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Would this have convinced you to short home equity mezzanine tranches in 2007? I'd like to think I'd have had the foresight to see what was coming if someone wa

Would this have convinced you to short home equity mezzanine tranches in 2007? I'd like to think I'd have had the foresight to see what was coming if someone was pitching it to me like this. If I'm being honest however I'm not sure how convinced I'd have been by these slides.

bryanlarsen 7y ago
When you're long timing doesn't matter as much, but when you are short it does. The Economist in 2005 had a cover story warning of a crash triggered by real estate. But if you shorted then you probably would have lost a lot of money. As they say, the market can stay irrational longer than you can stay solvent.
- krrrh 7y ago
  If I remember correctly, the Economist also had cover stories warning of a too hot real estate market in 2004, 2003, and 2002.
  - chrisco255 7y ago
    It probably was. What role did post-dot com, post-9/11 monetary policy play in creating the real estate bubble?
    - KMag 7y ago
      Artificially deflated lending rates, 5 year fixed-rate loans, explicit government pressure to expand the mortgage base, and what happens 5-ish years after the interest rates start coming back to their long-term averages? I remember back in 2004, some of my colleagues were all chatting about flipping McMansions. My housemates and I threw a party, and some poor half-drunk girl I didn't know was telling me that Warren Buffet was warning about a housing bubble and asking me, a stranger, if she and her boyfriend had made a big mistake in recently buying a house. I felt very uncomfortable on several levels trying to give her comfort. Going to a party without her bf and pouring her heart out while half-drunk to a stranger wasn't the biggest sign of looming trouble. There were long warning signs that things were not going to be alright. Hopefully she and her bf were able to ride out the crash.
- icelancer 7y ago
  Premiums kill you on the short side, it's true. It's tough being anti-asset.
nakedshorts 7y ago
> I'd like to think I'd have had the foresight to see what was coming if someone was pitching it to me like this. Well, you can test yourself, short ideas are abound in these uncertain market conditions. It's surprisingly hard to have clarity while things are happening, even if they are obvious in hindsight. For example, do you believe you should 1. Short restaurant equipment suppliers because up to 15% of restaurants could go out of business? https://www.presciencepoint.com/research/research-archives/middleby/ https://www.presciencepoint.com/research/research-archives/m... 2. Short Chinese tech companies claiming to have exponential growth numbers in the wake of "The China Hustle" and Luckin Coffee? https://citronresearch.com/wp-content/uploads/2020/04/GSX-Techedu-The-Most-Blatant-Chinese-Stock-Fraud-Since-2011.pdf https://citronresearch.com/wp-content/uploads/2020/04/GSX-Te... 3. Short tangentially related healthcare companies trying to cash in on COVID test kits? https://hindenburgresearch.com/scworx-evidence-points-to-its-massive-covid-19-test-deal-being-completely-bogus-price-target-back-to-2-25-or-lower/ https://hindenburgresearch.com/scworx-evidence-points-to-its... I believe at least one of these things will appear extremely obvious in hindsight ("duh, restaurants going out of business was a no-brainer").
- ethbro 7y ago
  I feel like one of the biggest opportunities in the 2007/8 housing market short was the speed at which it developed. More specifically: glacially. Up until the credit markets froze up, all the information was available, with time to digest and for anyone to act on it. That's the most interesting thing about this presentation. I'm assuming this or similar was the one dramatized in The Big Short? It's simply saying that something doesn't add up. Then laying out its case for the numbers that were added. At a macro level, there isn't much complexity: (1) Home price appreciation is strongly inversely correlated with default rate. (2) CDO are created with sharp risk cliffs related to systemic default rate. (3) Current home price appreciation + observed default rate + CDO pricing does not add up. Ergo, one of those things must be wrong.
  - cinquemb 7y ago
    Yeah, I think people knew it would eventually play out because of the marco, but for traders its important to figure out how to get the cheapest exposure to the short until it happens. Even in the big short, they show the routes different traders took to get short exposure and all took various amounts of heat until it payed off. Same is true now wrt to corporate bonds (or I should say was true, way more expensive now to short than it was say during the entire time of 2019), one know's they will go tits up, but getting the cheapest exposure will enable to either build the position with minimal/fixed draw down or sweat every bps move against you.
jaggederest 7y ago
I would have if I had the equity to spare. I was expecting it from ~2006 onward. Check out https://www.piggington.com/frequently_asked_questions https://www.piggington.com/frequently_asked_questions - I was a pretty avid reader at the time.
- glenngillen 7y ago
  Allow me to comfort you then, as someone who exited the property market in 2006 because I felt it was way over heated and about to crash: it cost me a significant amount and was a terrible decision. Be glad you couldn't act on that in 2006 ;)
  - jaggederest 7y ago
    Oh I wouldn't have exited anything, I was still living in an apartment. I would have shorted REITs etc.
icelancer 7y ago
What about now? What if someone told you housing was grossly overvalued and would collapse in part due to COVID-19? That could be true.

bryanlarsen 7y ago

When you're long timing doesn't matter as much, but when you are short it does. The Economist in 2005 had a cover story warning of a crash triggered by real estate. But if you shorted then you probably would have lost a lot of money. As they say, the market can stay irrational longer than you can stay solvent.

krrrh 7y ago
If I remember correctly, the Economist also had cover stories warning of a too hot real estate market in 2004, 2003, and 2002.
- chrisco255 7y ago
  It probably was. What role did post-dot com, post-9/11 monetary policy play in creating the real estate bubble?
  - KMag 7y ago
    Artificially deflated lending rates, 5 year fixed-rate loans, explicit government pressure to expand the mortgage base, and what happens 5-ish years after the interest rates start coming back to their long-term averages? I remember back in 2004, some of my colleagues were all chatting about flipping McMansions. My housemates and I threw a party, and some poor half-drunk girl I didn't know was telling me that Warren Buffet was warning about a housing bubble and asking me, a stranger, if she and her boyfriend had made a big mistake in recently buying a house. I felt very uncomfortable on several levels trying to give her comfort. Going to a party without her bf and pouring her heart out while half-drunk to a stranger wasn't the biggest sign of looming trouble. There were long warning signs that things were not going to be alright. Hopefully she and her bf were able to ride out the crash.
icelancer 7y ago
Premiums kill you on the short side, it's true. It's tough being anti-asset.

nakedshorts 7y ago

> I'd like to think I'd have had the foresight to see what was coming if someone was pitching it to me like this. Well, you can test yourself, short ideas are abound in these uncertain market conditions. It's surprisingly hard to have clarity while things are happening, even if they are obvious in hindsight. For example, do you believe you should 1. Short restaurant equipment suppliers because up to 15% of restaurants could go out of business? https://www.presciencepoint.com/research/research-archives/middleby/ https://www.presciencepoint.com/research/research-archives/m... 2. Short Chinese tech companies claiming to have exponential growth numbers in the wake of "The China Hustle" and Luckin Coffee? https://citronresearch.com/wp-content/uploads/2020/04/GSX-Techedu-The-Most-Blatant-Chinese-Stock-Fraud-Since-2011.pdf https://citronresearch.com/wp-content/uploads/2020/04/GSX-Te... 3. Short tangentially related healthcare companies trying to cash in on COVID test kits? https://hindenburgresearch.com/scworx-evidence-points-to-its-massive-covid-19-test-deal-being-completely-bogus-price-target-back-to-2-25-or-lower/ https://hindenburgresearch.com/scworx-evidence-points-to-its... I believe at least one of these things will appear extremely obvious in hindsight ("duh, restaurants going out of business was a no-brainer").

ethbro 7y ago
I feel like one of the biggest opportunities in the 2007/8 housing market short was the speed at which it developed. More specifically: glacially. Up until the credit markets froze up, all the information was available, with time to digest and for anyone to act on it. That's the most interesting thing about this presentation. I'm assuming this or similar was the one dramatized in The Big Short? It's simply saying that something doesn't add up. Then laying out its case for the numbers that were added. At a macro level, there isn't much complexity: (1) Home price appreciation is strongly inversely correlated with default rate. (2) CDO are created with sharp risk cliffs related to systemic default rate. (3) Current home price appreciation + observed default rate + CDO pricing does not add up. Ergo, one of those things must be wrong.
- cinquemb 7y ago
  Yeah, I think people knew it would eventually play out because of the marco, but for traders its important to figure out how to get the cheapest exposure to the short until it happens. Even in the big short, they show the routes different traders took to get short exposure and all took various amounts of heat until it payed off. Same is true now wrt to corporate bonds (or I should say was true, way more expensive now to short than it was say during the entire time of 2019), one know's they will go tits up, but getting the cheapest exposure will enable to either build the position with minimal/fixed draw down or sweat every bps move against you.

jaggederest 7y ago

I would have if I had the equity to spare. I was expecting it from ~2006 onward. Check out https://www.piggington.com/frequently_asked_questions https://www.piggington.com/frequently_asked_questions - I was a pretty avid reader at the time.

glenngillen 7y ago
Allow me to comfort you then, as someone who exited the property market in 2006 because I felt it was way over heated and about to crash: it cost me a significant amount and was a terrible decision. Be glad you couldn't act on that in 2006 ;)
- jaggederest 7y ago
  Oh I wouldn't have exited anything, I was still living in an apartment. I would have shorted REITs etc.

icelancer 7y ago

What about now? What if someone told you housing was grossly overvalued and would collapse in part due to COVID-19? That could be true.