Two Trends

I have identified two trends, one emergent, and one that has a long way to run. I want to lay out these trends and then think about how I may take advantage of them.

The first trend comes from a Financial Times article. It lists investment bank dependence on monoline insurance companies as hedges against CDO/CLO defaults. I found this quote interesting: "And one final point: having set up one negative basis trade, it hasn’t been uncommon for banks to take out a CDS against the CDS counterparty in that trade. As Paul J Davies points out in today’s FT, through negative basis trades, banks’ monolines exposures have often been hedged with other monolines." Brilliant! A self-sustaining object! Unfortunately, the bankers have not studied their metaphysics, because God is the only self-sustaining object. The only conclusion one can make is that the whole structure will fail spectacularly. How to profit from this? Go completely short the stock market. Buy 30-yr. Treasuries. Why? Because these credit default swaps act as $0 puts (if company defaults, stock is usually almost worthless). Trillions in puts creates a false sense of security in the market which props it up. The investment banks buy more because they believe that they have offloaded the risk onto someone else. In the past, default insurance has kept bond yields low (and prices high). As insurance becomes worthless, yields will soar (and prices plummet). Treasuries, as a safe haven will increase in value. As the credit default swaps are shown to be worthless, their value as a put on the stock market will also evaporate, making the market much more risky.

The second trend is "walking away." Mish has a great blog on this booming trend. He documents how this has started in housing and will continue in credit cards as people find a way around the bankrupcy restrictions. The loopholes are huge, and one thing Mish doesn't mention is that the current political trend is to give voters more loopholes. As Mish says regarding company layoffs and walkaways: if they can do it, why can't consumers? How to profit from this trend? Set up nonprofit to give empty houses to homeless people? I don't think that would really fly, but it would be nice. More practical would be to see if www.youwalkaway.com is hiring.