Market Fragility Ain’t Good News for Those Picking Up Nickels in Front of Steamrollers

Consider a good read:

There’s nothing controversial about the claim…that in the last 20 years Wall Street has moved away from an investment-led model, to a gambling-led model.

This was exemplified by the failure of LTCM which blew up unsuccessfully making huge interest rate bets for tiny profits, or ‘picking up nickels in front of a streamroller’, and by Jon Corzine’s MF Global doing practically the same thing with European debt (while at the same time stealing from clients).

As Nassim Taleb described in The Black Swan these kinds of trades — betting large amounts for small frequent profits — is extremely FRAGILE because eventually (and probably sooner in the real world than in a model) losses will happen (and of course if you are betting big, losses will be big). If you are running your business on the basis of leverage, this is especially dangerous, because facing a margin call or a downgrade you may be left in a fire sale to raise collateral.


The bottom line for Wall Street is that either the bailouts will stop and anyone practicing this crazy behavior will end up bust — ending the moral hazard of adrenaline junkie coke-and-hookers traders and 21-year-old PhD-wielding quants playing the Martingale game risk free thanks to the Fed — or the Fed will destroy the currency. I don’t know how long that will take, but the fact that the dollar is effectively no longer the global reserve currency says everything I need to know about where we are going.

The bigger point here is whatever happened to banking as banking, instead of banking as a game of roulette? You know, where investment banks make the majority of their profits and spend the majority of their efforts lending to people who need to the money to create products and make ideas reality?

Who plays the exact opposite & winning game? Trend followers do. So please knock yourself out and try to make a business out of picking up nickels laying in front of a moving steamroller. Just be aware that you will at some point get run over.

Note: The nickel/steamroller routine was LTCM’s way.

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