WHEN THE CAPITALIST SYSTEM ENDED

I started investing in stock markets in 2005, and I have have lived through the agonizing years of 2007-09, when my personal capital was almost wiped out by the market crash. So when I watched this move, I very well know how these CDOs had screwed me and the whole capitalist system, and the world economy.

Last night I watched the movie, THE BIG SHORT (2015), which is a screen adaptation of a book written by my favorite financial writer, Michael Lewis. The movie is based on the series of events that had led to the crash of the global capitalist system which we now remember as the Great Recession of 2007-09. The movie has portrayed in nuanced details how greed and fraud had led to the creation of CDOs (Collateralized Debt Obligations, AKA, financial weapons of mass destruction), and how their eventual failure vaporized the global monetary system!

But more than that, what stood out was the story of Dr. Michael Burry, a physician by qualification, who was a successful hedge fund manager of Scion Capital. Dr. Burry was among the first people who rightly in 2005 had realized that the world of CDOs will come crashing down, and when that happens, will drag the global capitalists’ economy along with it.

Dr. Burry wanted to capitalize on this find. But there was no way how he could bet against the global capitalist system. When he held meetings with large investment banks to let him buy CDSs (Credit Default Swaps, AKA, insurance against market crash, a kind of PUT OPTION) against CDOs, he was written off as delusional; as in 2005, the consensus was that the CDOs are the miracle of the capitalist system which will keep churning wealth, year after year.

Nevertheless, Dr. Burry did get to buy CDSs much before the crash and made a whooping profit of $800 million when the eventual crash happened! And so did a handful of others who had mimicked Dr. Burry’s trade.

I seldom recommend watching movies based on real life events, as it is often hard to capture the events without doing cosmetic changes; however, “the Big Short” has beautifully portrayed the series of events that had led to the economic meltdown.

I started investing in stock markets in 2005, and I have have lived through the agonizing years of 2007-09, when my personal capital was almost wiped out by the market crash. So when I watched this move, I very well know how these CDOs had screwed me and the whole capitalist system, and the world economy.

To summarize the Great Recession of 2007-09, I had penned down my feelings into a poem in 2012. Ten years later, when I read these lines, it still makes those tumultuous years vivid again.

THE GREAT RECESSION

The folly of human nature,

The limitlessness of foolishness,

And the resultant Great Recession1.

Sub-prime mortgage2 was not the culprit,

Human stupidity was.

Northern Rock, Bear Sterns and Lehman Brothers3,

AIG, RBS4 and the count goes on.

The year was 2008,

Today it’s 2012.

Neither the bulls5 can carry,

Nor the bears6 can destroy,

It’s a PIIGS7 market!

Spooked often by sovereign defaults

And sovereign bankruptcies.

Euro is staring at another ERM8,

Hedgers9 are attacking the Deutsche10 bonds

For PIIGS are too junk11 to speculate.

Where is this leading us into –

A world eased with oceans of money12?

Or into a sane philosophy of

The survival of the fittest,

Leaving the mass-extinction of the unfits?

It is a vicious cycle,

Booms leading to bubbles,

Bubbles succeeding by busts.

Cycle of growth and death

Goes on,

Cycle of greed and fear

Lives on.

History is witness to

The irrationality of human behaviors,

Swinging between hopeless hopes and utter despair,

Where the world is always ending

The very next day;

Living as if, there is no tomorrow.

Notes:

1. Economic contraction of 2008-2012.

2. Bank mortgage given to homeowners with NINJA (No Job, No Income & Assets!)

3. & 4. Financial institutions that went bust or saved with tax payer’s money.

5. Market condition when it rises.

6. Market condition when it falls

7. PIIGS: Portugal, Italy, Ireland, Greece & Spain: The troubled Euro zone economies.

8. ERM: Exchange Rate Mechanism, the predecessor of Euro, whose failure led to massive economic losses.

9. People who run Hedge Funds.

10. German Government Bonds

11. Bonds most likely to default, usually worthless.

12. World Central Banks are printing money AKA Quantitative Easing, flooding the world economy with cheap money to stop liquidity crunch and deflation.

The movie ends with the statement that Dr. Burry is now investing in only one asset, which is rare and the most essential: water! This was a cryptic message to the people that the next thing that will screw the masses is the freshwater crisis, which is another event going to happen during our lifetime. So, do we need a way to hedge our water resources or to find a way to make windfall profit by investing in water? Definitely. Maybe, in the future, we may get to buy some CALL OPTIONs on water.

[Disclaimer: If you decide to watch this movie, please find out the meaning of CDO and CDS beforehand. You’ll thank me later!]