The Big Short trailer

Everything Old is New Again?

The trailer for The Big Short movie is out; there are heros and villains. In case you were wondering, the banks are the villains. (Some of the heros are clients of ours).

The trailer rocks to Led Zeppelin’s “When the Levee Breaks”, which is a nice choice. The collapse of excessive leverage is exactly like a levee breaking.

There’s also this:

“How could the banks let this happen?”

“It’s fueled by stupidity”

“That’s not stupidity. That’s fraud”

“Tell me the difference between stupid and illegal and I’ll have my wife’s brother arrested.”

There was more than enough of each to go around. Too much leverage in an economy tends to encourage stupid risk-taking and fraudulent opportunism. When deployed funds outpace the availability of assets, market participants can make outsize returns because assets are bid higher, above their fundamentals. Bid higher, that is, until the music stops. Ultimately, the levee must break as returns diminish. Then whoever is holding the bag must give it back. Like the stripper with four houses and a condo.

Though we have all learned our lesson, it is interesting to note that on the back of massive multi-year, multi-government QE, Shiller’s Cyclically Adjusted PE (CAPE) ratio is near highs that were only really exceeded twice before, in 1929 and 1999:

How long until the next Big Short?