The UnTradeables

There is an elephant in the room that I haven’t yet seen discussed:  The UnTradeables.

In our discussion last week on SFAS 157, there was a subtext not articulated: The broad category of items that are actually too illiquid to trade. These include "one offs" such as Dry Cleaning stores, non-chain restaurants, Mom & Pop shops.

They are untradeable because the amount of research into each item, relative to their market cap/size, makes it too inefficient. No one will spend $100k for the due diligence on a $200k store. 

For a while, Pez candy dispensers were an UnTradeable — until eBay created a market where these can be effectively bought and sold. However, the total value of all the Pez dispensers in the world wasn’t measured in the trillions, or even 100s of billions. Even tho they are relatively illiquid, their small capitalization  makes it viable. And don’t forget, there is no leverage involved in any of the eBay items. Hence, no margin calls. 

Now consider the size of the derivative marketplace based upon mortgages: Everything from RMBS to CDOs to CDC. It runs into the trillions.

If they cannot be effectively priced, are these products essentially untradeable?

Consider these factors:

• The price relative to the requisite cost of research/due diligence;

• The size of the market relative to the overall regular and ongoing demand for that investment product;

• The buyers and sellers with an expertise and knowledge of this paper.

This may be the crux of the issue with subprime/derivative problem: The paper is, or at least should be, Untradeable . . .

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