Monday, May 21, 2012

Came, Saw, Bailed

Okay, so I clearly waited three weeks too long.

But I liquidated all the stock in my retirement accounts today.  It was only 25%.  But now it is 0%.

I sincerely hope that I did this at the bottom, and that things get very much better, quickly.  You can all laugh at me.

But I doubt it.  Because Spain cannot survive another month.  And banks and financial institutions in England have truly massive exposure.  This is the end.  Boom.  Not like economic boom.  Like really loud heavy object hitting a floor boom.

UPDATE:  LeBron describes capital flight from the wreckage of the EuroZone.  The comments are quite funny.

UPDATE 2:  Mr. Overwater asks, "Why?"  Not the volatility thing, volumes have not been that high lately.  In fact, holy shinola, volumes have fallen through the floor:

We are at 1999 levels of volume, even allowing for the Facebook IPO and etc.  Yikes!  I hadn't even seen that.  Damn.

No, the problem I see (before I scared myself with this volume picture) is the bets that so many banks have made on Euro bailouts.  It's not just JP Morgan and MF that did it, they just got caught first.  Many banks, worst in England, but bad elsewhere also, took huge net long positions in sovereign debt from Eurozone nations, betting that the bailout woud happen.  To the extent that the bonds were selling at a discount, and you end up getting par, that's a good bet.

The problem is that these banks are taking long positions with customers' money.  There were not hedges, they were net bets, big ones. 

Banks should be bookies, not bettors.  Bookies lay off bets and use the line (whether it's points, or odds, or whatever) to adjust the market so they get equal amounts of exposure on either side.  A bookie who himself takes a net position on a game, a horse race, or Greece is called (technically) an "idiot."  Bookies take bets on both sides, and make money on the vig, and cash in on volume of trades.

Well, it turns out nearly every bank you can think of is an "idiot."  They do NOT have equal positions betting for and against a Euro-zone sovereign debt bailout.  They all bet the bailout would happen.  As Louis XV said, "Apres (JP) MOIrgan, le deluge."

11 comments:

Mr. Overwater said...

Scary! Mungowitz has a pretty good track record on the stock market. Are you seeing something in the markets themselves like the volatility that sent you to cash a few years ago or is this just based on Europe?

Gerardo said...

What did you do with your money? Money market? Inflation-linked bonds? Precious coins? Jar Jar Binks memorabilia?

It's a serious question. If stocks take a 20% hit, I wouldn't mind holding cash the rest of the year.

Mr. Overwater said...

That makes sense to me. I'm interested to hear the answer to Gerardo's question.

I had heard about the low volumes on Marketplace and I have seen elsewhere that a lot of money has left equities and equity funds in recent years. Dippy optimist that I am, I thought "That's good because when people regain confidence in equities, that money will come flooding back into the market and stock markets will go up."

Why does the low volume scare you? I'm not disagreeing, I'm just curious (and I'm not an economist).

I'm considering moving some or all of the money I have in international funds into cash or bonds.

Mungowitz said...

Mostly into inflation linked, relatively short bonds. But, yes, you are right, G: A zero return in money markets might not be bad.

As for low volume: it means that nobody knows what prices are. Same thing as for high volume. If no one knows what prices are, financial markets freeze up. Assets with known, predictable prices are illiquid. Illiquid is very, very bad.

BR said...

Great cover story in The Economist this week, The Endangered Public Company'. I've been sticking to high-yield short-term bonds for a while now, with the occasional options purchases.

Steve_0 said...

Like the story about the little girl recalling to her mom the dare to climb the flagpole at school...

jokes on them, I got nothing saved.

Anonymous said...

Mungo,

Sorry - recent evidence suggests that book makers take large positions on games. The book on most games, even NFL games with heavy action, is typically unbalanced. And point spreads do not appear to move in the direction that the balanced book model would predict.

Sorry to pop your gambling bubble.

I can provide references if anyone is interested.

Gerardo said...

Yes, I forgot to zing you for that.

If I'm better at predicting games than you are, the last thing I want to do is give fair odds. If I know a coin toss is going to come up heads and you think it's 50-50, I'm going to do my best to get you to bet tails. Levitt has a great Economic Journal piece on that that changed my life.

Anonymous said...

I like the idea in Levitt's 2004 EJ paper a lot, but the empirical evidence leaves a lot to be desired. For example, his data come from a low stakes betting "contest" and not actual betting data.

But a lot of subsequent evidence using actual betting data shows that his results hold up in just about every setting.

Joseph Clark said...

Why stop there? Buy puts on equities and calls on credit spreads.

Anonymous said...

If you are confident Europe, and the world you seem to think, will implode... why don't you buy an inverse Europe, or an inverse All World, ETF? Or, if you have such a strong conviction, a double inverse ETF? It's easy and inexpensive to do so. If you feel so strongly, why take it all to cash or bonds?