I'll try and make this short and easy to understand, but the truth is that it's complicated. If we have a decent idea about what happened (and I do), it's bad. And if it's a tip-of-the-iceberg thing (which I don't believe it is), it could be really, really bad.
Investors put on hedges all the time. In fact, in our investment services like the Capital Wave Forecast we put on essentially the same type of "economic" hedges that JPM CEO Jamie Dimon is saying blew up on them. The economic hedges we put on are essentially hedges against long positions we hold.
For example, if I see some potential danger ahead, then I recommend we buy some protection, like buying the VIX in anticipation of rising volatility, or buying puts on broad market indexes.
The broad protective measures we take are economic hedges because they are not specific hedges designed to hedge potential loss in any one position. For example, if we owned JPM stock and we wanted to hedge our position, we might buy puts on JPM, or sell calls, or employ another specific hedge against our long position.
Personally, one of my favorite hedging tactics regarding specific positions is to not hedge it at all, but to sell the position outright. Needless to say, there are times when taxes, dividend payouts, and other factors make specific hedging prudent.
Back to economic hedging...
JPMorgan had on an economic hedge against what they thought was going to be an adverse (to their net positions across the bank) movement. It wasn't a specific hedge.
The problem is that they blew the hedge, big time.
We'll find out more in the coming days about what really happened (maybe), but I know they had on a massive arbitrage, or spread-type, position in the credit derivatives markets.
What's important to know is, what were they really doing? Where they "hedging" or betting with house money? Okay, I'll answer that for you. They were betting.
It's impossible to put on an economic hedge that size and not have it be a directional or spread bet.
It was a bet that went bad.
[To stay up-to-date with Shah Gilani's market insight, just click here to learn more about the Capital Wave Forecast.]Related Articles and Links:
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