Into the Swarm #2: The Greatest Trick Wall Street Ever Pulled, by Romain

You can make money when the things everyone fears happen, but you can make a lot more when the sh*t really hits the fan the things nobody fears because they haven’t thought about it happen. From Romain at theswarmblog.com:

Down the Market Hole

The French version of Michael Lewis’ book The Big Short is intitled Le casse du siècle, which literally means the “heist of the century.” This idea is interesting, as going short can be regarded as finding the weak points of the financial system and hacking into it.

However, that game is not easy. Firstly, because “there is a difference between knowing the path and walking the path,” as Morpheus said to Neo. Indeed, even if many people seem to understand problems and to see the answers, most of them will never dare to act. It is true for investors aware of heavy speculation on capital markets, but also for so-called political leaders noting that the trajectory of public debt is unsustainable. Many know what is going wrong, but how many of them will try to do something about it?

The second difficulty is that the greatest trick Wall Street ever pulled was convincing the world that an asset would never go down. Which means that even if one is willing to take a stand against the financial system, there is still a high probability that he or she will make the wrong bet because of that misperception of risk.

There are a lot of things that can be learnt from past crises, and especially from the events of 2007-2008. Today, most people in finance (apart from TikTok investors?) know that investors like Dr Michael Burry or Steve Eisman made huge profits thanks to credit default swaps on mortgage-backed securities or on collateralized debt obligations. But does it mean that such a trade could easily be replicated?

The answer is “no” as going short on housing securitized debt before 2007 required to agree to keep paying a premium while waiting for an event that never happened before. In fact, everyone laughed at CDS buyers, as betting against the US residential market was seen as the stupidest thing ever. In other words, it is not something that the average Joe would do, and people should bear in mind that Burry even had to prevent Scion Capital’s investors from taking their money back as his scenario was regarded as pure madness.

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One response to “Into the Swarm #2: The Greatest Trick Wall Street Ever Pulled, by Romain

  1. Pingback: Into the Swarm #2: The Greatest Trick Wall Street Ever Pulled, by Romain | STRAIGHT LINE LOGIC – Additional survival tricks

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