Tuesday, August 23, 2016

Answering James Grant's Question

Just remember insane or stupid or both is still tradable.  James Grant calls Switzerland loading up on S60 billion in USA equities a head-scratcher.  Well, not really.

Yes, they own a lot of everything. Let us consider how they get the money for that: They create Swiss francs from the thin alpine air where the Swiss money grows. Then they buy Euros and translate them into Dollars. So far nobody’s raised a sweat. All this is done with a tab of a computer key. And then the SNB calls its friendly broker – I guess UBS – and buys the ears off of the US stock exchange. All of it with money that didn’t exist. That too, is something a little bit new....
It is a truism that central banks do this. They’ve done this of course for generations. But there is something especially vivid about the Swiss National Bank’s purchases of billions of Dollars of American equity. These are actual profit making, substantial corporations in the S&P 500. So the SNB is piling up big positions in them with money that really comes from nothing. That’s a little bit of an existential head scratcher, isn’t?

Wouldn't you buy $60 billion for nothing?  And there here is the kicker, hedge it by shorting that $60 billion.  Out of nothing, you now have claim on $60 billion of USA industry.    What about margin call risk?  Shorting is dangerous when you borrow 60 billion with only a 10% margin.  No risk at all if you own the stock and short sell it to yourself, that is borrow it from yourself with 100% margin or no risk, or both, sell it off to suckers, and then await whatever happens.  Either way you win.  Worst case is the credit you used, or the value you "won" is repudiated, and you lose nothing, cuz you started the gig with nothing.

If I had a sovereign money gig, I'd do it.

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