Bottom of the range: Difference between revisions
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By contrast, putting on a short position at $15 — a price at which GME had not exceeded in twenty years — gears things the other way. To lose just one times your investment, GME would need to go to $30. To lose 15 times, it would need to go to $225 — a seemingly outlandish price. Of course that is exactly where it ''did'' go — beware of predicting the future is a different lesson — but here bear in mind: had Melvin put on its short ast the top ofg the range, it would have lost only 15 times its investment. Had it invested at the bottom, it would have lost 225 times its investment. | By contrast, putting on a short position at $15 — a price at which GME had not exceeded in twenty years — gears things the other way. To lose just one times your investment, GME would need to go to $30. To lose 15 times, it would need to go to $225 — a seemingly outlandish price. Of course that is exactly where it ''did'' go — beware of predicting the future is a different lesson — but here bear in mind: had Melvin put on its short ast the top ofg the range, it would have lost only 15 times its investment. Had it invested at the bottom, it would have lost 225 times its investment. | ||
This is also a good illustration of the second loss risk. Of course, as we know, Melvin didn’t have anything like 225 times its investment in cash. The point where it is wiped out, then someone else is wearing the rest of the loss. Welcome to the table your friendly, well capitalised, [[prime broker]] and its unsuspecting | This is also a good illustration of the second loss risk. Of course, as we know, Melvin didn’t have anything like 225 times its investment in cash. The point where it is wiped out, then someone else is wearing the rest of the loss. Welcome to the table your friendly, well capitalised, [[prime broker]] and its unsuspecting shareholders. You are just in time to pick up the bill. | ||
===Low mortgage rates: a sleeping dog?=== | |||
we see a similar thing with mortgage rates. Historically, interest rates have been between 1 and 10% — though perhaps only those of the JC’s vintage will believe that rates could ever have been above 2%. In the seventies, eighties rates were constantly between 8 and 15%. | |||
Rates, we know, as a central bank tool for controlling inflation. They will periodically move, by half or ever quarter point moves, and since monetarists slew the inflation dragon in the eighties, they have stayed with a much, much lower range (except, curiously, in [[New Zealand]]. Hello, [[carry trade]]!). | |||
But it is one thing looking at this from the prism of fiscal policy. Looking at it from a home-owner’s perspective tells a different story. You put on your borrowing mindful of the cost of doing so: the potential range of future interest costs. You borrowing is fixed for a short term, but your investment is illiquid — no-one moves home for the hell of it — so you have risk to interest rate movements. Now if you have borrowed at 8%, even a whole-point rise is generally tolerable: that’s an eleven percent increase in your cost of funding, but most people will be able to cancel Netflix, do without that Starbucks and so on to manage that. But if your borrowing rate is 0.75% — as many are today — a rate rise of 1% is a 158% increase in your cost of funding. Doubling, and half again, your mortgage payments, ''just to service interest''. | |||
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