How to sell an entire country

For all of those who haven’t seen the movie “La Gran Apuesta” o “The Big Short”, we want to warn our readers that although the film was shot to bring financial concepts and the general public closer together in order to understand what happened in the last great crisis it often is difficult to follow the movie’s complex financial plot. A brief overview about the film would be how different managers anticipated that the real public sector and the associated mortgages of the most powerful country on the planet would collapse.

It’s very understandable to not comprehend all the financial concepts and products that appear in the movie. Our objective for this article won’t be to do a full glossary of terms that appear in the movie but to do a short description of some of them. In this way, we can gain a deeper insight into the world of investments.

CDOs (Collateral Debt Obligation) are simply packaged products: mortgage debt was structured in the form of bonds.  This fact itself doesn’t constitute a problem; the real trouble was that they were sold as AAA (indicating high credit rating) fixed income products. The truth was that they were structured products that encompassed mortgages given out in the United States to groups with limited resources that couldn’t pay off their debts (subprime), especially after activating variable rate clauses. All of this was allowed by rating companies, which turned a blind eye to continue with the business.

It’s common knowledge that financial products are purchased, in the same way that stocks or bonds can be bought. However, professionals can also sell financial assets that they don’t even own. In the film, those that anticipated the real estate sector and subprime mortgages great debacle used swaps to take advantage of the situation. To not overcomplicate the explanation let’s say they “sold” the real state and associated mortgages. As an example: The fund manager Steve Eisman (Steve Carell) and Dr. Burry (Christian Bale) annually paid 5% premiums over 1.000 million dollars, while the bet lasted. In other words, they both paid 50 million dollars in premiums. If the bet was fulfilled (as it was going to happen) and the market finally collapsed, they were going to charge 1.000 million dollars (more or less depending on the time they sold their rights). The benefit turned out to be the amount accumulated minus the premiums that they paid. In short, the bet for the whole industry to collapse, as they were selling the real state and the mortgage credit market of the world’s most powerful nation. A risky gamble took them to cover the premiums during 2 years (if we follow the example that would be 100 million dollars each for those 2 years). They had to fight against the bank sector, which used all the tricks to hide their bad practices; against the rating companies that weren’t doing their job and against the FED, which protected banks and insurance companies with subsidies (who had secured those garbage products), as the saying goes “too big to fail”. This expression means that all the banks and companies affected were too important to leave them to fail: their bankruptcy would have caused the capitalist system to collapse, not only on the USA but worldwide, as the crises spread to every corner in the planet.

Don’t take anything for granted. Understand the product.

The two characters we have picked for our explanation were determined to investigate the situation thoroughly before making their bet.  Dr. Burry studied the CDOs composition and the underlying mortgages real quality detail by detail. The fund manager Steve Eisman examined the real state and the mortgage concession process.

Eisman was an expert in equities but didn’t have much experience on fixed income products. However, his gift was to never take anything for granted. He didn’t like being trampled by others. If he didn’t understand something he would ask and ask repeatedly until he understood what was going on without even caring about often being very rude. In the end, he realizes that many people in the sector didn’t really know what they were talking about as they were only paraphrasing previously established manuals. As the base of the sector was corrupt, the whole of it became an unfounded house of cards. Eisman and his team weren’t conditioned to belong to this sector and due to their investigation with complete independence; they were able to know more than experts. Therefore, they made their bet while “experts” laughed at Eisman’s audacity.

How to invest, Inbestme’s Scope

There are several things we can learn about the movie and of course, about the crises we experienced.

-Don’t invest in the unknown: CDOs were actually complex structured products designed by big banks to hide their own bad practices.

-It’s better to invest after being advised by people that aren’t linked to the product that is being commercialised. Only independent recommendations can truly give quality management and focus on the customers’ needs.

-If you’re really keen on investing in something you don’t know, you should first do some research. Nowadays, there’s information all over the place that can help you get to the bottom of what has been going on. If not, follow Eisman’s attitude: ask and ask and ask. If you don’t feel prepared for that then it’s better to leave it for later.

There are easier ways to invest than the CDOs or Swaps; with no need to “sell” markets, which is more risky than buying.  Our diversified portfolios are a good example of efficiency and simplicity.

Meanwhile, there are those who think of a new big bet. To “sell” the Yuan? George Soros and other important hedge funds are betting for China’s currency devaluation since a few months ago. This sure is an extremely strong bet! This is nothing less than betting against the second largest world economy’s currency and with the entire Chinese government behind it. This is the equivalent to going against the second world economy and knowing that it has the full artillery, in this case, of an intervened system. Remember that to follow the best requires a great deal of patience: “Markets can remain irrational longer than you can remain solvent” said John Maynard Keynes. This is what almost happened to some of The Big Short main characters.  Exchange markets are the most transparent markets (although the Yuan probably the most intervened currency), and it’s relatively easy to “sell” currencies. However, we prefer not to give detailed ideas on how to play this new big bet, and focus on more simple formulas.

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