On The Subject Of Cash

I recently (minutes ago) was confronted with a question regarding the interchangeability of long dollar products such as UUP and equivalent short exposure products like EUO with the dollar itself.

I think this is important enough that I will detail a post to it.

Even if I wasn’t bullish on the dollar here (I am), I would still be adamant that you have a cash position right now. To explain properly, let me create an anecdotal situation for you.

Let’s suppose that there are only two people investing in this world; yourself and Mr. Funds. Everyone else is a prospective buyer not vested at the moment.

You and Mr. Funds have just one position in common; you’re both long UUP in size. And in today’s market, you’re doing fabulous.

Fuck yeah.

Unfortunately, what you don’t know is that UUP is actually a hedge for Mr. Funds. Mr. Funds’ real positions include SLV, AGQ, and vast holdings of physical silver, as well as a short in ZSL because “the dollar is going to shit.” In fact, precious metals make up 85% of Mr. Funds’ holdings.

Oh yeah, and one other thing. Mr. Funds’ is a recipient of feeder funds, and is rolling deep in 2X margin, and playing options on top of those positions, to create a 10X exposure built on top of a base that could call for redemption at any moment.

Mr. Funds just lost 40% of his holdings this week, because he’s a jackass. And sadly for Mr. Funds, he really cannot sell to much more of his silver and precious metals related positions, because the rest of the world isn’t investing, as I said at the beginning. It’s just you and him.

Mrs. Margin Lady calls up Mr. Funds, and is quite irate with him, for being a talentless shit. She wants him to come up with some serious capital, and she wants it now or she freezes his trades.

Question: what does Mr. Funds sell next to cover his ass and try to stave off collapse?

Answer: his hedge, UUP.

So good job chaps, you guessed right and are long UUP, as the dollar is exploding in value. No, you didn’t just guess right; you leveraged. You borrowed money to…uh, go long money. And it shows, because now you’re up 50%. You’re all set to do some dip buying maybe, or are just going to hold out.

But hold on buddy. You see, Mr. Funds just liquidated his UUP position. And again, while there’s maybe more interest in the unvested to buy UUP than say, AGQ, there still isn’t much interest. Mr. Funds has just overwhelmed the potential market for UUP.

And UUP just got cut in half.

So, congratulations on your call for the dollar. However, you don’t actually have any dollars, as you were using leverage to get the exposure. After Mrs. Margin Lady gets done mopping up Mr. Funds corpse, she’s going to return to her list, and you’ll be right at the top of it.

Inevitably, UUP will return to its glory, and more. But you won’t care.

You won’t care because you’ll be in bankruptcy in time for Christmas.

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