The danger of subprime in early 2007 wasn’t truly default – it was volatility knock-on effects in markets far and wide. Once liquidity started to drop purely in subprime, that created more volatile pricing which downstream models started to perceive. It didn’t matter that a particular MBS security had no subprime mortgages in the structure, what mattered is that 3-4% haircuts were now modeled as perhaps not enough safety in the overall MBS collateral segment. That is exactly what happened from 2007 through 2009.

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The problem wasn’t so much “toxic waste” as it was artificially low volatility in the years before the crash. That was taken as the liquidity baseline and used to set vast liquidity and funding regimes as if it were all real. And that is what concerns me now, as that was exactly the behavior in especially junk, but not limited to it, in the past few years – particularly since QE3 in 2012. I believe the world was awash in artificially low volatility regimes which are being forced, right now, into re-assessment. That includes not just junk bonds but the very structures of the “dollar” and money dealing itself; from IR swaps to almost any chained bank balance sheet liability traded , thus providing liquidity, under low volatility assumptions.

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One factor that shouldn’t is all these continued calls that oil is about oil; it isn’t. Black gold is also “dollar” collateral.

This outlook basically underpins my current investment strategy. I might very well be wrong, but this tune sounds familiar.

I just started the #traderski tag. Maybe those of us interested in legalized gambling investing can congregate there.