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Originally posted at Capitalstool. 

The market is now operating in “Warren Space”

What is Warren Space????

It’s the difference….the space….between the Governments “Implicit ” and “Explicit” financial guarantees.

Why do I call it “Warren Space”.

Because where there is a guarentee gap it can be monetized.

You simply offer an explicit guarantee yourself, or you buy the asset at the low implicit market derived price and wait for the govenrment guarantee to become explicit! and then sell at the higher explicit price.

And no one is better at monetizing the implicit/explicit guarantee asset value gap than Uncle Warren.

Remember when you could rely on the FED’s implicit guaranteee to print whenever the market went down!!!! (not currtently operative.)

Remember when you could rely on the Treasury’s implicit guarantee to bail out Freddie and Fannie….(this one still firmly in place)

Remember when you could rely on the FLHB to come to the rescue of any bank experiencing a deposit run (this is still in place…but varies a lot…seems to be case by case now)

Remember when you could rely on the Governments implicit guarantee (which becomes explicit when a bank fails) for deposits over 250K (this one still seems to be in place).

Notice how the Government will not give explicit guarantees on this…only provide the implicit guarantee ….

Deliberately creating Warren Space.

They only give explicit guarantees when the market forces them to!

The Government is in the business of providing implicit financial guarantees FOR FREE.

The problem is……when does the guarantee become explicit and hence more valuable ??????

Its really a free call or put option on an asset, handed to you by the government but cannot be accurately valued becuse its explicity has a probability value below 1.

The end boundary of the Warren Space (i.e explicity) is always ill defined and subject to government decision making…usually in a crisis situation!

There needs to be a book

“Monetizing Government Implicit Financials Guarantees for fun and profit for Dummies”

Could be a best seller.

Indeed you could probably launch a whole family of ETF’s based on this idea.

One ETF per implicit guarantee.

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