Can we protect ourselves from dark liquidity?

January 2, 2008 § Leave a comment

A key person asked me, “Is there any way for us to protect ourselves against dark liquidity?” after “dark liquidity” was written.

“Dark liquidity” lists a number of clues from deepcaster that we can use. This is just my stream on a more detailed possible initial approach to protect ourselves, whilst adding in some other matters and possible impacts of globalisation. Indicators seem to be a “multitude of interconnected fatal consequences, social disintegration, a breakdown of democracy, more rapid and extensive deterioration of the environment, the spread of new diseases, and increasing poverty and alienation.

Invest in tangible assets and strategic commodities

Note: Investments to me are also on what and where I spend my time and energy (what I work on or intend to manifest), not just monies.

We can brainstorm and list products that will likely keep being produced, no matter what. Then, for each product we can check:

  • What ideas and innovations have gone in the design (Comment from Becky Winant: “Breakthrough design creates new markets. That is where there can be interesting entry points”)
  • What it does and what it does not do (including environmental impact)
  • What materials go into it (endurable? breakdown products?)
  • Vulnerability of its production process (dependent on what)
  • Whether there are products-soon-to-replace-these-products (examples of those are R744 as alternative for Freon and new energy sources and inventions)
  • How it differs from competing products
  • What we know of it’s market
  • What profit margins we can expect (without disasters or being taken down, and with those happening)

Some of the materials that these products have in common are tangible assets and strategic commodities.

Evaluate counter party strength to greater extent

Deepcaster writes “Are they clearinghouse guaranteed, for example? What is the reputation and strength of the clearinghouse?”

Publicly accessible information does not contain the “dark books” that can bring a clearinghouse down “unexpectedly”, and hence does not provide enough information. So how can we approach assessing counterparty risk? Walk in the shoes of “other” and ask ourselves some darn good questions.

  • What will they be thinking to themselves as they see dark pool transactions unveiled?
  • What associations will they be making? (like, “Is this like Northern Rock, and Housing bubbles?)
  • What specific questions will they want to ask?
  • What objections can we hear them raise internally? (like “Sounds pretty spooky. Is there any way for us to protect ourselves against this?”)
  • Even when continuing out of self preservation and already made time and energy investments, what obstacles will they (subconsciously) want to put in the path of further dark pool development?
  • And a level deeper: What more subtle questions, objections and obstacles might they think up and/or subtle feelings might they have?

Then we step out of that state again and ask ourselves which things made the hair on our necks rise, didn’t “smell” good, or pointed to a vulnerability, and check if any such signals are given in our exchanges with our counterparties (where we intend to invest our time and energy), indicating they may be involved in dark pool transactions. And if we find such indications, we can ask for more transparency, based on our trust levels with counter party and the indicators we noticed.

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