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Important Lessons from The Big Short

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Important Lessons from The Big Short

One of the blockbuster hits of 2015 was the film The Big Short, an equal parts dark and comical tale by director Adam McKay that chronicles three small groups of investors who foresaw the collapse of the real estate market in 2007-2008.

 

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The wildly popular movie was based on bestselling financial author Michael Lewis's book of the same title. Perhaps part of its popularity was its star-studded cast that included Ryan Gosling, Steve Carell, Christian Bale, and Brad Pitt.

Although undoubtedly dramatized at certain junctures, the basic facts detailed in The Big Short actually happened: While ignorance and greed prevailed, three different funds—even one run by a pair of ambitious twenty-somethings—placed enormous bets on the impending real estate crash becoming a reality.

There are several key lessons about how financial markets work that we can glean from the film that relate to why private gold ownership is so important in today's economic environment.

The Precariousness of the Economy

housingObviously one of the main themes of the movie is that real estate in the United States was in a bubble in the middle of the last decade.

Yet underlying this inflated value of homes and the reckless practices of banks that bundled together mortgage-backed securities (MBS) was the real potential for a full-fledged economic collapse.

Steve Carell's character bemoans the fact that the implosion of the real estate market in the U.S. could bring down the entire global system with it. One of the undeniable reasons why this was the case was this: the whole financial system was (and is) built upon a heaping pile of worthless paper assets, no matter what kind of triple-A rating Moody's or Fitch slaps on them.

The Prevalence of Fraud

scamAnother consistent thread that runs through the film is the notion that the system is rigged—to the point of being downright fraudulent.

For instance, as more and more mortgages went bust and the housing market began to crumble, the main players who built up their short positions were astonished that the value of their positions didn't change. Even though mortgages were failing, somehow the securities tied to them were apparently doing just fine. All of them complained that this was evidence of fraud and complicit oversight, especially on the part of the big banks increasingly at the heart of the system.

Another key takeaway is that the staggering amount of risky securities and derivatives floating around the financial markets means the system is always a giant house of cards that (seemingly inevitably) will fall apart.

The Dismal Future Outlook

bomb-474146_640Perhaps most disheartening is the ending of the film, which basically lays out the idea that all of the mayhem from the financial crisis is bound to happen again. The same shady practices abound: instead of peddling collateralized debt obligations (CDOs), these same financial products are simply being sold as bespoke tranche opportunities (BTOs).

It just goes to show that the only truly safe protection for one's wealth is gold. Keep in mind that gold prices rallied to roughly $1,900/oz in the years following the financial crisis. As the closing of The Big Short cynically implies, the next crisis will almost certainly be even worse.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

About the Author

Everett Millman

Everett Millman

Analyst, Commodities and Finance
Managing Editor

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in CoinWeek, Advisor Perspectives, Wealth Management, Activist Post, and has been referenced by the Washington Post.

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