26 Dec 2009

Potpourri: Be Afraid, Be Very Afraid Edition

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The translucent von Pepe sent me some scary articles today. I am not in the warp and woof of the markets enough to say whether the below excerpts are 100% right, but they definitely express the foreboding that von Pepe and I share.

* This FT article talks about hedge funds betting on rising bond yields by buying deeply out of the money options. I loved this part (though see the following paragraphs on what happened to such investors in Japan):

Hedge fund managers, however, have been hesitant to engage in short sales of Treasury bonds to profit from the rising yields – and falling prices – because of the Federal Reserve’s heavy involvement in the market. This has led some to buy options – dubbed “high strike receivers” – that would enable them to profit from sharply higher Treasury yields, hedge fund managers say. These trades, which are relatively cheap to execute because they are so out of the money, are based on the thesis that yields could hit 7 or 8 per cent.

“If they are right, and the world ends, they will make a fortune,” said one fund manager who is sceptical of the idea. “If they are wrong, they haven’t lost much.”

* In this apocalyptic post, “Tyler Durden” argues that in 2010, demand for US fixed income assets has to rise elevenfold over the 2009 level or else we’re all eating Ramen noodles.

* Another ZeroHedge post, breaking down the changing holdings of Primary Dealers. I’m not sure what the moral is, but I don’t like it. (It’s sorta like if you told me Tim Geithner was using a fake name to massively short Quaker Oats. What does it mean?! I don’t know, but I don’t like it.)

* I don’t even know how to describe this one. Just skim it and then pick your jaw back up. Notice that when politicians run a region (Michigan) into the ground economically, they just double down. Stick a fork in the US economy. If and when the crisis erupts as I (and Tyler Durden) have been predicting, Obama & Friends aren’t going to cut taxes and privatize federal assets. No, they’re going to pass anti-gouging laws, void commodity ETF contracts, and start another war.

* To cheer you up, EPJ passes along season’s greetings.

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