Forum Post: Mark Faber: "I Am Convinced The Whole Derivatives Market Will Cease To Exist And Will Go To Zero" /// $707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months
Posted 12 years ago on Nov. 26, 2011, 11:24 p.m. EST by MonetizingDiscontent
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Mark Faber: "I Am Convinced The Whole Derivatives Market Will Cease To Exist And Will Go To Zero"
-12/21/2011-
Anyone seeking joyous holiday greetings and cheerful forecasts for the new year is advised to not listen to the following most recent Mark Faber interview, in which in addition to his predictions for 2012 (led with "more printing" by the dodecatupling +1 down central planners of course, and far less prosperity), we get the following:
"I am convinced the whole derivatives market will cease to exit. Will become zero. And when it happens I don't know: you can postpone the problems with monetary measures for a long time but you can't solve them... Greece should have defaulted - it would have sent a message that not all derivatives are equal because it depends on the (((counterparty.)))"
And on the long-term future:
"I am ultra bearish. I think most people will be lucky if they still have 50% of their money in 5 years time. You have to have diversification - some real estate in the countryside, some gold and some equities because if you think it through, say Germany 1900 to today, we had WWI, we had hyperinflation, WWII, cash holders and bondholders they lost everything 3 times, but if you owned equities you'd be ok. In equities in general you will not lose it all, it may not be a good investment, unless you put it all in one company and it goes bankrupt." As for gold: "I am worried that one day the government will take it away." As for the one thing he hates the most? No surprise here -government bonds.
MARC FABER'S PREDICTIONS FOR 2012 : MORE PRINTING, LESS PROSPERITY
(((WATCH))) http://revolutionarypolitics.tv/video/viewVideo.php?video_id=16942
$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months
by Tyler Durden on 11/26/2011
While everyone was focused on the impending European collapse, the latest soon to be refuted rumors of a quick fix from the Welt am Sonntag... http://www.reuters.com/article/2011/11/27/us-eurozone-integration-ecb-idUSTRE7AQ00F20111127 ...notwithstanding, the Bank of International Settlements reported a number that quietly slipped through the cracks of the broader media. Which is paradoxical because it is the biggest ever reported in the financial world: the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives reported by the world's financial institutions to the BIS for its semi-annual OTC derivatives report titled "OTC derivatives market activity in the first half of 2011." http://www.bis.org/publ/otc_hy1111.pdf ...Indicatively, global GDP is about $63 trillion if one can trust any numbers released by modern governments.
Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high. Another way of looking at the data is that one of the key contributors to global growth and prosperity in the past 10 years was an increase in total derivatives from just under $100 trillion to $708 trillion in exactly one decade. And soon we have to pay the mean reversion price.
What is probably just as disturbing is that in the first 6 months of 2011, the total outstanding notional of all derivatives rose from $601 trillion at December 31, 2010 to $708 trillion at June 30, 2011. A $107 trillion increase in notional in half a year....
Continue Reading this article Here:
Bankers Hedgefunds and sovereign wealth funds are gambling on hunger by speculating on food supply
-December 20, 2011-
The Speculative Scrum Driving Up Food Prices
High-frequency traders and momentum-driven hedge funds made it their business to speculate on food in 2011.
-20 December 2011-
...."Prices have been way out of equilibrium in 2011," Bar-Yam told me. "The bubble has not burst yet."
According to Bar-Yam, the international thirst for biofuels has put a strain on arable land previously reserved for food production. At the same time as the rise of the biofuel mandate, the rise of investable commodity indexes and other electronically traded funds has offered investors of all stripes a chance to sink their cash in a sparkling new casino of derivative products. As a result, an ever-flowing spring of speculative capital sustains the status quo.
But just as food is no ordinary widget, speculation in commodity markets is not simply a matter of financial predation. "The high prices of food have resulted in accumulations of inventories at the same time as people can't afford food," said Bar-Yam, who noted that the Arab spring was triggered by the food-price bubble. In fact, Necsi's quantitative model of speculation predicted the uprisings in Tunisia, Libya and Egypt, and warned that if food prices remain inflated, riots and revolutions will go global sometime between July 2012 and August 2013.
"We are at a critical point," said Bar-Yam. "We don't have a stay-the-course option right now."
He believes the time has come for global regulators to step in and manage the global market. Their first task would be to guarantee transparency and make public information previously shrouded in secrecy – such as who holds the biggest stakes in global commodities. Transparent accounting practices would have made the disappearance of $1.2bn worth of customer money from the books of MF Global... http://www.dailymail.co.uk/news/article-2071686/Jon-Corzine-apologises-MF-Global-clients-1-2-billion-money-remains-missing.html ...less a matter of sleight of hand and more a matter of international crime...
(((Read the -entire- article Here))) http://www.guardian.co.uk/global-development/poverty-matters/2011/dec/20/speculative-scrum-driving-food-prices
The Food Crises: A Quantitative Model of Food Prices Including Speculators and Ethanol Conversion
http://necsi.edu/research/social/foodprices.html
In layman's terms for those us still wrestling with 'deep thoughts', please!
At this rate it would not be surprising to see one quadrillion in OTC derivatives by the middle of next year. The global derivative pyramid scheme is almost over.
:::::::::::::Counterfeit Value Derivatives: Follow the Bouncing Ball :::::::::::::
http://www.oftwominds.com/blogfeb12/counterfeit-derivatives-Zeus02-12.html
-February 3, 2012-
This guest essay on derivatives was written by frequent contributor Zeus Yiamouyiannis.
Here is how the counterfeit value derivative con works. It’s a game of “I pretend, you pretend, we all pretend, and the taxpayer will pay in the end”.
1)) I’ll create an instrument, say a credit default swap (CDS), an unregulated insurance with no capital requirements, with a certain “notional” value. Notional value is just something I assign. It does not have to be attached to or backed by any real asset or actual money/principal, but I can pretend as if it is. (Notional amount): http://en.wikipedia.org/wiki/Notional_amount
2)) As a seller, I will just declare that this swap covers the full value X of this company, contract, etc. if credit event Y happens. I receive lucrative insurance premiums and fees for my unbacked promise. The CDS’s value is based in nothing more than my promise to pay. I don’t have to have adequate capital reserves on hand, but I can pretend as if I do perhaps with some mini-reserves based on objective-seeming risk ratios calculated by my mathematical models. (credit default swap): http://en.wikipedia.org/wiki/Credit_default_swap
3)) As a buyer, you can then buy as many of these CDS’s as you want, even for a single default. If you are really sure something is going to tank you can insure it 30 times over (or a 100 or 1,000) and get 30 (or 100 or 1,000) times the return when it goes bust! In regulated insurance it is unacceptable to insure beyond the full replacement value of the underlying asset. Not so with CDS’s. The seller has gotten 30x the premiums and the buyer gets 30x value in the event of default. As a buyer of this phony “insurance” you don’t have a stake in the affected properties, but you can essentially pretend you do.
4)) As buyer and seller of CDS’s either one of us can assign our risks to a third party through another contract, and pretend as if we are covered in case our own game playing blows up in our faces. This allows us to retain even less reserve capital and spend freed-up funds on more high-risk, high-(pseudo) return speculation. (The monster that ate Wall Street.): http://www.thedailybeast.com/newsweek/2008/09/26/the-monster-that-ate-wall-street.html
5)) We can purchase and sell of these derivative contracts to each other at unlimited rates to generate massive volume and huge fees and profits. We can simply hyper-cycle risk and take our chunk each time.
According to the Bank of International Settlements, as of June 2011 total over-the-counter derivatives contracts have an outstanding notional value of 707.57 trillion dollars, ( 32.4 trillion dollars in CDS’s alone): http://www.bis.org/statistics/otcder/dt1920a.pdf ...Where does this kind of money come from, and what does it refer to? We don’t really know, because over-the-counter derivatives are not transparent or regulated.
With regulated economic markets, when an underlying real asset is impaired (i.e. the company in question is bankrupt, the mortgage has defaulted, etc.), market value is assessed, default insurance is paid up to replacement or full value, bond holders and stock holders make claims on remaining value and the account is closed. There is no need for bailouts because order and proportion of compensation has been established and everything is attached to the value of the underlying asset.
When the unreal, counterfeit economy intrudes, you now have a situation where a person can put in an unregulated, but recognized, claim to be paid a thousand times over in case of impairment. Say market participants have negotiated for a bankrupt company a 70% payback for bondholders and (36% payback for insurance claims): http://seekingalpha.com/article/65104-a-misleading-chart-on-credit-default-swaps ...and I come with not one but rather 1,000 CDS claims demanding to be paid for each CDS.
Where does that money come from? Well if it were regulated insurance, I would have to be invested in the company in some way, my bond or stock payout would be limited by the actual asset value of the company, and my insurance payout would be limited as well. However, since I am unregulated and unrestrained, the money due me has to come from the CDS seller and my contractual agreements with that company (say AIG).
AIG could easily have sold 1,000 different unregulated insurance policies to the same person or a million CDS’s to a hedge fund, and when AIG could not pay up, it was threatened with insolvency, under which both its regulated and unregulated insurance policies and investments would become impaired. In fact there is abundant evidence that hedge funds (i.e. Magnetar) did in fact multi-insure certain portfolios while simultaneously pressuring the portfolio managers to select risky investments to ensure that the portfolios would crash. This is the opposite of a traditional “stake,” and this is the disease that modern derivatives bring—profit from intentional market destruction.
This chaotic state of affairs and its cascading implications for other interlinked parties and counterparties (read “too big to fail banks”), essentially resulted in economic extortion to force a huge public bailout of the whole crooked mess (totaling somewhere in the neighborhood of 10 – 14 trillion dollars in giveaways, loans and guarantees starting in 2008 in the U.S. alone.) Instead of agreeing to the extortion temporarily to prevent collapse and then aggressively pursuing orderly investigation, prosecution, and receivership, regulators and world leaders have simply covered up the events and even rewarded the perpetrators.
No wonder the market goes up dramatically when there is talk about another quantitative easing (Fed bailout) or emergency rescue (government/taxpayer bailout). These financial game players already know that an open public spigot is on its way, pouring real capital directly into their pockets.
In regulatory actions and legal courts, unregulated insurance claims should simply be declared null and void when applied to real assets and real compensation. “You have no stake, therefore you have no claim. Your agreement was with a third party that did not have adequate capital to pay for a contract with you. Take them to court.” Or “You have an imaginary claim for imaginary damage. Here’s your imaginary money. Your deal was private and unregulated, then it should be settled in private between companies without public intervention or support.”
Did that happen? No, because AIG had collapsed its unregulated private and regulated public functions and Congress had allowed it to do so with the repeal of the Glass-Steagall Act. Because the wall came down between regulated and unregulated activity, transparent and “shadow” markets, traditional and investment banking, this private fiat virus broke quarantine and the resulting contagion cannot be put back in the lab.
Because world leaders and their regulators blinked and did nothing, counterfeit private fiat (backed by nothing) has metastasized and infiltrated “genuine” public fiat (backed by country’s productivity if not by gold), and more and more actual money and productivity in the form of austerity is being thrown at a gargantuan and unrecoverable sea of counterfeit obligation.
How can you exceed 700 trillion dollars in unregulated derivatives alone? This is easy when market players are buying and selling from each other and when people can buy an infinite number of claims, insurances, and guarantees on credit events rather than assets. When banks are allowed to mark-to-model and then claim somehow that their back-and-forth trading and abstract multiplication of asset value is real, then all bets are off (or “on” depending upon which side of the fence your sitting).
Is it any wonder that the market for derivatives has grown another 100 trillion over the last two years? “We’ll concoct value and you’ll pay us real money for it? Of course we are going to keep doing it! Why not another 100 trillion!”
This probably is not going to stop until there is massive world-wide outcry and political change, a “black swan event,” or both. Let’s hope the first gains steam along with some long-overdue accountability for fraudsters before these nefarious banks destroy the body politic with their hubris and greed.
:::::::::: Fraudulent Debt = Counterfeit Money ::::::::::
http://www.oftwominds.com/blogfeb12/counterfeit-debt02-12.html
-February 2, 2012-
( ( ( f l a sh b a c k ) ) )
Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?
http://www.zerohedge.com/news/five-banks-account-96-250-trillion-outstanding-derivative-exposure-morgan-stanley-sitting-fx-de
-09/24/2011-
So basically if Germany doesn't bail out we have a bunch of "too big to fails" collapsing again here?
LOL here, here. The incomprehensibility factor is pretty high here :) I'm a sharp cookie I've been told, and this might as well have been written in Chinese as far as my ability to decipher it is concerned.
Financial instruments, especially the newfangled experimental ones, are not easy to understand for most of us.
1.5 years after this post, all the same problems are still happening. And they are bigger now. Yet the system seems to keep plugging along.
Thoughts?
::::::::::::Bankers’ Complaint of Uncertainty Obscures Reluctant Disclosure::::::::::::
http://www.bloomberg.com/news/2011-12-22/bankers-complaint-of-uncertainty-obscures-reluctant-disclosure.html
-Dec 22, 2011-
While bankers complain that regulatory uncertainty is hurting growth, their failure to provide balance-sheet transparency is creating uncertainty for the taxpayers who bailed them out....
Trading is fine. When its real stuff. But these people are gambling on things that only exist in the future. They are not real. The only thing real about these futures deals is the paper certificate they give to you in return for your dollars.
Trading is trading. Betting is betting. No More Bad Las Vegas Bet Bailouts.
There are investments, but does putting $707,568,901,000,000 on black, sound like an 'investment' to anyone? Does anyone consider that reasonable here, in the real world?
LOL I've read that number many times, but I still don't know, what derivatives, who originated them, what are they based on ---------it makes me nuts not to know. I'll guess they are CDS (credit default swaps) because I think they can be 200 to 1 bets on a bond ---they trade on basis points (I'm not quite sure how that works) The other thing about CDS is that it's a contract with a time limit like an insurance policy. In other words if they stopped selling them today and nothing crazy happened for a year ---poof they could all be gone, or not. Many of these OTC derivatives are private contracts between banks so we don't know what the hell they are or where they are or how long they are for or wether we might get stuck with the bill. It's enough to make you nuts.
OTC derivatives market activity in the first half of 2011
http://www.bis.org/statistics/derstats.htm
Semiannual OTC derivatives statistics at end-June 2011
http://www.bis.org/statistics/derstats.htm
To understand the true importance of this, I sugest you read: http://www.globalresearch.ca/index.php?context=va&aid=27872 by Paul Craig Roberts. It details how "Goldman Sachs and US banks have guaranteed perhaps one trillion dollars or more of European sovereign debt by selling swaps or insurance against which they have not reserved. The fees the US banks received for guaranteeing the values of European sovereign debt instruments simply went into profits and executive bonuses. This, of course, is what ruined the American insurance giant, AIG, leading to the TARP bailout at US taxpayer expense and Goldman Sachs’ enormous profits." So when Italy or whoever defaults on their debt (note, I said when, not if) then these banks will owe money that they do not possess. The world banking system is on the verge of collapse, isn't it, Tyler? Welcome to the Next Great Depression.
Okay, do you have a legitimate source for the above?
I have that the US is backing $259 trillion in derivatives from the fed gov:
http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq211.pdf
Considering that the world GDP is circa $60 trillion, and US is circa $14 trillion? This is called "writing checks your a$$ can't cash."
::::::::OTC derivatives market activity in the first half of 2011::::::::
http://www.bis.org/statistics/derstats.htm
::::::::Semiannual OTC derivatives statistics at end-June 2011::::::::
http://www.bis.org/statistics/derstats.htm
"writing checks your a$$ can't cash." Ahh see this is language I understand. So what happens when they bounce, and in what time frame is that likely to occur in? In laymans terms.... anyone?
:::::::::::: http://www.usdebtclock.org/# ::::::::::::
Holy crap that's a good link, passing this on freely. :)