Danger Will Robinson

I emailed one of the brightest guys I know today. He is easily one of the most connected guys on the planet. Economist, trader, & major player in politics. I asked him his view, not for a trading tip or strategy, but because he does have a vast understanding of how things work:

I know you run in an interesting world…how much worse we getting?

He responded:

No comment in writing.

So I called. The short of it from his fundamental big picture economy perspective?

1. What happens when all of those Circuit Cities are sitting empty? Multiply the effect out across jobs, commercial real estate and their competition, i.e. Can Best Buys of world survive? Now apply this thinking to all retail. How long can you go without a new suit? Think about it. He sees retrenchment on wide scale.

2. He sees us either at 1978 or 1931 and his guess is that we are at 1931.

3. When do stocks stop falling? When one of the big guys, preferably the bull’s poster boy Mr. Buffett, collapses. Buffett going down would be a signal for panic, which would lead to an eventual selling climax. He wasn’t predicting this, it was just his temperature gauge on what needs to happen for pain to subside. He did note Buffett’s derivative exposure.

4. From a trading perspective, this is not insight you can really use unless you see stock markets tumbling another 50% from here, you are a buy and holder, and just want out. He could see 50% more down from here.

Sobering stuff. As I said, these comments are not a trading strategy, or prediction, but just feedback from an associate of mine who has been around the block.

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18 thoughts on “Danger Will Robinson

  1. I wonder

    FYI – Circuit City, in Canada, was already granted bankruptcy protection. And we have not even seen the worst of it yet. The wave has not hit us much at this point.

    We are starting to see issues with the financial sector. Federal Government deficits were anticipated (after many years of surplus).

    Glad i am short financials and crude at this point.

  2. For a guy who says he doesn’t invest in banks because of derivatives, he really has a giant one. Last year he bought $30b in equities, and sold $4 billion in put premium when the VIX was about 12. He also sold CDS on junk bonds. I really don’t know how he is solvent at this point. He has to put up collateral on his put positions? Someone needs to look into this trade and find his maximum exposure because I’m sure its mind numbing.

  3. An article found tonight:

    Shares of Warren Buffets insurance holding company are on the ropes this month, plunging 30% in part because the fabled investor dabbled in an area of the market he has long publicly derided: derivatives. And due to a tangled web of financial relationships, they may be taking Goldman Sachs shares down with them.

    Investors are concerned about a $37-billion bet that Buffett made last year that U.S. and world equity values would be higher in 15 to 20 years than they were then, when the Dow Jones Industrials were trading around 13,000. Through his firm, Berkshire Hathaway, Buffett sold option contracts, known as naked puts to an undisclosed group of investors for around $4.85 billion, reportedly using Goldman as broker.

    The buyers saw the puts as a type of insurance that would pay off royally if stocks fell over the next decade. They were seen by Buffett as an easy way to pocket a quick $4 billion-plus, which was booked much like an insurance premium, even though he is famous for scoffing at derivatives as weapons of mass financial destruction.

    But easy money is the worst kind. The problem is that stocks worldwide have gone downhill in a hurry, and with a lot of the sort of volatility that makes put contracts swell in value. And due to accounting rules, this has made Buffett already need to mark down a $6.7 billion loss on the trade even though the trade has another 14 years to work out.

    Because of its solid-gold credit rating, Berkshire Hathaway was not required to put up collateral to make this trade. But now rumors are flying on Wall Street that the owners of the contracts have demanded that broker Goldman Sachs put up collateral for the rest of the amount due. Since the value of the trade could be infinite, the collateral demands are said to be large, and fears that Goldman will struggle to make good on its obligation has panicked shareholders.

    Indeed one theory making the rounds this week is that Buffett put $5 billion into Goldman at around $125 per share in September not as an investment but to help provide funds for the collateral.

    Of course, there are other reasons for investors to sell Berkshire shares, which are down 42% overall this year, back to 2003 levels. Many of its biggest stock holdings have plunged in value this year, including American Express, General Electric, SunTrust and Goldman itself. And like most insurance companies, it holds a lot of bonds that have plunged in value during the credit debacle.

    To see how Buffett described the put contracts in his 2008 letter to investors, click here. Theres little doubt that he and Berkshire will survive this mess. But for now this a blemish on his otherwise sterling record of achievement.

  4. Brightest minds?

    When someone creates a brilliant idea, he does not own it and his name means nothing but a starting reference to what he did, its the details of what greatness he or she had achieve that matters, and in these details there are no names, it can be all in your mind and you will become what people call brilliant, feeling that some one is brilliant is a feeling that gives us joy, and this joy must be used to look for how this feeling come, it is all in the details and this feeling will go away in to ways:

    1 – You learn what caused the brilliant feeling, and you become an expert by knowing the details, now the feeling of brilliance becomes a feeling of wisdom, knowing more probabilities of a systems outcomes is what causes the feeling of wisdom and that results in better forecasting

    2 – You feel the joy of someone else’s brilliance and you feel it again and again when ever you see it, now the feeling of brilliance becomes a feeling of comfort, knowing that you need not know how it was done and the details, your feeling of comfort is a result of not risking the consequences of thinking for your self, its a fake feeling of comfort

    We are all hooked to the assuring feeling these famous achieving persons names give us, come on guys these people are not important and will soon vanish for ever like we all will, its what they did that matters and will live on, we may study the details of what they have done and if beneficial we should break it down and reconstruct it under our names and teach our children to pass it on to their names and so on.

    Religious maniacs have been following very old stories of people’s names and their glories, always relating these glories to the names of those people that don’t exist any more.

    Instead, we must forget who created what or who knows best and focus on what he knows best and how he knows it and only then we can benefit from this knowledge.

    People should take the responsibility of their action and not hide behind the comfortable feeling of other people’s successes.

    If you want to beat the market, learn how others have done it, don’t repeat it but break it down to details and relate these details to others in your own mind with out any name, in fact try renaming them temporarily and when you have results you want to share bring back the common names for other people to communicate with you, merge this information under your own name and only then you can see beyond other peoples names and achievements that are in the past, when you have done this it will become yours and you will have control because you have built it your self.

    Even and ‘meter’ measuring unit does not exist, its a third party measure for people to synchronize against.

    So dont celebrate people, celebrate their findings.

  5. Diabetes is a name of a pattern shared by all of us, we benefit because we share the details of diabetes research.

    Jim Simons is a name of a pattern of a great trader that will happen only one time and it is one person, what he does is a pattern shared by all of us, his achievements are not called Jim Simons, in order to share it we have to give it a neutral name that we share and build on.

    We live beyond our life span in what good we leave behind, and those things we leave behind are other names for us. If i leave a charity school behind and people learn from it, then my name becomes those student names and what they achieve and leave behind becomes their names and also mine and so on, we all add our names together under names like ‘the law of large numbers’ and ‘cancer treatment’ and ‘better medical care by law’ these are common names we share and they represent great people that have come and gone through the generations, we must respect common naming because its the only way we can respect those whom created them for us to benefit from them.

  6. So a couple of months ago Buffett bought $5billion of Goldman Sachs stock. That has now dropped more than 50%. A $2.5 billion loss in just 2 months on one stock alone! Now what was he saying about only buying stocks with a “high margin of safety”??

  7. Anyone seen Berkshire CDS? it’s trading above Morgan Stanley’s! All the banks are cr#ping themselves, Goldman weren’t the only to do uncolateralised trades with them – they all did and now they’re buying Berkshire CDS to hedge their exposures.

  8. Retracement levels after manias stike me as being 50%, 75% and 95%. That puts the Dow at 3500, crude at 38.00 and gold at 250$. Maybe, maybe not but these levels are certainly outside of most peoples’ imagining…..and that’s the thing that makes them possible. Of course it might not happen. Tremdfollowers should make money in any case.

  9. I picked up a book the other day(Charles R. Geisst, “100 Years of Wall Street,” Published 2000).

    Some excerpts: “During the 1920’s, Wall Street folklore started to develop more strongly than at any other time in the past. The decade of excess was born. Magazine articles appeared, extolling the virtues of getting rich quick. It became the American thing to do. Books appeared claiming to show the finer details of speculation to the average investor. Tales of great wealth being amassed in little time lured many into thinking that the streets were paved with gold. The bull market began to draw crowds of tourists from as far away as California, and they lined the street to see their broker heroes come to work in the morning and applaud them.”

    Later excerpts: “Wall Street began to look distictly shaky in March 1929, and the Federal Reserve became disturbed about stock price levels. Charles Mitchell, the head of National City Bank, stepped in to help by adding some of his bank’s funds to the market and a catastrophe was averted. But not for long. Finally,the bubble burst on October 24, 1929. Unfortunately, the worst was still to come. “The Jazz Age stopped so abruptly that it seemed as if someone had suddenly turned off the phonograph. The decade of the 1930’s would be remembered as one of slow economic growth, high unemployment, and a general pessimism about the future. Some of Wall Street’s most significatnt moments occurred during the 1930’s as the country tried to come to grips with the financial community it blamed for many of the problems. The 1930’s began on a sour note as bank crashes became common. Many had lent money to margin traders and failed when the loans were not repaid. Others failed because of bad or fraudalent management. The property boom of the 1920’s ended abruptly as well, leaving banks with mountains of unpaid debt. Faith in the financial system crumbled quickly. The Great Depression was already at hand, although on the surface it seemed that just another routine panic had occurred. During the early years of the Depression, the markets recorded their worst performances in decades. The NYSE continued in a free fall. From a high of 350 in 1929, the Dow dropped like a stone to only 41 in 1932. It would close the decade at only 150.”

    Although it is folly to attempt to predict anything, I personally see a lot of parallels between then and now. One can argue that we could never have a Depression like the Great One because of (name your favorites)and that may be true but Japan has been in a funk for a number of years with no change in sight. Can it happen here? We don’t know. One thing we do know is that the answer for traders is to react to whatever the market serves.

  10. Evidence of a trend change: When people who normally go with the flow, start thinking too much… and find themselves starting to believe they (or ANYONE they know) might figure it out…

    The prevailing trend is already down, so we don’t need to explain why. Go do something else you enjoy until it changes…

  11. i think this environment absolutely blows and there is no visibility. deflation, deflationary depression or inflation and worse, who knows ? regardless this just isn’t fun. bring back the 70s 80s and roaring 90s!

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