P&S and STO Death Blow's Message Board

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Strategies & Market Trends : P&S and STO Death Blow's

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To: Boca_PETE who wrote (4278)	7/27/2002 2:45:09 PM
From: h8_2_b_l8	Read Replies (2) of 30712

I'm looking at it in the context of gold. I should have stated that with the article. It's basically the equivalent of a naked short by an MM to make the market liquid, only they have no need to make the market liquid. Liquidity is needed on the opposing position. Until recently gold sold off for 20 years. Can you imagine JPM shorting gold since $1000/oz having a position likely multiples what the market could bear in any given year. In the case of a bankruptcy would they never have to cover? Where does all that money go? The government would have to make them unwind some of these positions, the market simply can not support it and risk exposure is too high. I imagine the Basle agreement would come into effect as something that would drive derivative unwinding. It's similar to the idea of savings and loans in the 80's when short term and long term interest rates changed dramatically. It's great when things are going for you, as the gold market has been for 20 years, but what happens when the variables for the model that has been so successful change? When a 20-year bear market in gold and 17-bull market in equity changes in such a short time frame how do you rebalance that much money? You can't. You literally support more positions than money can buy. You are talking about a potential massive financial crisis when a company that supports $25T in positions goes under. That would mean massive defaults, a strip of liquidity, etc, etc. There would no doubt be a massive chain reaction which brings up the whole idea of "too big to fail". The government couldn't let it happen. I agree that the Notional Amount is a high estimate since it assumes delivery or fruition of contract terms and they can easily be sold ahead of time. But essentially they are highly leveraged and many multiples of what can be considered reasonable and the problem is there and its a biggie!

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