The only question is how much time. I thought this would hit
the fan years ago. Surely, I was wrong. You've seen these
numbers of long vs short hedge funds from Tommaso. Pretty lop-
sided, if you ask me. About 1/3 of all funds have been shorting
puts and calls, i.e., effectively shorting volativity, plus
shorting the yen. This is essentially the same trade, "proven"
by the math (LTCM trade, he-he). It basically works until it
blows up, but the blow-up is spectacular, and based on lack
of liquidity. The Fed ensured there is no lack of liquidity,
so the markets stopped having "tails" features. Thus, I
believe, the markets will only blow up in a very spectacular
fashioun (worse than 1929 or 1987) once they overpower the Fed.
Since the bond market is by far the larges derivative market,
only the bond market has the capacity to do it. It will happen
some day, no doubt, the only question is when. Could be a
while, but I suspect the blow-up in bonds will coinside with
the blow-up in currency carry trade. It will take the form
of an anti-Fed currency fiasco. |
