Tuesday, September 16, 2008

Deus ex machina

Voltron says: The "Deus ex machina" of the '87 crash was portfolio insurance . . . basically "put" options. Most people think Credit Default Swaps will be the cause of the next crash. That may be, but then the crash after that will be caused by short ETFs such as SDS and SRS which make money when the market goes down. Unlike options, ETFs don't expire. Unlike a short position, you have limited downside risk. It's a less scary way to make money in a declining market. Right now the average investor is sitting like a deer in headlights - crippled by fear and lulled into complacency by Cramer on CNBC. Someday they'll look at what trades do well in a crash and they will start piling into short ETFs. That can create a bubble in reverse and cause the market to basically consume itself.

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