Looking for Risk

There is the old saying that only two things in life are certain, death and taxes. Actually some people manage to avoid the second quite well so maybe there is only one thing actually certain. Everything else has a degree of risk. Somehow humanity has struggled along and in fact I think it is safe to say that most people are better off than their ancestors were. All of this was accompanied by risk.

In today's economy we are recovering from a significant risk event, triggered by the sub-prime mortgage situation. Now when you look at that situation many of these mortgages were clearly not justifiable except in a scenario where prices climbed forever. Once prices stabilized and started to fall, as they had to eventually, the sub-prime people were doomed. Further, that collapse had all sorts of repercussions as the instruments designed to mitigate risk started to pay off and the companies that had to pay couldn't.

Now had the issuers of the subprime mortgages not been able to package and sell them raising money to issue more that they packaged and sold, etc. etc., the subprime mess would have been contained. Of course for a certain period of time this activity led to increased economic activity in construction, furnishings, appliances, well just about everything as houses were built, sold and provisioned.

But what was probably the most interesting part of the whole crisis for many investors, was that a few people made extraordinary amounts of money. Now you can make money in a good market, sort of the old fashioned way, relatively slowly and over time. However in a collapse you can make a whole lot of money in a very short time. This is quite appealing to many who now are constantly looking for the next big collapse so they can short it.

Now, identifying this risk is not very rewarding unless you can convince everyone else the risk is real and maybe even cause a panic. The European debt crisis looked ripe and did cause a decline but without actual defaults it didn't attain the level required to really cash in. If you trade instruments that require defaults by Greece, Spain, Portugal, they go up and down in value until the actual default happens. Those looking to really cash in will hold hoping that like a lottery ticket they become the next big winner, and the next legendary trader.

Mostly this won't happen since those types of panics are relatively rare and those who hold these instruments will probably hold them too long since cashing them in before the default seems like throwing away the golden goose.