Our day-by-day experiences with the effectiveness of flexible markets as they adjust to, and correct, imbalances can readily lead us to the conclusion that once markets are purged of rigidities, macroeconomic disturbances will become a historical relic.
However, the penchant of humans for quirky, often irrational, behaviour gets in the way of this conclusion. A discontinuity in valuation judgement, often the cause or consequence of a building and bursting of a bubble, can occasionally destabilize even the most liquid and flexible of markets.I do not have much to add on this issue except to reiterate our need to better understand it.
The proceeds must be held either in cash or invested in short term treasuries (maturing in less than two years and held with the emitting treasuries. (With Treasury Direct for the US Dollar.)
No holding must be deposited with any bank.
I made a mistake in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions.The clear evidence of underpricing of risk did not prod private sector risk management to tighten the reins.- Advertisement -
In retrospect, it appears that the most market-savvy managers, although conscious that they were taking extraordinary risks, succumbed to the concern that unless they continued to "get up and dance [The Twist?]", as ex-Citigroup CEO Chuck Prince memorably put it, they would irretrievably lose market share.
Instead, they gambled that they could keep adding to their risky positions and still sell them out before the deluge [The Liquidity Trap?] Most were wrong.
Debt Instruments, Real Estate, Businesses and Illiquid Assets:
Sell on Sept. 7th.
Playing the Crash:
Given that the probability of a crash is above 25% a risk neutral individual should consider playing more than 25% of his investing money on that event. Given that we will use options and that both the implied volatility on stocks is going down (VIX) and the week ends brings the time values of options sharply down I will offer my strategy on Sept., Monday 13th, in the article "A Cheap Play for the Market Crash"
A Future for our Grandchildren: