The movie on Netflix, The Big Short was a nice example of edge trading. They spotted a structural flaw and positioned trades to take advantage of it. I had to watch it a couple of times to get past the drama and see the concept. The movie overstated how "in the pocket" the rating agencies were. In the real world the cdo ratings were lifted by buying insurance from companies like AIG to reduce default risk. A poor bond rating could gain double A status just by buying enough insurance to reduce the default risk by 1 or 2 percent. CDO's have been created for car loans and credit cards as well. I imagine some hedge funds are trying to short car loan cdo's now and we'll doubtless here of huge performance in the next year or so. If anyone has trouble understanding the complexity in the movie I recommend watching The Flaw on Amazon Prime. It also helps to understand how this edge is still in existence today. I mention this because too many traders are dependent on Technical Analysis to trade. Edges are the bread and butter of trading. The more of them you can use, the better your results in trading will be.
Except none of the riskiest tranches were insured nor insurable. That's what lead to the demise in the mortgage crisis. And does not help either when a single insurer signed responsible for the largest chunk of all those deals. Insurance companies go under at times and if such systemically important insurer's default means a global financial crisis then that's not called "insurance", just irresponsible gambling and risk taking. The next crisis is not lurking in the housing market but private equity market that is running out of cash and now borrows at insane 20% interest. The only way to finance those loans is by issuing ever riskier debt. Such debt has now topped historical levels. Then lurking government shutdown. A rising conflict between two super powers. Sky high valuations for many listed corporations, especially in technology that is not justified by expected future cash flows. A hyped up ai bubble that is currently deflating at light speed right before our bare eyes. Inflation that does not central bankers don't seem to be able to tame (because they are not in control of commodity prices), hence even more rate hikes.
I was naive. Back then I thought I could have a conversation with like minded traders. I was sent some screenshots of my posts from websites in other countries. One was a thread that had been downloaded more than 10,000 times. My interest in trading is the discovery and research of interesting ideas. I realized I couldn't do anything publicly so I stopped. I've spent the last couple of weeks looking through YouTube videos relating to trading. Most of the content seemed to be technical analysis related. I thought maybe a post on edges would be useful to others sitting in front of a bunch of charts on screens.
Can you expound upon this some more? Why would private equity running out of cash create a crisis, who loans them money at 20%, who are you referring to that needs to issue riskier debt, and who would buy that debt? Maybe give us a hypothetical? I'm just trying to understand what you mean here. We may not agree on politics and religion, but I know you know what you are talking about in matters like this.
The age of free money is gone. PE is scrambling to raise cash, if you were a string puller at retirement, sovereign wealth, or endowment funds would you fund an outfit to invest in overvalued farm land or unproven startups today, right now? Valuations are at absurd levels. No easy money around anymore. The top dogs slowly come to the realization that the only way for their bidders in political positions to avert a revolution of the middle class men is to tame inflation and to make life again relatively affordable. That means higher rates for a much longer time, potentially more hikes if OPEC has its way (which is impossible to reliably predict). The only way to raise more cash is by paying absurd borrow rates which some PE outfits are now doing at 19% and 20% cost. How quickly are their investments generating such ROI? At some point that debt comes due and then what? Most of those loans at such high rates are medium term in nature at best. There was also an interesting article on bbg the other day. If you have a terminal you should be able to easily find it. Not sure it was posted on bbg news for pure news subscribers.