CDS market.

But, that is what got us into trouble in the first place, and anyone doing a large transaction today almost always has to have some escrow to back up the guarantees, anyway.

Am I missing something?

Oct 21 09:07 AM

[Tom Armistead:]

You are missing the moral hazard in selling naked CDS. In life insurance, and in property insurance, the insured has to have an insurable interest in the subject of the insurance. You can't insure a complete stranger, you can't insure your neighbors house. Reason, murder and arson for profit.

But for CDS no such rules apply, leading to the financial equivalent of murder or arson for profit.

Einhorn was there, he pulled the trigger and torch Lehman, take his word for it.


On Oct 21 09:07 AM CaptainJJack wrote:

> For the life of me, I do not see where a regulated market, similar
> to the markets for options and futures, would not solve 95%+ of the
> problem.
>
> I understand that there are some situations where the standard contract
> would not work well, but that often happens in futures markets, and
> most of the time, the basis risk is far less than the risk you are
> trying to hedge.
>
> With a regulated market, the contracts "settle" each day, in cash,
> and leverage, while high, is controlled by contract.
>
> I can see why many do not want to have even the margin money tied
> up, and that, I think, is the primary appeal of the current CDS market.
>
>
> But, that is what got us into trouble in the first place, and anyone
> doing a large transaction today almost always has to have some escrow
> to back up the guarantees, anyway.
>
> Am I missing something?

Oct 21 09:30 AM

[John Galt:]

I'd vote for him.

Oct 21 10:01 AM

[tripleblack:]

Big thumbs up, Mr. Armistead. You strike to the heart of the issue. Looking at all these things equally as "products" dehumanizes the process.

The "moral equivilance" of financial products...


On Oct 21 09:30 AM Tom Armistead wrote:

> You are missing the moral hazard in selling naked CDS. In life insurance,
> and in property insurance, the insured has to have an insurable interest
> in the subject of the insurance. You can't insure a complete stranger,
> you can't insure your neighbors house. Reason, murder and arson for
> profit.
>
> But for CDS no such rules apply, leading to the financial equivalent
> of murder or arson for profit.
>
> Einhorn was there, he pulled the trigger and torch Lehman, take his
> word for it.

Oct 21 10:09 AM

[T.Stamps:]

Very good article. With this administration systematically
tearing the economy/America apart this looks to be a very
good bet.

Oct 21 02:00 PM

[CaptainJJack:]

I understand the concern about insurable interest, but the same issues arise when you talk about any speculative risk.

There is a fundamental difference between an insurable risk and a speculative risk. It is pooling of risk versus transfer of risk.

The CDS market is a risk transfer market, not an insurance market because the underlying risk is an investment risk, and all the markets dealing with investment risk are transfer markets, including the stock exchanges, the options exchanges, and the futures market.

While I understand there have been abuses, I do not think the solution lies in identifying an insurable interest anymore than it would be to require that only the holders of a stock should trade the option on a stock, or that only grain farmers trade grain futures.

YES, there will be bubbles, but that is the nature of a speculative market.

But, I do not think the existence of the CDS market was the main problem here.

The way I assessed the Lehman downfall is that hedge fund managers took huge positions in the CDS market betting on the failure of Lehman AND THEN started "asking questions" about Lehman's solvency AND THEN started a concentrated program of shorting the stock.

THAT was the abuse, in my opinion.

As Warren Buffet has said many times, financial stocks trade on trust, and there are laws about starting false rumors, causing a run on the bank.

By putting the CDS market in an exchange, you get at a lot of these abuses because you force transparency.

At least a regulator can find out if the guy "asking questions" (i.e. promoting the rumor) is the same guy who stands to make a lot of money if it is true.


On Oct 21 09:07 AM CaptainJJack wrote:

> For the life of me, I do not see where a regulated market, similar
> to the markets for options and futures, would not solve 95%+ of the
> problem.
>
> I understand that there are some situations where the standard contract
> would not work well, but that often happens in futures markets, and
> most of the time, the basis risk is far less than the risk you are
> trying to hedge.
>
> With a regulated market, the contracts "settle" each day, in cash,
> and leverage, while high, is controlled by contract.
>
> I can see why many do not want to have even the margin money tied
> up, and that, I think, is the primary appeal of the current CDS market.
>
>
> But, that is what got us into trouble in the first place, and anyone
> doing a large transaction today almost always has to have some escrow
> to back up the guarantees, anyway.
>
> Am I missing something?

Oct 22 08:50 AM