Thursday, September 20, 2007


As if proof was needed of the inherently irrational nature of capitalism and its markets, various reports are circulating about a so called 'Bin Laden' trade, a speculative trade of such enormous proportions that it is causing some concern in the financial world, as an economist it is intriguing to see how even after yesterdays palliative actions by the Fed, the tongues are still wagging about this trade...Basically here are the facts,
1) How it started ...Somebody is betting $900 million on the S&P crashing by Sept 21st. It's been dubbed the "Bin Laden" trade.Just such a trade surfaced on Wednesday 12th of September when anonymous parties agreed to buy and sell 120,000 SPY September call options using deep-in the-money strikes ranging from 60 to 95.This is a monster trade because it controls 12,000,000 SPY shares.Other commentators state that these influence 6.5 million shares at $750, making it in effect a $4.5 Billion bet . To put it at its most simple someone or some group are betting a huge amount of money that the markets will shift dramatically by 21st September hoping to make the huge 'bet' a winner.This led others to speculate that maybe a terrorist action was due which would cause this upset, with shadowy speculators in on the jihadists plans cashing in on the economic and financial repercussions of such an attack, hence the term the 'Bin Laden trade'.
2)Downplayed in the past week...Many respected analysts studiously pooh-poohed notions around this speculative talk by saying that it was just a device to reduce vulnerability, and nothing could be read into it..Dan Perper, a Partner at Peak 6, one of the largest option market makers and proprietary trading firms, has confirmed that the trades are part of a "box-spread trade."This was done as a package in which the box spread was used [as a] means of alternative financing at more attractive interest rates" explained Perper.
3)Saudi Arabia may have a role in this after all...However the latest twist in the story is that Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time,signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
4)China...the joker in the pack.Two officials at leading Communist Party bodies have given interviews in recent weeks warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.Shifts in Chinese policy are often announced through key think tanks and academies.Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.A dollar crash would set off a shift in already very jittery markets
5)Whats Really Crazy About All this....Basically Capitalism is inherently unstable,the fact that the future prosperity or poverty of so many on this planet is determined by the what Keynes called the 'animal instincts' of the traders on the world markets must be one of the most obscene aspects of capitalism. Speculation, panic, frantic buying and selling of options is all a million miles away from the needs of ordinary people, for work, education, shelter, food and culture. Any system that is so profoundly influenced by what is essentially gambling does not serve well the people of this planet..Socialism,admittedly improved and updated for the 21st Century, having learned from the errors of its past,is still the only rational way forward.


Curlew said...

A crash like this wouldn't surprise me. Ever since Enron, it's been apparent that US companies are being economical with the truth in their financial reporting. -Having worked at one time for a US multi-national I can see how this is easily done.
With the sub-prime truth about to emerge and the fact that some middle east countries (eg Iran) are now insisting new contracts for oil in currencies other than the USD - something is bound to give.

I have no shares - but I'd better check on my bank I think.

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