Tuesday, November 13, 2007

Carpe Diem on CNBC's "Kudlow and Company"

Thanks to Larry Kudlow for another nice mention of Carpe Diem (this post and the graph above) on tonight's "Kudlow and Company" show on CNBC. Here is a link to the 14:38 segment titled "Goldilocks Is Golden" (go to about 13:24 for CD part).

The discussion was about how Goldman Sachs' stock price rose by 8% today (and is up by 33% since August, see chart below), in spite of the subprime mortgage crisis, partly because of the short positions that it used to successfully hedge credit risk.

I suggested during my appearance on "Kudlow and Company" last Thursday that the explosion in futures trading (35% annual growth since 2000, see chart above) has elevated hedging and risk-management to an all-time historical high, allowing many companies and investors to "hedge themselves out of diaster," as Larry Kudlow said on tonight's program.

(HT: Zied Lajnef)


3 Comments:

At 11/14/2007 9:17 AM, Anonymous Anonymous said...

So, the hedge funds managed their way out of the crisis. Who was on the buying end of their short-selling strategy? You make it sound as if the losses have evaporated into thin air!

 
At 11/14/2007 10:39 AM, Anonymous Anonymous said...

There are a lot of people in the derivative markets that have definetely not hedged themselves away from disaster. In fact, many of these new financial instruments have only contributed to the moral hazard prevalent in today's markets. As Minsky said: "stability is unstable". A lesson that many are learning now.

 
At 11/14/2007 11:14 AM, Blogger Mark J. Perry said...

How about this analogy: Suppose we have a large area affected by a major flood, earthquake, fire or tornado. Wouldn't that local economy be better off with market-priced property insurance than a similar area that didn't have insurance?

Point: Insurance markets and derivatives don't reduce the total, overall amount risk in the economy. But they do allow effective risk-management instruments that help protect the overall economy from shocks and risks, resulting in an economy that operates more efficienty, can perform at a higher level, grow at a faster rate and be better insulated against recessions?

 

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