The Big Short – Enlightened & Frustrated

We’re big movie fans around here… see our Star Wars Infographic, Top Investing Movies, or review of market-related movies such as Cancel Crash or The Wolf of Wall Street for proof of that.

So it’s no surprise we navigated the Star Wars lines to get out and see the latest investing/economy/market related movie – the Big Short. If you’re looking for an over the top Wall Street movie filled with drugs, parties, and irresponsible behavior, this isn’t the movie you’ll enjoy. Actually, scratch the last one… it’s full of irresponsible behavior, just not on the scale we’re used to seeing in movies. From the main characters to the big banks, from the credit rating agencies to people that used their dogs name on mortgage applications – there’s plenty of irresponsible behavior to go around in this one.

The Big Short (based on the book written by Michael Lewis) takes on some of the most complex and mind-numbing details of the 2007-2008 housing bubble / financial crisis, breaking them down into something anyone could understand through the lens of edutainment. For example, as a way to explain Credit Default Swaps and Synthetic CDOs – they enlist Selena Gomez and Behavioral Economist Richard Thaler to play out a scene of blackjack where observers make bets on whether or not Selena was going to win her hand.

The Big Short Characters

The all-star cast (Steve Carell, Brad Bitt, and Ryan Gosling) tell the story of how a group of separate individuals made billions of dollars betting against mortgage backed securities – or more simply – betting against the housing market.

One of the most interesting aspects of the movie is that these characters all came to their own individual conclusions about the housing bubble, with no idea each other existed and were looking to profit from the same thing while everyone else was oblivious. They saw that housing prices were soaring, no money down mortgages were being approved without income verification, all while Wall Street was packaging them into mortgage backed securities (groups of mortgages) stamped with high credit ratings.  What could go wrong?

The Big Short Whitepaper Blog Call To Action

Mark Baum (played by Steve Carell) is a cynic hedge fund manager that literally stumbles onto this information from a conference call that was a wrong number. Meanwhile, quirky, Michael Burry M.D. (played by Christian Bale) finds out about these bad mortgages when he takes the time to look at all the mortgages inside of some mortgage backed securities. Then there are two hedge fund managers Jamie Shipley and Charlie Geller (played by Finn Wittrock and John Magaro) out in Colorado that figure it out with the help of retired trader (played by Brad Pitt).  As an aside, could Brad Pitt have landed Angelina with that haircut?

The movie spares no light hearted moments to drill its point across in what seems more like unnerving documentary than a popcorn flick. There’s a scene where Shipley and Geller’s characters start dancing in public and Pitt’s character stops them to bring reality to the fact that winning means that millions of people will lose homes, jobs, and life-savings. Unlike typical Wall Street movies filled with parties and dancing and little time spent on the victims, when these group of individuals win, there’s every day Americans losing. In this sense, the lines of good vs. evil are incredibly blurred. We say this, because throughout the movie — if you find yourself rooting for the protagonists, you find yourself rooting against Americans being able to pay their bills on time. If you find yourself wanting the protagonist to lose, you accept the fact that you’re okay with the big banks, the SEC, the credit agencies, and some would argue the Fed (although not mentioned in the movie) getting away with playing fast and loose with the lives of those completely oblivious.

The movie places a heavy amount of blame on big banks, credit rating agencies, and the mortgage process, while leaving out the role the Federal Reserve might have played in the process, something the Wall Street Journal chronicles concisely:

But it never answers the bigger question: how the bubble, and the belief it would never collapse, formed. The reason lies in broader macroeconomic and societal forces that are barely mentioned: low interest rates engineered by the Fed after the Nasdaq bubble’s collapse; the glut of foreign savings from China and elsewhere pouring into the U.S. bond market; the complacency nurtured by years of economic calm; the financial innovations—well beyond mortgages—and lax regulatory standards bred by that calm. These forces were global: Many countries had housing bubbles and bank bailouts.

One of the lingering questions left from the movie is why someone wasn’t held accountable. Those traders? The Big Banks? The entire mortgage process? Steve Carell’s character (Mark Baum) seems to think that the big banks knew this was going to happen, but they didn’t care because they knew the federal government would bail them out. We won’t go that far… because honestly there’s no true way of knowing that information, and of course Angelo Mozillo of Countrywide did go to jail and the banks did pony up billions of dollars in fines and settlements and all of the rest for their part, but the monies made before and during (remember the banks were given bailouts and allowed to profit from those) help reduce the sting of those outlays.

One big winner left out of the movie – which profited from the financial crisis without any of the drama outlined in the book and movie – systematic Global Macro and Managed Futures strategies. When you see all that went into crafting the thesis that the housing market was about to crash, the research and insight needed to know the credit ratings were bogus and the mortgage approval process essentially fraudulent, a systematic approach sure seems a whole lot easier. Systematic alternative investments which don’t rely on a growing economy or rising stock market are dynamic strategies which react to the consequence of all of the mess outlined in  the movie. They don’t need to know why it is happening – they just need to identify that it is happening, positioning their bets to profit from falling currency, bond, commodity, and stock index markets.

Anyone want to make the sequel – The Big (Systematic) Short – highlighting the boring days leading up to new signals in short us stock indices, short crude oil, short copper and all the rest;  and the non-eventful hours when the teams at systematic managers watched their computers print out the next day’s orders and entered the orders with pre-determined risk points like every other day of their careers. We’d go with Jim Broadbent as David Harding.

Harding Broadbent

We won’t hold out breath waiting for the systematic version. In the meantime, the discretionary version out in theaters now provides the best explanation of the financial crisis to date, but at the cost of leaving you feeling helpless that no one was held accountable. The best thing to do is take some time to see the movie and decide for yourself.

 

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See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.