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Guest Post: Action Versus CDS And FX - Different Motivation But Common Effect
Submitted by Thermidor (the opinions contained herein are purely that of the author)
With governments fueling "La Terreur" towards all things financial, it's hardly surprising that market players are running scared after talk of market clampdowns and restrictions. However, before we panic and cut all our positions it's important to understand what's motivating governments. What are their true objectives and what lasting impact can they have on markets? Once we understand this can we place our bets more securely and objectively.
The main focus of attention has been the CDS market and frankly for good reason. Indeed, along with many of my clients I've been convinced for a while that the CDS market especially, the sovereign market was a ridiculous market (why did Qatar with 15% of the world gas and Austria with a truly insolvent banking system trade at the same level?) and was cruising for a bruising. The reasons are simply that it offers FAR too high leverage, it isn't anchored to reality and it's a direct threat to governments. That last point is the most important and made a clampdown inevitable. To understand why, one needs to appreciate that in the post Bretton Woods world its politicians that have become more wedded than any other members of society to FIAT money. Their control of paper money and its associated debt has granted them almost god like powers and most importantly the ability to indulge in political patronage. Just consider, where Gordon Brown's numbers would be if he hadn't effectively bought all the votes of the public sector and the welfare dependent.
Therefore, it is obvious that a CDS market, which ultimately threatens the very core of their power is going to be brought to its knees.
As for the FX probes I think the bark is truly toothless because for the moment FX isn't a threat. Yes, there are a core of European politicians who truly HATE hedge funds, haven't forgiven them for ERM I and have almost certainly unleashed their secret services to tap our phones, just as they did in 1992-3. However, the reality is that the powers that be in Europe aren't interested in stopping the fall of the Euro at least not yet anyway. As for the US's involvement, I see this as a combination of courtesy to the Europeans in a world of post G20 co-operation, combined with a cynical opportunity to add some more fuel to Obama's own mini terror campaign vs. prop trading. It's not a serious attempt to curtail the FX market although clearly it's added to this short covering rally in the Euro.
However, there is a serious market impact from all of these apparent "clampdowns" especially the move against CDS and that is that they kill momentum. Without aggressive swings in market prices we have to expect trades will take much longer to come to fruition. That's because our pricing signals will depend on macro data or political data, which are typically far slower to turn. That doesn't invalidate a trade because at the end of the day macro developments can't ultimately be manipulated by governments, it just means that we'll need to be patient.
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Explain how trading slower data instead of momentum is bad for capitalism.
Your post just shows how difficult it is to have any sympathy for any hedge fund. Here's hoping you go belly up in the next six month.
explain how goverment threats,obfuscation attempts and use of military espionage to monitor commercial activity are NOT bad for capitalism ?
explain how goverment threats,obfuscation attempts and use of military espionage to monitor commercial activity are NOT bad for capitalism ?
and by Macro Developments I'm guessing he means the price of gold up, strong deflationary pressures all around, and a world full of pain hurt and misery from a successive round of sovereign defaults engulfing the entire world by Dec 21, 2012.
What do I win?
politicians are such self-serving pussies. No wait, I shouldn't say that I'm insulting wimps and vaginas.
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