The futures manipulation by the Fed has induced a whole new
financial industry. $1 Trillion in hedge fund money plays
the market. 1/3 of this money is associated with LTCM
strategy of selling options with delta-hedging, effectively
shorting volativity. Very profitable 99.9% of the time, 0.1%
is the Little Kahuna. -g- Seems like a free lunch, but we
all know there is no free lunch. In case of BK,
all these profits and more are completely wiped out,
only the BKs have not been allowed by the Fed for 20 years.
I expect that's exactly the place the BK will come
from - and I expect the BK to arrive during the SECOND market
rout. The reason is, conditioned by the Fed, this crowd
will short puts as volativity rises first time around,
which is exactly what's happening now.
If this does not work, and with all these guys positioned
short puts hedged at higher VIX with delta-hedging, the
VIX rises further, then BK will arrive. Note: 300B playing
this game now, and they are probably 100x leveraged.
But, the really big game is credit derivatives, which
mostly the big boyz play. Rising defaults will be the
real reason for the meltdown. And, defaults are on the
rise, dramatically so. That is sure affecting the $500B
credit derivative monster. I wonder what is the
notional value of derivatives attached to, say, one $250K
subprime mortgage. I bet it's at least 10x that. |
