Crisis Progress Report (5): The Black Hole, by Robert Gore | STRAIGHT LINE LOGIC
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Using borrowed dollars meant these trades were short dollars. The end of QE and the dollar’s rally are inflicting massive pain and prompting the unwind of many of them. A 5 percent loss hurts when the speculator has put up the full price, at 10 times leverage it becomes a 50 percent loss, at 20 times the speculator’s equity is wiped out. Putting up full price in modern financial markets is quaintly anachronistic. Almost everyone is leveraged, and 20 times or more is not anomalous. The unwinds contract the debt used to fund the underlying trades, shrinking total debt. In other words, much of the world’s speculative activity is running smack into the event horizon.
Using borrowed dollars meant these trades were short dollars. The end of QE and the dollar’s rally are inflicting massive pain and prompting the unwind of many of them. A 5 percent loss hurts when the speculator has put up the full price, at 10 times leverage it becomes a 50 percent loss, at 20 times the speculator’s equity is wiped out. Putting up full price in modern financial markets is quaintly anachronistic. Almost everyone is leveraged, and 20 times or more is not anomalous. The unwinds contract the debt used to fund the underlying trades, shrinking total debt. In other words, much of the world’s speculative activity is running smack into the event horizon.
How does a force that depreciates a currency serve as an implicit monetary tightening? Usually I associate a depreciating currency with loose monetary policy.