Fed Researchers Channel Pozsar, Warn On Margin Calls, EU Utilities
"Pozsar proceeded to speculate on a tsunami of margin calls for market participants long physical commodities and short futures," I wrote, on March 5, following the largest weekly gain for commodity prices in recorded history.
At the time, Vladimir Putin's star-crossed misadventure in Ukraine was just days old and the incomparable Zoltan Pozsar was busy warning that if the rally in raw materials was one for the history books, "so the margin calls must be historic too."
He was right. Shortly th
I found out about the problem described by M. Cetina in the included quote the hard way in my younger days. I had enjoyed a nice run up in the market but the pundits were all forecasting a downdraft. I didn’t want to sell and cede my hard-won capital to the IRS and I did want to protect my gains so I worked with my advisor to develop an affordable, though a bit costly, hedge to protect my gain. Well, the market didn’t fall, my hedge moved against me, of course, and expired leaving me to eat a loss on the hedge. That was a real loss, like an insurance premium is a loss, and even though the market rise gave me unrealized gains equal to the loss on the hedge, the net effect was zero on the books but I lost the benefit of the gain and I would have had to do what I didn’t want to do in the first place, sell stuff or kiss the lost cash goodbye. What I learned that the cash mismatch in hedging, especially for retail punters such as myself, means hedging needs to be done in other ways. Thanks for the reminder, really.