Great Ponzi.com

2009-03-18

The great questions bears must ask themselves


Where we are now

We know this is a bear market. We know that the market will either continue to go down, or underperform capital preservation (cash / gold / CDs).

That part isn't hard to figure out. The question is, what do you do about it?

Should you try to trade this?

Western financial markets are broken. The UK and US financial systems, the two dominant in the west, are totally fubar. The Italian minister even let slip a remark that governments around the world may just shut down the markets totally while they sort things out. These are not good conditions to trade in... the infrastructure is broken and has become unreliable.

So what do you try to do ... do you try to trade within the confines of this environment? How do you handle the fact that the regulators are changing the rules on the fly, making up crazy new shit as they go along. Making non-public arrangements with the few remaining market makers and prime brokers (UBS, JPM, C, Barclays).

Do you decide to take your chances, try to hold short positions in a marketplace where securities lending has broken down and therefore it's unlikely to find shares to borrow? Or how about holding options in a marketplace where spreads are widening, as the options market makers are exiting due to volatility risk. And let's not forget the real danger of high failures through the clearinghouses. Most of the options you would be tempted to use in lieu of short selling are rather illiquid and are likely not going to be tradeable in panic market conditions.

The question is: which should you do?

  1. Continue speculating in the marketplace, acknowledging that the basic mechanisms of western financial markets have broken down and governments are more desperate than ever to maintain a perceived state of calm

  2. Or take your money out of the market, and be thankful you have all that cash/gold and that you cashed out before all the baby boomers liquidated their 401k's (RRSP in Canada, Superannuations in Australia)

I'm leaning towards the latter. Here is my great worry: even if the brokerages allow me to take the positions I want, and even if the market cooperates enough that I can continue to make profitable trades, I have serious doubts as to whether at "the end" I will be able to take that profit money and walk away. I have major fears about strange new rules that might restrict liquidation. I also fear that the brokerage will collapse before I can take my profits out.

- Perpetual Bull