CaptainJJack

David Einhorn Increasingly Concerned About Dollar Crisis, Hoarding Gold

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?

David Einhorn Increasingly Concerned About Dollar Crisis, Hoarding Gold

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?

Today in Commodities: Thursday, July 2

While I have a substantial (for me) holding in the oil sector, I cannot see another bubble until the economy gets back on its feet.

From what I can tell the recent rise in oil price is due to the Chinese deciding that they will make more money holding oil than US Treasuries so they've been using dollars to buy oil. This may be a good idea in the short run, but once they go back to levels based on what they are actually using, I expect we will see crude prices fall.

I also expect that we will see more substitution, using Natural Gas for oil, where possible.

Finally, at $60/barrel, I think coal gasification Fisher-Tropish) becomes viable, and even allowing for carbon capture, we could see this coming on line soon.

11 Months After the Oil Bubble Burst

This is clearly a China dollar play. We are still running a huge trade deficit with China and it doesn't want to invest anymore in dollar denominated bonds.

However, if they in any way signal they don't want anymore US bonds, their trillion dollar current holding of US bonds takes a hit.

SO, they buy commodities, especially oil, with the new dollars they get from the US.

This also explains why Natural Gas has lagged since it is produced and sold pretty much in the US. There is no China dollar play involved.

Gold: Now Demonstrating Trust in Obama

What boggles my mind is the logic used to support gold prices. Either we are facing massive inflation, and then gold goes up, or we are facing deflation, and gold goes --- up?

What is missing in all of this is a key variable: velocity of money. Clearly, the FED stands to monetize the debt, but IF you believe that the velocity of money will stay as low as it is now, it may not need to.

You may not have noticed, but consumption is falling off a cliff. People are paying down their debts and building up their bank accounts. In other words, people are saving.

In normal times, this saving would be invested in building more productive capacity, and if the government borrowed an extra 2-3 trillion, you would see interest rates skyrocket --- not next year, but TODAY.

Clearly, we've seen this much extra borrowing already. Bush spent 2 trillion dollars on tax cuts and another trillion on Iraq, and inflation and interest rates went ---down.

We have too much productive capacity, and we have too much fear, so business are not investing, and savers are getting meager returns -- or negative returns. If the government spends what hasn't been invested, you may see some increase in interest rates and inflation, but nothing like the gold bugs perceive.

The real issue is entitlement spending, and the biggest part of that is Medicare. If you REALLY want to deal with the deficit, fix Medicare. The rest of this is peanuts in comparison, and if we do not fix Medicare, gold may well be a good investment.