We’ve had a pretty eventual year when it comes to financial markets, with the $GME GameStop drama gripping headlines in both financial press and mainstream press. A story I think hasn’t fully been uncovered, but one for another time.
A story I think that's even bigger than the Robinhood trader drama has to be the story of Archegos. A family office you've probably never heard of led by Bill Hwang made headlines this month when his positions went against him, got margin called and lost a mind-blowing $20 Billion in 2 days
The unravelling has not only blown a hole in his fund but those that lent him the money too; several prime brokers woke up to massive losses, with Credit Suisse ending up stuck holding most of the bags and costing them $4.7 billion. An outcome that cost several people their jobs.
Dropping bombs on the market
Now, this is one hell of a complicated unravelling too deep for me even to begin to explain. Besides, many of the reports are still speculation, and no solid details have come out while the dust of this bomb still settles.
From what I can tell is this Bill dude could take his initial capital investment and leverage it with several banks who would borrow him multiple millions. He would then take massive long positions in the stock market, thinking well a fed put will back all his longs.
As short sellers have shy'd away from this market, many investors are laying on tonnes of leverage to go long.
Image path - forexlive.com
Banks are looking for ways to make money, and when hedge funds and family offices come to them for loans so they can play in the market, they are all too happy to hand them billions. Borrowing to these institutions is a high margin business, as they borrow big and, when the market is doing well, pay back pretty hefty sums in interest.
This is one way the rich get richer by getting access to this sort of premier banking. Perhaps I loaned to go long, and my longs aren't working, I can go back to the bank for more money to go long somewhere else. Banks are always willing to give these sort of institutions extensions on capital.
When speculators like this have access to this much leverage, to the tune of multiple billions, they can start to move markets in ways that benefit them. Sucking in index funds as they pump up stocks and then sell into them there-calibrating index funds or smaller investors chasing up the price.
In bull markets, leverage looks like a genius
In bull markets, it seems like a no brainer to go and borrow money and bet on a "sure thing" that stocks are going up, and yes, they do in the long run, but that doesn't mean they go up in a straight line. Taking on leverage isn't a bad thing, but you need to be adjusting your risk, selling off where you can, taking profits, securing new positions, winding down others and do all you would if you were only using your own fund's money.
However, the current market conditions are clearly making traders more brazen and happy to take on more risk and leaving them open to massive blowups at the slightest drawdown.
I'm pretty sure Archegos isn't the only one playing with fire like this, and the story has more layers to it that we're not even aware of, as the news is only trickling out as the damage gets assessed.
We must remember banks lending to funds like this don't want to spook the markets and risk further drawdowns, so there is going to be some damage control going on regarding this story.
Markets didn't flinch
Blowing up 20 billion in 2 days is no an easy feat; in another world, this would send markets into panic. Yet the market seems bullet proof for some reason.
We've been through the worst recession in recent times, and stocks are still going up. We've been through a 20 billion dollars blow up that probably contains far more systemic risk, and markets are didn't even bat an eye.
My question is, are we moving into a world where markets don't react or have we hit a point where pricing in dollars just can't be seen by the naked eye due to asset price inflation.
I feel like the currency is being used to cover up every nook and cranny where possible risk can be found and what scares me is if we are able to hide blips like this so easily, how will we recognise when a real correction does come around, or when a major part of the system does collapse like in 2008.
Have your say
What do you good people of HIVE think?
So have at it, my Jessies! If you don't have something to comment, "I am a Jessie."
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