… Derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets.
Many companies in Networking/Communications survived the past years because they were sitting on tons of cheap money or had easy access to more cheap money. This could be ending.
Companies with healthy balance sheets will be better positioned for the coming endgame. I’m sure more than one company out there is staring wistfully at their FY2004 10-K balance sheet and wishes it hadn’t frittered away that equity.
The Andromeda Strain was a good movie and a good analogy in every way.