- The Quadrillion Dollars Financial Derivatives Time Bomb! And the Winner Is?
by Bill Holter, http://blog.milesfranklin.com/
Actually, a better question is, “Who were the losers?” I’ve written several times that the derivatives market is a zero sum game where for every winner there is a loser and that when volatility or a sustained move sets in, “winners” will become “losers” because the loser cannot pay up. I’ve had a few e-mails telling me that I’m wrong and take a too simplistic view of this, that I “just don’t get it.” Maybe so but I don’t think so.
The total derivatives market is over $1 quadrillion. This completely dwarfs the size of all markets combined. When you add up all of the stock markets, bond markets, commodities markets and real estate (plus money supplies) you still fall short of $1 quadrillion. If ever there was a place or “picture” of the tail wagging the dog itself it is here in the derivatives market.
That said, logic would tell you that there are also greater “gains and losses” behind the dark curtain called the derivatives market. But, we just don’t hear about them. We heard a few chirps back in 2008 when Lehman Bros. went down the “chain” would break but very little since then. In fact, the “chain” did break but it broke behind the curtain and banks just did not report on this. Since these derivatives are largely not marked to market and thus don’t require huge margin calls they are carried on each firms books at prices that are simply made up. “Mark to fantasy” if you will and this is the reason that the same contract can be carried on the books at a “gain” by both counterparties at the same time.
It is important to understand that these derivatives are mostly said to be used as “insurance.” Against insurance rates going up and rates going down. They are used to “insure” against movements in copper prices, oil prices, stock prices, bond prices, real estate, mortgages and even the weather …you name it…the contract can be created for whatever and they have. But, if the “contracts” outstanding aggregate to be more than the underlying product then how real, how useful, how “truthful” can they really be?