Author Topic: Deflation hedges  (Read 141895 times)

Xerxes

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Re: Deflation hedges
« Reply #400 on: March 05, 2020, 04:40:56 PM »
I think like options, these hedges have time premium, and with just couple of years left, that premium has mostly collapsed. Said differently, the downturn needs to be far severe today, to get a homerun, then had it happened say 6 years ago.


Xerxes

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Re: Deflation hedges
« Reply #401 on: March 12, 2020, 09:23:19 AM »
It would be the ultimate letdown if the deflation hedges don’t produce meaningful results.

petec

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Re: Deflation hedges
« Reply #402 on: March 12, 2020, 01:05:13 PM »
It would be the ultimate letdown if the deflation hedges don’t produce meaningful results.

For the reasons given above, they won’t. Not a cat’s chance in hell they are going to end up in the money so they’re worthless.
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Santayana

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Re: Deflation hedges
« Reply #403 on: March 12, 2020, 01:16:10 PM »
Except that inflation usually happens gradually, but when deflation happens it comes on fast due to a systemic shock.  I don't think they'll pay off, but the way markets are acting, who knows.

petec

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Re: Deflation hedges
« Reply #404 on: March 12, 2020, 01:21:46 PM »
Except that inflation usually happens gradually, but when deflation happens it comes on fast due to a systemic shock.  I don't think they'll pay off, but the way markets are acting, who knows.

Is that right? I’d have thought the other way on. Inflation accelerates like a mad thing when people lose confidence in the value of money and get rid of it as fast as possible, driving velocity up. Deflation I think of as a gradual thing as banks shrink their balance sheets and (all else equal) money supply drops.
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Santayana

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Re: Deflation hedges
« Reply #405 on: March 12, 2020, 01:29:53 PM »
There are hyper-inflationary events, but in general inflation is a slow steady slog.

StubbleJumper

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Re: Deflation hedges
« Reply #406 on: March 12, 2020, 01:34:37 PM »
Except that inflation usually happens gradually, but when deflation happens it comes on fast due to a systemic shock.  I don't think they'll pay off, but the way markets are acting, who knows.


Interesting question.  Will the deflation hedges pay off, meaning, "Will they end up in-the-money" at the end of the contract?  I would propose that it is not necessary for the contracts to end up in-the-money, but rather FFH could re-coup a bit of its capital if it can sell the contracts some fearful buyer who is willing to pay for a bit of deflation protection and is prepared to accept the risk that they might not end up in the money. 

On this one, how would we define "victory" at this point?  If FFH could sell those contracts for US$50m, would that constitute a "victory" at this stage of the game? What about US$75m, would that be enough to declare victory?  Frankly, if they could sell them for $75m or $100m, I would be happy to have recouped even that much capital....  Even if they could sell half of the protection for $50m, that would recoup a bit of capital and would still leave a large value of notional protection...


SJ

Santayana

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Re: Deflation hedges
« Reply #407 on: March 12, 2020, 02:04:15 PM »
Isn't that how they profited on the CDS bet?  it's different in that those were in the money, but I think they realized the value by selling them before expiration.

StubbleJumper

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Re: Deflation hedges
« Reply #408 on: March 12, 2020, 02:14:41 PM »
Isn't that how they profited on the CDS bet?  it's different in that those were in the money, but I think they realized the value by selling them before expiration.


Oh, that's definitely how FFH profited from CDS, they definitely did not hold them until expiry.  My musings about the definition of a "victory" are really a question of what kind of offer would FFH need to salvage some useful amount of capital?  I was of the view that the contracts should have been sold 15 months ago when they had a market value of about $25m, but maybe that was hasty?


SJ

Xerxes

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Re: Deflation hedges
« Reply #409 on: March 12, 2020, 03:22:43 PM »
Side question :

How much of the $40B portfolio can they realistically deploy if they see good names ?
With indiscriminate selling I would think they wouldn’t have to “try to hard” to find investing opportunities like in the past.

I understand their need to buyback some of the minority positions, recap the insurance side to take advantage of the hard market and maybe buy back shares with left overs take priority; but all these are being funded through corporate earning. Correct ?

« Last Edit: March 12, 2020, 03:27:51 PM by Xerxes »