The Big Short, a 2015 movie from Michael Lewis’ eponymous novel, explains how a small group of financiers had anticipated, as soon as 2005, the U.S. real estate bubble and explosion of the sub-primes in 2007-08. Taking advantage of the general blindness of big banks, government and media, these outsiders were looking for a way to bet against this trend in order to make a lot of money and realise the “robbery of the century”. The trick was to bet on the fall by shorting the real estate market and waiting for it to crash. In order to make this bet, they had to buy a special type of CDS (Credit Default Swap), a financial instrument only available to large financial institutions, as demonstrated in the movie. An individual having had the same intuition couldn’t have played that game.
Let’s ask ourselves this question: What would be today’s Big Short, how could we play it concretely, and would it be available to anybody or not?
Stock markets have been falling since the start of January, but let’s forget this for now... it’s not even important. If Janet Yellen, the Fed chairwoman, initiates a new QE, a fourth one, whether Mario Draghi increases the ECB’s or not, it is very likely that markets will go up again, as if by magic, and for several months. Misgivings about the slow growth throughout the world will fade with this new influx of money and investors will be rejoicing over a market giving hope again, and they will blame the early year crisis solely on bad mood.
Nevertheless this will only last for a while. This blindness of governments, media, banks and the majority of investors is about central banks and their capacity to control large financial variables and improve the state of the economy. For the moment markets have faith in them, as witnessed by their constant analyses of central banks directors’ statements, and they put stock in them, as reflected in the prices. This is exactly what we have to bet against.
But how can one bet against central banks, the behemoths of the financial world? It’s very simple, actually. What are central banks producing? Paper money, and they’ve been producing way too much of it since the 2008 crisis. And what is the opposite of paper money? It is money that has intrinsic value or, in other words, physical gold (not paper-gold, which will evaporate in a serious crisis). Thus the Big Short consists in acquiring physical gold and waiting, knowing this could be lucrative in the short term if stock markets keep on falling, or will be lucrative longer term if central banks keep on printing paper money. Gold is today’s “bet”. The advantage being, this time, that anybody can participate since physical gold is available to all.
The Big Short allows protection from a system that has become nefarious and fraudulent, while profiting from its fall. And why wouldn’t one do so? This system has indeed created false beliefs, distorted the price discovery system and the risk management scale, and increased the amount of debt, while impeding the real economy... and we are all paying for this. It is now time to do some role reversing.
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Philippe Herlin Finance Researcher / Member of the Goldbroker Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.