Best way to profit from a crash

Starcraftmazter · 19 December 2011

In the event of a GFC-style market crash, which is more profitable - buying XJO shorts or USD?

Does anyone know which gave the most ROI last time? Although this time it's arguably a bit different as the AUD is more overvalued than during the pre-GFC days.

Also, is contract expiry a big deal here? Ie. Having to deal with the expiry of whatever instrument you use versus being able to park money in USD and wait as long as you want until the AUD bottoms out?

young-gun · 19 December 2011

Starcraftmazter said:
In the event of a GFC-style market crash, which is more profitable - buying XJO shorts or USD?

Does anyone know which gave the most ROI last time? Although this time it's arguably a bit different as the AUD is more overvalued than during the pre-GFC days.

Also, is contract expiry a big deal here? Ie. Having to deal with the expiry of whatever instrument you use versus being able to park money in USD and wait as long as you want until the AUD bottoms out?

if bernanke keeps printing(which its almost inevitable once the previous QE measures wear off) what makes you think that the AU$ will crash hard against the greenback? i agree there will be some negative movement but i dont think that is where money will be made. MO if europe ends up printing(it is a possibilty albeit a slim one) and the states continue to, gold will be your best bet. however if they let there nations deflate and debt gets written down, then gold is the last place you wanna be. and then i completely agree with you holding US dollars would be a good idea.

going short on xjo would probably be your best bet, but im not very experienced in going short, so prob best not to listen to my ravings.

Tysonboss1 · 19 December 2011

young-gun said:
if bernanke keeps printing

Has he printed any money?

Craft explains it best, so I'll quote him.

I wish I had a dollar for every time I have seen “printing press” referred to in the last few years.

But I’m a bit confused. In the private sector money is created when people take on debt, how is that any different to the Government creating money by taking on debt?

I see sovereigns stepping into the breach to ease the economic impact of private deleveraging. But so far they are doing so by taking on debt obligations. I have not seen any money created without a corresponding obligation – so why all the talk about running the printing press when in reality no one (excluding Zimbabwe) has been near the big red button yet?

So long as there is an obligation to repay and a mechanism to control interest rates, runaway inflation can be controlled and the ultimate weapon against deflation is ‘true’ printing (without obligation)

The issue with monetary policy is not that it is setting us up for disastrous extremes which cannot be controlled but that it has a limit in being able to generate real growth. In a finite world perhaps that’s not such a bad thing – once everything is repriced to recognise that reality.

An adjustment to the growth paradigm is probably going to take a while with quite a few rotations between “Growth is back” and the “sky is falling” still to come.

That’s the big picture delusion I work under - I prefer it to the doomsday versions

McLovin · 19 December 2011

Tysonboss1 said:
Has he printed any money?

Craft explains it best, so I'll quote him.

How is the Fed buying bills and bonds, if not through the printing of currency?

sptrawler · 19 December 2011

I have never traded currencies, however I do believe starcraftmazter is correct and the $aus will trade back to a more normal range.
The fact that all our miners are ramping up production, will in itself result in oversupply and a resultant drop in prices.
The carbon tax, whether right or wrong will ultimately reduce our manufacturing output.
Consumer confidence is crippling retail, which will lead to higher unemployment.
We generaly have enjoyed a dream run, with China ramping up manufacturing and infrastructure spending, at a time when everything else was turning to crap.
However I believe the problems with currency aren't insurmountable and even though China would love to force a change from $U.S as the reserve currency, it won't happen in my life time.
My guess is equilibrium will return and we will go back to $0.80cU.S.
We have to have these catastrophies in the capitalist system otherwise a loaf of bread ends up costing a wheelbarrow load of money. Only my opinion.

Tysonboss1 · 19 December 2011

McLovin said:
How is the Fed buying bills and bonds, if not through the printing of currency?

Juggling reserves.

craft · 20 December 2011

McLovin said:
How is the Fed buying bills and bonds, if not through the printing of currency?

Currency is just a small part of the money supply.

Currency is a liability for the Fed. If they purchase 'already existing debts' then they add to liquidity by enlarging their balance sheet but not to the money supply. If they add 'new' assets to their balance sheet (ie by financing new government debt) they are adding to both liquidity and the money supply. If they printed currency (debt for them) but did not enlarge the balance sheet by recording it as a debt and the corresponding asset owed to it by whoever the money was given too (ie the government) then you would have true inflationary currency printing.

A lot of what people call running the printing press is not even adding to the money supply it is just providing liquidity (and transferring default risk to the public) The remainder of the feds "printing” is nothing more then equivalent to money creation in the private sector and it is not keeping up with private deleveraging.

The reality is almost diametrically opposed to the “printing press” myth. It was the run up to the GFC when people should have been talking about the printing press -when it was getting a real work out by the private sector and sovereigns with trades surpluses and pegged currencies.

The liquidity will only become a problem if an appetite for private borrowings returns and it is not efficiently drained at that time, until then it simply exists as excess reserves.

McLovin · 20 December 2011

craft said:
Currency is just a small part of the money supply.

Currency is a liability for the Fed. If they purchase 'already existing debts' then they add to liquidity by enlarging their balance sheet but not to the money supply. If they add 'new' assets to their balance sheet (ie by financing new government debt) they are adding to both liquidity and the money supply. If they printed currency (debt for them) but did not enlarge the balance sheet by recording it as a debt and the corresponding asset owed to it by whoever the money was given too (ie the government) then you would have true inflationary currency printing.

The assets being bought by the Fed are not part of the money supply. So, although they are moving much of the liability to their own balance sheet (monetising debt) they are, in doing so, adding to the supply of money (which is the whole point; exchanging less liquid assets for the most liquid asset). The Fed could purchase any asset (real estate, stocks, bonds etc) and exchange that for newly printed money. That would immediately add to M0 and eventually flow through to M1, M2 etc.

craft said:
A lot of what people call running the printing press is not even adding to the money supply it is just providing liquidity (and transferring default risk to the public) The remainder of the feds "printing” is nothing more then equivalent to money creation in the private sector and it is not keeping up with private deleveraging.

Sure, as long as there is an understanding that the "printed" money will eventually be destroyed. There is nothing particularly special about a central bank increasing liquidity, the whole banking system is backstopped by the idea that the CB can print a theoretically limitless amount of money to ensure banks remain liquid. As you state below if the liquidity isn't drained out of the system when conditions improve then it can cause inflation. I guess if the market no longer believed the Fed would eventually destroy the money, then banks would become reluctant to hold large reserves of currency.

craft · 20 December 2011

McLovin said:
The assets being bought by the Fed are not part of the money supply.

Yes they are – the money supply was created when the original debt was taken on.

McLovin said:
So, although they are moving much of the liability to their own balance sheet (monetising debt) they are, in doing so, adding to the supply of money (which is the whole point; exchanging less liquid assets for the most liquid asset). The Fed could purchase any asset (real estate, stocks, bonds etc) and exchange that for newly printed money. That would immediately add to M0

Correct - When the fed adds liquidity it is adding to the money base.

McLovin said:
and eventually flow through to M1, M2 etc.

Not necessarily. Flow through to the money supply (M1 and above) only occurs if somebody takes on new debt obligation. The problem is liquidity is now pushing on a string. The money base is not stimulating money supply (even at very low interest rates), because in aggregate people are deleveraging. The increase in money base is all just ending up in excess reserves.

McLovin said:
Sure, as long as there is an understanding that the "printed" money will eventually be destroyed. There is nothing particularly special about a central bank increasing liquidity, the whole banking system is backstopped by the idea that the CB can print a theoretically limitless amount of money to ensure banks remain liquid. As you state below if the liquidity isn't drained out of the system when conditions improve then it can cause inflation. I guess if the market no longer believed the Fed would eventually destroy the money, then banks would become reluctant to hold large reserves of currency.

The market does seem to believe the liquidity will be drained when appropriate that is why US can sustain interest rates are at very low levels and why the US$ index has basically been moving sideways since the GFC at least halting (if not starting the reversal of) its prior devaluation. What an understanding of the process and what the market reflects is at odds with the “printing press myth”

cutz · 20 December 2011

Starcraftmazter said:
In the event of a GFC-style market crash, which is more profitable - buying XJO shorts or USD?

Just curious, how do you intend to buy XJO shorts ?

McLovin · 20 December 2011

craft said:
Yes they are – the money supply was created when the original debt was taken on.

My mistake, you're correct. I meant money base. I blame jet-lag.

craft said:
Not necessarily. Flow through to the money supply (M1 and above) only occurs if somebody takes on new debt obligation. The problem is liquidity is now pushing on a string. The money base is not stimulating money supply (even at very low interest rates), because in aggregate people are deleveraging. The increase in money base is all just ending up in excess reserves.

I agree. In my original response I had something along the lines of "and hopefully flows through". I've seen a lot of blame pointed at banks in the US for not wanting to lend but I think much of the issue is businesses and consumers not wanting to borrow.

craft said:
The market does seem to believe the liquidity will be drained when appropriate that is why US can sustain interest rates are at very low levels and why the US$ index has basically been moving sideways since the GFC at least halting (if not starting the reversal of) its prior devaluation. What an understanding of the process and what the market reflects is at odds with the “printing press myth”

I think we are pretty much in agreement. Although, the Fed is still "printing" money, it just plans on destroying it in the future. The actual process is not unique or out of the ordinary, only the size and scale.

Most people have formed the opinion that the Fed is somehow funding the US Government through printing money, which is true banana republic status.

young-gun · 20 December 2011

Tysonboss1 said:
Has he printed any money?

Craft explains it best, so I'll quote him.

i would hope by now everyone would have been aware bernanke isnt standing next to an actual printing press? printing, creating, pulling out of his ****, whichever takes your fancy. at the end of the day he does not have hundreds of billions if not trillions of dollars in reserve. how much this devalues the greenback is yet to be seen, and how happy do you think people are going to be when interest rates go up along with everything else as the gov/fed attempts to tame what they have created?

im sorry craft but if anything has become clear its that no one really has control over anything that is going on...things are heading south. the fact that they think they can control it is exactly what has gotten the world into this mess. governments and feds believe with all their heart they know what they are doing, and that they can help. they cannot.

which brings me back to the point of if there is another qe3 and or europe 'prints'(not actual printing of money) then gold will go up.

craft · 20 December 2011

young-gun said:
i would hope by now everyone would have been aware bernanke isnt standing next to an actual printing press? printing, creating, pulling out of his ****, whichever takes your fancy. at the end of the day he does not have hundreds of billions if not trillions of dollars in reserve. how much this devalues the greenback is yet to be seen, and how happy do you think people are going to be when interest rates go up along with everything else as the gov/fed attempts to tame what they have created?

im sorry craft but if anything has become clear its that no one really has control over anything that is going on...things are heading south. the fact that they think they can control it is exactly what has gotten the world into this mess. governments and feds believe with all their heart they know what they are doing, and that they can help. they cannot.

which brings me back to the point of if there is another qe3 and or europe 'prints'(not actual printing of money) then gold will go up.

........ Merry Christmas.

Tysonboss1 · 20 December 2011

craft said:
........ Merry Christmas.

And god bless every one.

Starcraftmazter · 21 December 2011

craft said:
If they purchase 'already existing debts' then they add to liquidity by enlarging their balance sheet but not to the money supply.

Pardon me, but where does the money they use to buy said assets come from? It doesn't come from gold, that we know. If they create that money - then yes it does increase monetary supply.

cutz said:
Just curious, how do you intend to buy XJO shorts ?

I'm doing OK with ETOs at the moment. Might move to other instruments in the near future, but I'm a bit busy with stuff right now...

young-gun · 21 December 2011

craft said:
........ Merry Christmas.

do you disagree that buy freeing up bank balance sheets or providing them with 'liquidity' which then allows them to create money as debt to more consumers that this is not in essence bringing more money into the system? or am i wrong in this assumption?

if the fed did in 07-08 what they have done of recent, inflation would have been out of control...

proof that they cant control whats going on is when america were engineering their soft landing mid 2000's, where they planned to rise interest rates to slow things up and then drop them to stop it from crashing. worked well very well.

craft · 21 December 2011

craft said:
........ Merry Christmas.

What I meant was Merry Christams. Better things to do this time of year then debate finance.

young-gun said:
do you disagree that buy freeing up bank balance sheets or providing them with 'liquidity' which then allows them to create money as debt to more consumers that this is not in essence bringing more money into the system? or am i wrong in this assumption?

There is a huge difference between adding to the money base and adding to the money supply. You can add to the money base all you like and it will make no difference to the money supply in the econmomy if it just sits in reserves and doesn't circulate.

young-gun said:
if the fed did in 07-08 what they have done of recent, inflation would have been out of control....

eggzactly you prove the differnce between money base and money supply.

young-gun said:
proof that they cant control whats going on is when america were engineering their soft landing mid 2000's, where they planned to rise interest rates to slow things up and then drop them to stop it from crashing. worked well very well.

Do you really want to live in a controlled economy?

Merry Christmas Young-un

young-gun · 21 December 2011

craft said:
What I meant was Merry Christams. Better things to do this time of year then debate finance.

There is a huge difference between adding to the money base and adding to the money supply. You can add to the money base all you like and it will make no difference to the money supply in the econmomy if it just sits in reserves and doesn't circulate.

eggzactly you prove the differnce between money base and money supply.

Do you really want to live in a controlled economy?

Merry Christmas Young-un

if you have better things to do then why come back?

i fail to see what the point of stimulus and qe measures are if it isnt to promote growth, when the only thing that causes growth is people spending money incl corporations. if it doesnt eventually end up in their hands through one channel or another, then it surely is effectively doing nothing.

never said i wanted to live in one - in fact they should stop effing around with it all as its the reason we have arrived where we are at of current.

sorry to interrupt all your other far more important chrissy commitments

Best way to profit from a crash

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