What Does Buying TARP Assets have to do with day-trading?
Everything.
I said it on the Cavuto show on Friday November 14th – “they will come back to buying the assets because the market needs a bid. It has to find a bid somewhere and nothing will be fixed until it does.” I have said it before in this blog but since getting the &#)@)#? tag cloud to work correctly is one of techno road blocks of my life, I can’t find the exact post. (probably user error I admit).
Anyway – these markets we trade are auctions. If there are no buyers, the price either keeps going down or the seller withdraws the item. Since withdrawing the CDO’s and CMO’s isn’t an option, the auction is always open…and waiting waiting waiting for a bidder/buyer to show up. It isn’t one iota different in process than what happens in a rapidly directional ES or YM move. Not one iota.
Oh yeah, the timeframes are different and the product’s complexity is greater but the underlying idea that a human somewhere needs to be willing to pay something for the asset – i.e. bid on it – is identical.
The reason I bring it up is because essentially thinking through what has happened with these assets and how they have been handled is a slow-motion object lesson in the same high-frequency trading we do everyday. That might sound odd… but think about it and let me know…
Tags: auction market theory, TARP
I won’t bet against you – “they” have already been pumping with utmost, never before seen, strenuousness. Point I seem not to be making is that there could never have been anything like a futures contract on this stuff, & none of the players whose bread was being so well buttered would have been advocates of such a thing either. It was never a free open auction market to begin with & cannot, will not be converted to one now -it was at best a hybridized corruption (& I think even that is way too much credit) -& nobody wanted it to be otherwise. The blowback from this is, will be Kuhn-esque (paradigm rolling, along with lots & lots of heads). Nationalized financial sector, Denise; auction market theory does not apply to managed economies/markets – the crucial ingredient is gone, taking with it the value-finding mechanism. No way to determine unreasonable extremes, except in hindsight, if we live so long.
Btw, anecdotal as it is, I work with realtors & their abandoned properties regularly. Expensive homes, gated communities, N. Scottsdale, stripped (in a hurry – as in demolished) of all appliances, including swimming pool equipment. If the vandals who were listed on the mortgage left anything, like copper plumbing, a second wave is likely to scavenge that. The bubble valuations were bad enough, these damages add tens of thousands of dollars…none of this is getting marked to market, none of this inventory is moving, & nothing that’s being done will rectify this (including gov “bids”, which is actually an oxymoron – anti-bid would be better term).
Black Swan is raping Golden Goose; the progeny will be vicious.
Mark, we can’t go back and undo – but the fact is the payment streams are actually better than the assets are being priced at. If they were truly traded on the open market, someone would be willing to bid for that payment stream – at a better price. In other words, in Market Profile terms, we are at an unreasonable extreme. It isn’t as if everyone is defaulting on their mortgage…
But the point is the lesson for auction market theory – that without a free market auction – markets don’t work. With a very limited number of traders in the CDO etc market, it was easy for them all to drop their hands and go NO BID at the same moment… in fact, right after word of BSC trying to unwind some of these assets. The dominoes just started falling and haven’t stopped. Sooner or later this current US administration will bid. Mark my word.
I think there is an iota, Denise, not of process perhaps, but of detail (as in apples – no contracts – & oranges – fcoj. If an element of the es or ym bankrupts (actually, long before that, but for simplicity’s sake…), it is delisted, is no longer a component asset in the tradeable – because there are standards, minimum quality requirements – real things, products. In some other arena, whatever remains of the ‘asset’ is liquidated.
Now, take a bunch of those bankrupt, or soon to be bankrupt ‘assets’, spun from politically correct nothingness [see CRA - Community Reinvestment Act], slap on a thin topcoat of GSE, for apparent legitimacy, respectability, ‘securitize’ them…since the minimum standards & quality requirements necessary to commodify them, let alone qualify them as real things, assets, are absent, & they are not fit to be exchange traded (by design) – they are not real products, after all, just figments of fevered imaginations – it had to unwind exactly as it did, is doing. The r/e is not the asset, it is the collateral for the asset, which is the mortgage itself – a kind of bond, & in this case, banana republic bonds. It may be possible to construct an exchange traded contract for such dreck, it may even survive birth, but beyond adding another layer of insult to an already mortal injury, what would be the point?
Does a nationalized mortgage industry, banking industry really qualify as as “a human somewhere willing to pay something for the asset”? Or as a legitimate bid in a legitimate auction?
Here’s the link Denise. “Catch a bid” http://traderpsyches.com/blog/?p=391