The Beginning Of The End
The Beginning Of The End By Michael T. Snyder - Kindle Version

The Prepper's Cookbook

Don't Buy Survival Food Until You Read This - If you stockpile the wrong foods, you could be setting your family up to starve. It sounds harsh, but the truth is too many people with good intentions are making critical mistakes with their food stockpiles. Watch this video now >>
The End of Obama? Approaching Obama scandal could change the White House Administration and our country overnight... Click Here
Gold Buying Guide: Golden Eagle Coins
PREPARE FOR A CME, EMP, OR GRID DOWN TERRORIST ATTACK AT: http://www.iplantosurvive.info/

Archives

The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System

Most people have no idea that Wall Street has become a gigantic financial casino.  The big Wall Street banks are making tens of billions of dollars a year in the derivatives market, and nobody in the financial community wants the party to end.  The word "derivatives" sounds complicated and technical, but understanding them is really not that hard.  A derivative is essentially a fancy way of saying that a bet has been made.  Originally, these bets were designed to hedge risk, but today the derivatives market has mushroomed into a mountain of speculation unlike anything the world has ever seen before.  Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion.  Keep in mind that the GDP of the entire world is only somewhere in the neighborhood of $65 trillion.  The danger to the global financial system posed by derivatives is so great that Warren Buffet once called them "financial weapons of mass destruction".  For now, the financial powers that be are trying to keep the casino rolling, but it is inevitable that at some point this entire mess is going to come crashing down.  When it does, we are going to be facing a derivatives crisis that really could destroy the entire global financial system.

Most people don't talk much about derivatives because they simply do not understand them.

Perhaps a couple of definitions would be helpful.

The following is how a recent Bloomberg article defined derivatives....

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.

The key word there is "speculation".  Today the folks down on Wall Street are speculating on just about anything that you can imagine.

The following is how Investopedia defines derivatives....

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

A derivative has no underlying value of its own.  A derivative is essentially a side bet.  Usually these side bets are highly leveraged.

At this point, making side bets has totally gotten out of control in the financial world.  Side bets are being made on just about anything you can possibly imagine, and the major Wall Street banks are making a ton of money from it.  This system is almost entirely unregulated and it is totally dominated by the big international banks.

Over the past couple of decades, the derivatives market has multiplied in size.  Everything is going to be fine as long as the system stays in balance.  But once it gets out of balance we could witness a string of financial crashes that no government on earth will be able to fix.

The amount of money that we are talking about is absolutely staggering.  Graham Summers of Phoenix Capital Research estimates that the notional value of the global derivatives market is $1.4 quadrillion, and in an article for Seeking Alpha he tried to put that number into perspective....

If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.

The notional value of the derivative market is roughly $1.4 QUADRILLION.

I realize that number sounds like something out of Looney tunes, so I’ll try to put it into perspective.

$1.4 Quadrillion is roughly:

-40 TIMES THE WORLD’S STOCK MARKET.

-10 TIMES the value of EVERY STOCK & EVERY BOND ON THE PLANET.

-23 TIMES WORLD GDP.

It is hard to fathom how much money a quadrillion is.

If you started counting right now at one dollar per second, it would take 32 million years to count to one quadrillion dollars.

Yes, the boys and girls down on Wall Street have gotten completely and totally out of control.

In an excellent article that he did on derivatives, Webster Tarpley described the pivotal role that derivatives now play in the global financial system....

Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.

Most people do not realize this, but derivatives were at the center of the financial crisis of 2008.

They will almost certainly be at the center of the next financial crisis as well.

For many, alarm bells went off the other day when it was revealed that Bank of America has moved a big chunk of derivatives from its failing Merrill Lynch investment banking unit to its depository arm.

So what does that mean?

An article posted on The Daily Bail the other day explained that it means that U.S. taxpayers could end up holding the bag....

This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn't get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.

So did you hear about this on the news?

Probably not.

Today, the notional value of all the derivatives held by Bank of America comes to approximately $75 trillion.

JPMorgan Chase is holding derivatives with a notional value of about $79 trillion.

It is hard to even conceive of such figures.

Right now, the banks with the most exposure to derivatives are JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, Wells Fargo and HSBC Bank USA.

Morgan Stanley also has tremendous exposure to derivatives.

You may have noticed that these are some of the "too big to fail" banks.

The biggest U.S. banks continue to grow and they continue to get even more power.

Back in 2002, the top 10 U.S. banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 U.S. banks control 77 percent of all U.S. banking assets.

These banks have gotten so big and so powerful that if they collapsed our entire financial system would implode.

You would have thought that we would have learned our lesson back in 2008 and would have done something about this, but instead we have allowed the "too big to bail" banks to become bigger than ever.

And they pretty much do whatever they want.

A while back, the New York Times published an article entitled "A Secretive Banking Elite Rules Trading in Derivatives".  That article exposed the steel-fisted control that the "too big to fail" banks exert over the trading of derivatives.  Just consider the following excerpt from the article....

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

So what institutions are represented at these meetings?

Well, according to the New York Times, the following banks are involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.

Why do those same five names seem to keep popping up time after time?

Sadly, these five banks keep pouring money into the campaigns of politicians that supported the bailouts in 2008 and that they know will bail them out again when the next financial crisis strikes.

Those that defend the wild derivatives trading that is going on today claim that Wall Street has accounted for all of the risks and they assume that the issuing banks will always be able to cover all of the derivative contracts that they write.

But that is a faulty assumption.  Just look at AIG back in 2008.  When the housing market collapsed AIG was on the wrong end of a massive number of derivative contracts and it would have gone "bust" without gigantic bailouts from the federal government.  If the bailouts of AIG had not happened, Goldman Sachs and a whole lot of other people would have been left standing there with a whole bunch of worthless paper.

It is inevitable that the same thing is going to happen again.  Except next time it may be on a much grander scale.

When "the house" goes "bust", everybody loses.  The governments of the world could step in and try to bail everyone out, but the reality is that when the derivatives market comes totally crashing down there won't be any government on earth with enough money to put it back together again.

A horrible derivatives crisis is coming.

It is only a matter of time.

Stay alert for any mention of the word "derivatives" or the term "derivatives crisis" in the news.  When the derivatives crisis arrives, things will start falling apart very rapidly.

 

Be Sociable, Share!
  • bobbobbobbob

    amerika used to make things now it makes things up. the rebuplicanterrorists have consistently supported selling bets on bets(financial make believe jobs) and support the outsourcing the good union jobs(manufacutring jobs) in the name of amerika and kapatalism and you buy these lies!! why do these hedge fund traders pay only 15% tax rate while u pay much more?? the rebuplicanterrorists consider you pesants and you are Google walmart pesant insurance!!!!
    i dare uuuuuuu

  • SMASH THE CONTROL MACHINE

    CULT OF PERSONALITYhttp://www.youtube.com/watch?v=7xxgRUyzgs0 I EXPLOIT YOU STILL YOU LOVE ME I TELL YOU ONE PLUS ONE MAKES THREE!!!!

  • Forrest Chambers

    I normally agree with this website, but in this case, I find it impossible to believe that derivatives can and will bring down the banking system. The main reason is that when someone loses money, someone else makes money, it’s that simple. No, this absolutely can not happen.

    • Michael

      Forrest:

      If the “house” can’t pay, both sides lose.

      Michael

      • http://lnx-bsp.net/ Tel

        The “house” should never need to pay, because derivatives are always one party petting against another party, and the broker in the middle just takes a fee. This is not the problem at all, but I’ll explain the real problem.

        Party A makes a win, so they demand their money, Party B makes a loss and the loss is huge so they demand a government bailout, else they will collapse and take the system down with them. The government guys have no market experience but they get terrified that something bad might happen to their pensions so they hand over the bailout. In order to pay the bailout they sell government bonds which get bought up by Party A.

        Now future taxpayers are in debt to Party A for a long, long time.

        The fundamental problem is that this is a standover operation… banks threaten the government with financial instability and government is pissweak (and typically corrupt) so they buckle easily. Once the banks learn that this process works they keep going: rinse and repeat.

        As more and more people understand that the system is rigged and the rule of law has broken down, they stop participating constructively and focus on their own personal survival. This accelerates towards systemic collapse. These people would use the democratic system to restore the rule of law if that were an option, but both parties are more interested in supporting big business than anything else. As it gets to the point where some sort of hardship becomes inevitable, each tribal group tries to blame the other side for causing the problem.

  • Jim Shores

    Tell those 2,500 elite mass murdering thieves to stick those dirivates up their arse. We don’t owe and we sure as Hell won’t pay.

  • Gary2

    Gotta love the capitalist system and deregulation. Not workin out too well is it?

    From the Christian Science Monitor:

    The standard of living for Americans has fallen longer and more steeply over the past three years than at any time since the US government began recording it five decades ago.

    Bottom line: The average individual now has $1,315 less in disposable income than he or she did three years ago at the onset of the Great Recession – even though the recession ended, technically speaking, in mid-2009. [...]

    “The pace of change has been incredibly rapid and incredibly tough on the less educated,” says Mr. Zandi, who calls this period the most difficult for American households since the 1930s. “If you don’t have the education and you don’t have the right skills, then you are getting creamed.”

    Yes folks this is capitalism at its best working just as it is designed to. Time to rethink this disastrous unstable economic system that brings one recession and depression after another on a regular basis. Can’t argue the facts-capitalism is not stable, just look back at history.Every ten years or so another crash, each being worse than the last.

    • Kevin2

      Gary2

      Capitalism works. The 20th century was for the most part brought to us by capitalism. I can’t name any items that propelled mankind into the modern age coming from communism.

      The above being said it’s the lack of regulations on capitalism that has caused the problem. Abandoning tariffs and replacing it with “Free Trade” with slave labor nations and de-regulation across the board specifically the demise of Glass-Stegall laid the groundwork for our fall.

      I like computers, cutting edge medical procedures, cell phones and the like. I don’t like the financial fox left in charge of the chicken coop.

    • http://lnx-bsp.net/ Tel

      Bottom line: the average citizen of the US owes a share of their government debt equal to about $48k which is a lot more than most of them can afford.

      • Kevin2

        Tel

        The debt is constantly paid off with devalued currency and higher prices. Remember the ten cent coke, nickel candy bar and nice new $2700 car?

  • Gary2

    Michael-and you need to ask why there is an occupy wall street movement? You answered your own question in you above excellent post among other reasons.

  • Gary2

    Les Leopold has a good explanation in his latest book:

    The Looting of America: How Wall Street’s Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It

    http://www.amazon.com/Looting-America-Destroyed-Pensions-Prosperity/dp/1603582053/ref=sr_1_1?s=books&ie=UTF8&qid=1319171096&sr=1-1

  • Sailor Jo

    Americans love it complicated. It is not enough to have the VIX to describe or measure volatility. The VIX, which has no value or substance, can be traded. That is worse than betting on a horse or a dog.

  • Toomanyfakeconservatives

    When the derivatives crisis hits, who do you want at the helm? Cain, Romney, Bachmann, Obama, none of the above?? Given the Balkanization of America, I think we are all going to be at our own helms soon.

    • jackro

      The only way out is the tough way. Give me a nut cracker any day. I would rather go down swinging, than with a whimper.

  • das monde

    They are basically placing bets that potentially no money in the world could pay out. The bailouts is frequently nothing more than 100% compensation of bet winners via obscured stories of helping out (bet loosers).

    Or look in this way: with every mortgage “new money” is created, right? During the subprime debacle, Credit Default Swaps (CDS) on subprime bonds were abstractly considered as equivalent to new issues of subprime mortgages – the investor demand for them was that mad. This lead to the infamous synthetic CDO bonds, and perhaps quite a few CDS on them. So here is a hitch: the CDS was indeed equivalent to mortgage bonds, except in chronology. A mortgage contract “crates” new money first, and then come the regular payments. The CDS is an “insurance”: first come regular payments, and then – bah! – a full scale compensation. Where does money come for the compensation?! Some ad hoc bailout action, of course.

    Some say that short sellers (for whom CDS is indispensable) add invaluable signals to the market. Well, if we would have more smart “investors” into the subprime bubble collapse, the TARP packages would had beenaccordingly many times larger!

  • http://None Hans

    I am watching all of this from South Africa. It is just a question of time before the whole crooked system collapses. We do have our own challenges, but I would not like to trade places with anyone in the USA. However, the coming collapse will affect all of us. At least one who sees what is coming, can take steps to prepare. Personally I think the age of working until retirement and sitting back thereafter has come and gone. So-called “sensible” investment planning has become meaningless. planning to survive the coming storm is more appropriate.
    America seems to face many challenges:
    -Corporations are outsourcing jobs overseas
    because:(i) It is cheaper and (ii) There are
    fewer laws and regulations to comply with.
    -Without proper jobs the housing market can
    never recover.
    -The economic system is doomed to fail. Any
    person with even a few brain cells can see
    that to print money from nothing is just not
    sustainable. Propaganda from the MSM can delay
    things. However, as they say, you can fool
    some of the people some of the time, but not
    all of the people all of the time.
    -I do not understand how any economist can have
    the idea that you will ever be able to repay
    your debt, whether personal or government
    debt.
    -We here drive mostly German or Japanese cars.
    American cars do not have a very good
    reputation in this part of the world.
    Personally I do like your electronic gadgets,
    manufactured in China!!!
    -Personally, I am also sceptical about doing
    business with people selling you
    worthless “investments”, like CDS swaps,
    derivates and so on. To bundle worthless
    mortgages together, give it a AAA grading and
    sell it to unsuspecting investors is just not
    ethical. This damages your credibility in the
    eyes of the world. People that were stung once
    will not remain suckers.
    -As the sole surviving superpower, everybody
    used to be careful of dealing with the US.
    After seeing the weaknesses of your forces
    exposed in Iraq and Afghanistan, more enemies
    may decide to challenge you in the
    future.
    -If the SHTF, there are enough weapons in
    circulation in the US to make surviving there
    interesting, to say the least.
    Good luck to all the good folks out there.
    I do appreciate sites like yours and all the work that goes into compiling the articles.
    Thanks.

  • Syrin

    Gary, you are seriously uneducated. Be honest, are you still in high school? Capitalism is not the fault. Capitalism would have NEVER bailed out these guys, they would have failed, and other stronger companie without risky ventures would have stepped in. Gov’t interference is the cause of the ENTIRE problem. The housing bubble was caused by gov’t interference when mandating interest rates stay ARTIFICIAlLY low, and demanded banks give loans to unqualified borrowers or face penalties. NONE of that happens in a free market. We live in a fascist state.

    http://mises.org/daily/5752/The-Fascist-Threat

    I know you have NO desire to educate yourself. You have “learned” enough from the proapganda our state education system has given you to be dangerous, but you have perhjaps the most closed mind of any who come here. You fail to see the obvious in that this administration has received the most campaign dollars from Wall Street of any in US history. The administration is fuill of appointees right out of Goldman Sachs, yet you say wall Street is the problem. You have no earthly clue what the Federal Reserve is or does, and how intertwined all three are. You don;t WANT to know, after all, you are what Marx called a “useful idiot” there to be loud and do the bidding of those you protest.

    More for the benefit of those with truly open minds:

    http://mises.org/daily/5753/Occupied-by-Government

    This one really highlights how utterly clueless the Sesame Streeters are about how an economy works:

    http://mises.org/daily/5761/What-Radicalism
    http://mises.org/daily/5773/In-Praise-of-the-Capitalist-1-Percent

    “In the world of the protesters, means of production have the same essential status as consumers’ goods, which as a rule are of benefit only to their owners. It is because of this that those who share the mentality of the protesters typically depict capitalists as fat men, whose plates are heaped high with food, while the masses of wage earners must live near starvation. According to this mentality, the redistribution of wealth is a matter merely of taking from the overflowing plates of the capitalists and giving to the starving workers.

    Contrary to such beliefs, in the modern world in which we actually live, the wealth of the capitalists is simply not in the form of consumers’ goods to any great extent. Not only is it overwhelmingly in the form of means of production, but those means of production are employed in the production of goods and services that are sold in the market. Totally unlike the conditions of self-sufficient farm families, the physical beneficiaries of the capitalists’ means of production are all the members of the general consuming public who buy the capitalists’ products.”

    PERFECTLY states how short sighted, uneducated, and brainwashed the Gary’s of the world are. Like Marx said, useful idiots.

  • http://SandyStringfellow.com Sandy Stringfellow

    Michael, thanks so much for this informative article. Considering the complex nature of the subject, the article is clear and concise, yet remarkably comprehensive. Your intelligent readers left many excellent comments as well. Bless you, sir, and Godspeed in your efforts to alert American voters to impending catastrophe.

  • wimpy tuesday

    I say there son, you listening to me son?, I say there, let us not throw the rich under the bus. We need them.

    I say, save our rich folk, lower their taxes.

  • tappedops

    Holy coladeralized debt obligation Batman… how are we going to get out of this one…

  • mack

    So how does one prepare for the coming repeat crisis, especially if we have money in one of those “too big to fail” banks or Merrill Lynch ? (short of moving money to a credit union. Though doesn’t that just weaken banks further? A run on the banks?)

  • mack

    Maybe the whole damned thing needs to come to a spectacular collapse so we can all learn from scratch what really matters….after the survival of the fittest law cleans house, that is.

  • http://SilverMiningClaims.com Barry Murray : editor NevadaMining.net

    For us on the supply side of silver mining that have not been able to raise dollars to actually mine metals needed for solar energy because of silver ETFs — we know all about the dangers of Monopoly Money.
    This is why more miners bite a paper dollar, of late and finding it isn’t real, are suggesting their wives take in laundry to pay for other commodities as fuel, and food, to replay loans in real silver dollars.

  • BlackDog

    Best definition of a derivative: You’re at the track. Beezelbub & Bernanke-Bites are walking towards the gate. You bet your buddy which horse poops first. That’s a derivative of who wins the race. Ask Henry Paulson & Lloyd Blankfein what derivatives are.

  • Fred

    I do not see how the events that will soon be upon Europe, Asia, and the United States financial system will save the global economy.
    Europe is unable to find a real solution to their financial problems. I just read an interesting article about the Chinese bubble that may soon burst. As for the United States, we all know national debt is going up faster than a speeding bullet. It now stands at a record 14.9 trillion dollars when just two months ago it was 14.3 trillion dollars. Now throw in the derivatives and there can be no doubt that the global ecomomy will collapse.

  • Lennie Pike

    Criticize derivatives at the risk of being labeled a communist or socialist – even after the derivatives explosion. That is if a nuclear one does not take place first.

    If you think that’s a little too much, you unfortunately would be incorrect.

    Buckle up.

    • Balmyone

      Along with the implosion of all financial assets will be the discovery that there are more gold and silver contracts long than there is gold and silver to satisfy.

      Better load up on PHYSICAL gold and silver before its too late.

      http://gainesvillecoins.com

      Buy now before its too late.

  • clearthinker

    don’t forget about naked short selling. The crooks have sold everything under the sun, with no intention to deliver it.

    Look it up -it’s everywhere.

  • http://www.thewitchandsunflowergirl.com erik

    Most Derivatives are harmless- options and futures since they expire. But CDO’s and CMO’s are a mix of good and bad debt. Now Europe has the same problem since debts are mixed like scrambled eggs and cant be unscrambled or un broken. Gold anyone?

    • sharonsj

      Derivatives are not harmless. I remember another derivatives blow-up 25 years ago that wiped out whole municipalities and school systems. These people were told (translation: lied to) that derivatives were safe investments and were left in terrible debt which the taxpayers, as usual, had to pay for. I don’t think anyone went to jail back then either.

  • Bob McLean-Australia

    It is simple to overcome this issue, just force the banks into bankruptcy reorganization. This will allow the banks to continue to trade under their charter in a more controlled environment with the reintroduction of the Glass Steagall Act, and the derivative debt is cancelled. Like you or I, if we are bankrupt…all debt is cancelled and we move forward in a limited financial way for a period of time. In this case with the banks, all debts are cancelled but allowed to continue trading providing they operate under the Glass Steagall Act. NO Glass Steagall Act, next election, vote only for the Representative who supports this idea. Simple….ahhh…sorry for my ignorance…forgot…you are dealing with politicians who are easily bought off due to their own illusion of grandeur and self worth. Its time for a few guilty culprits to face jail.

  • HP

    who writes these articles?

  • JustanOGuy

    Here’s an idea… everybody stop paying their mortgage and credit card bills and let the games begin.

    • Sarah P.

      Been saying that since 2008. I hope it catches on. Include taxes also.

      You need to STARVE THE BEAST!

  • jackro

    Great article. Only one thing missing. How do we protect ourselves from this monster? Gold, silver, food, ammo, and water are the obvious, but is there something that we can do with our retirement savings(some of us still have 25 years of planning to do) etc?

  • Paul

    I never signed one of these contracts. Did you? It seems that we taxpayers should insist that our Congress critters refuse to backstop or prop up any derivative contract. Let the speculators alone suffer for their actions. They entered that market to ESCAPE THE NORMAL REGULATORY HURDLES REQUIRED IN CONVENTIONAL MARKETS. They should bear sole risk.

  • PAUL LEO FASO

    This is a criminal enterprise of the highest order. There can be only one resolution to the endless looting of our Treasury.

    GOOGLE; CLASS ACTION LAWSUIT AGAINST THE FEDERAL RESERVE BANK..OR FOLLOW THE LINK BELOW TO THE PLAN;

    http://www.zerohedge.com/print/365866

  • Wendell MacKenzie

    Easy solution…have a world finance ministers meeting and declare that all credit derivative products and those participating in them amount to terrorist acts being inflicted upon humanity.

    Give a 30 period to disband them to all market participants. Then start smart bombing the holdouts.

  • Richard

    The solution is very kiss! I can solve the problem beyond question! A simple solution? Sincerely, your mentor!!!

  • Charlie

    Sounds like another bailout for the “too big to fails” that we can’t live without!

  • Ray-UK

    I would like to recommend a book that tells you all about “The Quant’s” by Scott Patterson. The maths geniuses who brought down Wall Street, The frightening thing is that the Quants are still at it.The coming Deriviatives crisisis could happen any day soon.

  • http://www.kristostrading.com Mike McGill

    Ladies & gentlemen, boys & girls, this is going to get bad – REALLY BAD! As we speak there is occurring a steady withdrawal by depositors from the “Too Big To Fail Banks”- a silent but deadly run on the banks.The world banking system is on the edge of dangerous precipice that is threatening international equities and bond markets. Investors and savers need to prepare for a financial avalanche by moving their wealth into gold and silver immediately. Please don’t delay as time is of the essence.

  • http://CAFR1.com Walter Burien – CAFR1.com

    Understanding the puzzle of derivatives

    The Commodity Futures market is one of the largest derivative trading arenas with many commodities; currencies; precious metals; and energy products listed – .

    It all revolves around “Price” and “Time”. You will notice that on all traded contracts there are time periods listed noted by contract months going out up to three-years out.

    Whatever the price is today (minute by minute as the contracts are traded) someone can buy or sell a contract with a 1% to 3% of the value of the contract in their account (buying or selling on margin)

    Most from the public are psychologically conditioned that they have to buy first and then sell to make a profit. In derivatives that is 100% incorrect. You are making a “time” bet for higher or lower prices. If you think the value is going down, you sell a contract. If you think it is going up you buy a contract.

    With the markets now primarily being traded electronically, when a buy or sell order is entered and at your price your fill usually is instant. This means you can jump in and out at your choice. If you choose it could be 10 minutes, an hour, a day, a week, or longer that you hold your position. The following is an example of the best profit in the shortest period I personally made:

    It was back in 1981 and on on day when I was watching silver towards the close, it looked like it was very top heavy after moving up a few dollars over a couple of weeks. I said to myself: “I think it is going to collapse in the last few minutes before the close. It was 4-minutes to the close and I at that time having an account balance of about $32,000 slapped in two orders; (SELL) 35 DEC SILVERS at Market, and (BUY) 35 DEC SILVERS (Market on Close)

    Well, got filled on the 35 sell orders in about 5 seconds and in the next 4-minutes silver collapsed by 42c where my Market on close orders were filled. No more 35 derivative orders held, just accounting of the instant CASH collected on the trade. Here is the accounting: 42c X 35 = $14.7 X $5,000 ($1 value of a silver contract move) = $73,500 + $32,000 (my account balance before the trade)= $106,500 (account balance after the trade) or not bad after a 4-minute derivatives trade. Now those that had the “other side” of the trade got burnt. The commissions I was paying at that time was about $15 per contract X 35 contracts traded = $525 that went to the House and exchange that “cleared” the trade.

    Most commodity contracts have active participation in the front months but the further the time goes out participation dries up and thus no liquidity to trade those contracts.

    For every contract being that it is a bet on “time” will reach its expiration and delivery day. When that happens all speculators are out and those wishing to take or make delivery stay in to the last day and then the exchanges match up the “real” buyers and sellers to each other on the outstanding contracts where physical delivery of the underling commodity is made.

    Come that last day the volume of contracts held dries up to usually less that 1% of what it was a few days earlier (over 99% were speculators and less than 1% actually wanted to take or make delivery)

    The 600 trillion notional value is: the value of all the bets.

    EXAMPLE: on the commodity futures market has a $100,000 face value of the bet and the margin requirement to hold it over night is $2,500 and day trading margin can be $1,000. As of today the “Net” contract volume is at about 289,000 contracts. So based on notional face value that is 289,000 X $100,000 = $89 billion-dollars but the “margin deposits being used is substantially less.

    So that 600 trillion is the “full contract value” of all contracts being traded. That 1.5 quadrillion is when you take into account both sides of the contract. For every buyer holding a contract there is a seller holding the other side. So when counting each side 600 X 600 = 1.2 quadrillion.

    Here is the “Bottom Line”:

    With 99% speculators, yes it is a casino. But “who” are the primary players that are liquidating tens of billion of dollars a day from the trading activity (remember when the trade is closed in 5-minutes or 5-months it is all a “cash” accounting for the winner’s and loser’s account balances)

    Well, those from the general public that tries to play this game, they get their account balances decimated to the tune of 98% of those player that participated in very short periods of time. (bought on highs; sold on lows; got stopped out or force liquidated for not having the proper margin after being depleted from quick adverse market moves)

    So who are that 2% factor that takes everyone’s money to the tune of over a few trillion dollars a year (some times in a month as happened at the end of 2008) ?

    The answer may surprise you. Now the House and the Exchanges get a small cut from each side. There are a few magnates on the inside track that also make good money: But the “Primary” profiteer for several decades now are: Institutional Government Fund Management.

    They in so many words all subscribe to the same News Services and consulting groups. They have the fund resources in trillion dollar collective totals managed from around the globe. They can act in loose concert and roll the markets up; down; sideways and do so as fast or as slow as they wish.

    The end of 2008 showed how fast they could move the markets by exercising their multi-trillion dollar trading accounts and massive contract volume they can move in and out.

    At the end of 2008 in a month and a half about 25 to 30 trillion-dollars was “sucked” right out of players accounts globally that were on the wrong sides of the trades. Now some government investment funds where they were on the outside track got burnt. The primary government institutional global accounts that “were” on the inside track made a killing of several trillion dollars.

    Now here is the definition of arrogance:

    Government (USA) global institutional funds now after having liquidating trillions out of the playing loser’s accounts at the end of 2008, (which caused massive defaults from the loser’s who ended up with severe deficit account balances)now uses a trillion here and a trillion there of taxpayer revenue to shore-up their own casino and friendly corporate interests.

    Is there a “bubble” in the derivatives market?

    As of 2009, Oh yes.. You can not suck so many trillions out of others accounts at the end of 2008 without destabilizing the playing field. Commodity futures contracts back then were settled after weeding out defaults so back to normal there. I note the definition of normal is those government institutional accounts rolling the market up and down, quick and slow; as they liquidate that 98% factions cash on the trades.

    The danger lies in those “Mortgage Interest Rate Swaps” where there is a substantially reduced value of the underling commodity and in some cases the contract instrument traded had no underling commodity to back it up at all(real-estate home and commercial properties)

    Here the balancing act is precarious to say the least. Offsetting those contract instruments to balance out with “real” underling value market to market is a nightmare for the players.

    Those trillions in bailouts to the global banks and financial institutions have primarily gone to that end.

    Are they getting closer to balancing the books? Yes..

    Are they there yet? No, they are about 60% there and it will take more time to balance the remainder and the beat goes on..

    Walter Burien – (CTA) Commodity Trading Advisor) 1978 – 1992 and commodity Futures Trader of 33 years.

    • http://theeconomiccollapse Dr. Crow

      Thanks for your enlightening explanations on the derivative markets. I had no idea the depth of government involvment in these areas. Therefore I expect if things get really dicey, The Rules will be changed- to benefit the rulers of course! Good luck to you, sir.

  • http://www.toibry.blog.com Ibry

    Why do the nations rage and the people’s plot in vain?

    toibry.blog.com

  • http://CAFR1.com Walter Burien – CAFR1.com

    Understanding the puzzle of derivativesThe Commodity Futures market is one of the largest derivative trading arenas with many commodities; currencies; precious metals; and energy products listed – Futures Market It all revolves around "Price" and "Time". You will notice that on all traded contracts there are time periods listed noted by contract months going out up to three-years out.Whatever the price is today (minute by minute as the contracts are traded) someone can buy or sell a contract with a 1% to 3% of the value of the contract in their account (buying or selling on margin)Most from the public are psychologically conditioned that they have to buy first and then sell to make a profit. In derivatives that is 100% incorrect. You are making a "time" bet for higher or lower prices. If you think the value is going down, you sell a contract. If you think it is going up you buy a contract. With the markets now primarily being traded electronically, when a buy or sell order is entered and at your price your fill usually is instant. This means you can jump in and out at your choice. If you choose it could be 10 minutes, an hour, a day, a week, or longer that you hold your position. The following is an example of the best profit in the shortest period I personally made:It was back in 1981 and on on day when I was watching silver towards the close, it looked like it was very top heavy after moving up a few dollars over a couple of weeks. I said to myself: "I think it is going to collapse in the last few minutes before the close. It was 4-minutes to the close and I at that time having an account balance of about $32,000 slapped in two orders; (SELL) 35 DEC SILVERS at Market, and (BUY) 35 DEC SILVERS (Market on Close)Well, got filled on the 35 sell orders in about 5 seconds and in the next 4-minutes silver collapsed by 42c where my Market on close orders were filled. No more 35 derivative orders held, just accounting of the instant CASH collected on the trade. Here is the accounting: 42c X 35 = $14.7 X $5,000 ($1 value of a silver contract move) = $73,500 + $32,000 (my account balance before the trade)= $106,500 (account balance after the trade) or not bad after a 4-minute derivatives trade. Now those that had the "other side" of the trade got burnt. The commissions I was paying at that time was about $15 per contract X 35 contracts traded = $525 that went to the House and exchange that "cleared" the trade.Most commodity contracts have active participation in the front months but the further the time goes out participation dries up and thus no liquidity to trade those contracts. For every contract being that it is a bet on "time" will reach its expiration and delivery day. When that happens all speculators are out and those wishing to take or make delivery stay in to the last day and then the exchanges match up the "real" buyers and sellers to each other on the outstanding contracts where physical delivery of the underling commodity is made. Come that last day the volume of contracts held dries up to usually less that 1% of what it was a few days earlier (over 99% were speculators and less than 1% actually wanted to take or make delivery) The 600 trillion notional value is: the value of all the bets.EXAMPLE: a 30 Year Bond on the commodity futures market has a $100,000 face value of the bet and the margin requirement to hold it over night is $2,500 and day trading margin can be $1,000. As of today the "Net" contract volume is at about 289,000 contracts. So based on notional face value that is 289,000 X $100,000 = $89 billion-dollars but the "margin deposits being used is substantially less.So that 600 trillion is the "full contract value" of all contracts being traded. That 1.5 quadrillion is when you take into account both sides of the contract. For every buyer holding a contract there is a seller holding the other side. So when counting each side 600 X 600 = 1.2 quadrillion.Here is the "Bottom Line":With 99% speculators, yes it is a casino. But "who" are the primary players that are liquidating tens of billion of dollars a day from the trading activity (remember when the trade is closed in 5-minutes or 5-months it is all a "cash" accounting for the winner’s and loser’s account balances)Well, those from the general public that tries to play this game, they get their account balances decimated to the tune of 98% of those player that participated in very short periods of time. (bought on highs; sold on lows; got stopped out or force liquidated for not having the proper margin after being depleted from quick adverse market moves) So who are that 2% factor that takes everyone’s money to the tune of over a few trillion dollars a year (some times in a month as happened at the end of 2008) ?The answer may surprise you. Now the House and the Exchanges get a small cut from each side. There are a few magnates on the inside track that also make good money: But the "Primary" profiteer for several decades now are: Institutional Government Fund Management. They in so many words all subscribe to the same News Services and consulting groups. They have the fund resources in trillion dollar collective totals managed from around the globe. They can act in loose concert and roll the markets up; down; sideways and do so as fast or as slow as they wish. The end of 2008 showed how fast they could move the markets by exercising their multi-trillion dollar trading accounts and massive contract volume they can move in and out. At the end of 2008 in a month and a half about 25 to 30 trillion-dollars was "sucked" right out of players accounts globally that were on the wrong sides of the trades. Now some government investment funds where they were on the outside track got burnt. The primary government institutional global accounts that "were" on the inside track made a killing of several trillion dollars.Now here is the definition of arrogance:Government (USA) global institutional funds now after having liquidating trillions out of the playing loser’s accounts at the end of 2008, (which caused massive defaults from the loser’s who ended up with severe deficit account balances)now uses a trillion here and a trillion there of taxpayer revenue to shore-up their own casino and friendly corporate interests.Is there a "bubble" in the derivatives market?As of 2009, Oh yes.. You can not suck so many trillions out of others accounts at the end of 2008 without destabilizing the playing field. Commodity futures contracts back then were settled after weeding out defaults so back to normal there. I note the definition of normal is those government institutional accounts rolling the market up and down, quick and slow; as they liquidate that 98% factions cash on the trades.The danger lies in those "Mortgage Interest Rate Swaps" where there is a substantially reduced value of the underling commodity and in some cases the contract instrument traded had no underling commodity to back it up at all(real-estate home and commercial properties)Here the balancing act is precarious to say the least. Offsetting those contract instruments to balance out with "real" underling value market to market is a nightmare for the players. Those trillions in bailouts to the global banks and financial institutions have primarily gone to that end. Are they getting closer to balancing the books? Yes..Are they there yet? No, they are about 60% there and it will take more time to balance the remainder and the beat goes on..Walter Burien – (CTA) Commodity Trading Advisor) 1978 – 1992 and commodity Futures Trader of 33 years.

    http://CAFR1.com

    • Rob

      Hi Walter,

      What do you figure the odds are of the next crisis coming before the books are balanced enough to bail out the losers again?

  • READ ROVER

    One thing that always seems to be forgotten is that we the people have no standing with the us government! It is a little known fact that since FDR had no authority to confiscate gold under norman law he invoked the “TRADING WITH THE EMEMY ACT” left over from WW1 and thus by declaring US citizens the “ememy” he could impose ccomfiscation on them.The “TRADING WITH THE ENEMY ACT” has never been repealed nor has the declaration of US citizens as “the enemy”. we taxpayers are the enemy of the US and thus our protests are mmeaningless!

    Awful and sad but true! We need to rid ourselves of our elected Emperor and his Nobility in congress!

  • Mark Sivad

    The derivatives in my opinion, and others here may or may not be a threat. What is a real threat is the overvalued assets allowed on banks balance sheets, which just prolong the eventual re-evaluation.

  • wayne

    The AIG “derivatives” were actually just mortgage insurance that any one could buy. They were not limited to the entities that made the loans. So all the financial powers and insiders bought insurance (derivatives) on these loans, knowing full well many if not most would defualt and they would collect full value on real estate loans that they had not even made.

    This is why Greenspan, Paulson and the others allowed and encouraged ridicuously easy loan quaification and “liars loans” without any income verification. It was the biggest insurance fraud in world history. Would Jewish financiers and other like minded people commit insurance fraud? Is there a fat ass in America?

  • http://n.a. Rod Bleckstyne

    ….Mao Tse Tung wisely pointed out “Political Power Grows Out of the Barrel of a Gun!”

    ….Similiarly the only way today’s governments will yield to the Public’s Outrage (Democractic process is now a Pathetic Joke) over their collaborative “Corporate Crimes” is if that Public are weilding GUNS and Confronting Them en masse!

    • http://theeconomiccollapse Dr. Crow

      Yes, the Great Helmsman also said:
      “A revolution is not a dinner party…”

  • Don

    If the derivatives are little more than bets, and the govt. is going to provide the legal system and infrastructure to support the process somewhat akin to a gambling establishment. then a 10% vig should should be charged on both sides of the transaction. A monitor should also be appointed to prevent a house from gambling more than it could afford to lose.

    • Guest

      I’d rather see the old method that was put up to straighten out attorneys (not fool proof, but helped).
      I suggest we take ALL the major bank officers, including down through the 2nd and 3rd VP’s for all sections, mix them up in a big stadium, then have them all line up.
      Shoot every third one of them and then tell them if anymore shennanigans like “derivative” “investing” will see them all brought together again and every 2nd one will be shot.
      Works every time… AFTER you’ve taken the first step to get them all together.

  • mile

    The Derivitive Bank extortion has already paid 850 billion ………………

  • Munford Coldwater

    Can anyone speculate how much writing and negociating 1.4 Quadrillion in these contracts yields in commissions and other assorted fees. Seems to me this represents a huge amount of money sucked out of the system, which is perhaps the true season for the existance of these largely useless contracts.

  • jon

    now you know why were in so much debt! its been an open free for all for the politicans and bankers. not one is in jail because of it. the set up was delibert to rip off and clean out america and much of the world . t o destroy fiat

  • Mike

    So how much of this problem has to do with our fiat currency system and are most people living in denial about an inevitable world economic collapse? Human ingenuity will take us through whatever we got ourselves into. I cannot subscribe to the idea that a failed economy is the end of my hopes and dreams. I believe that a massive shift in how we live and trade commodities will occur in my lifetime and it’s great to be alive during such a rapidly evolving time in world history. Old ideas will be thrown out by necessity. A new way of life will emerge…exciting times people! Good luck and stay safe.

    • SmokietheBear

      ‘A new way of life will emerge.’

      Hopefully, with a ten-fold reduction in population.

      • Lovelife

        About you comment of a reduced population,Great , you can be the first to go.

      • ace

        lead by example you go frist

      • steve edward

        I hope you are included in the the ten-fold reduction in population

  • blackjack

    OK we all know whats going on
    but how to preserve your wealth – is it cash gold silver WHAT?

    I dont see an answer to this?

  • Tom

    MF Global ; The first domino ?

  • http://theotcspace.com Bill Hodgson

    To quote you “Most people don’t talk much about derivatives because they simply do not understand them”.

    I’m afraid your posting uses the notional size of the contracts instead of the actual financial risks which are far smaller. You’ve picked on giant numbers and metaphorically arm waved and spread fear and doubt.

    For each derivative contract, you need a ‘notional’ number which is the amount of money to calculate payments on – the actual payments and therefore amount at risk, is derived from those numbers, and comes down to much smaller amounts.

    e.g. an interest payment on a $100m interest rate swap, where the difference between the fixed and floating rate could be as low as 0.5% would be $500k, hardly a mind boggling amount. And yes these amounts add up, but not the to vast amounts you’re suggesting. Have a read about the bond market – really big amounts, those are the ones to worry about.

    At the moment, the problems with the world economy are driven by over-borrowing, simple stuff. The derivatives in the world are little to do with how some European countries and one north american country have borrowed too much.

    Best wishes, Bill

    • Credulous Dolt

      Thank you, thank you, thank you.

  • Atilla Levay

    History seems to be repeating itself again and again since Biblical Times.

    The present worldwide financial crisis, like the ones before it, is not an unpredictable, unforeseeable sudden act of Nature, like a Tsunami, Hurricane or Earthquake, and proves yet again that the (Financial) World is run mostly by bulimically greedy, insatiable, cynical, unscrupulous, dishonest, short sighted, but incredibly arrogant and conceited idiots, driven probably by some inferiority complex ridden, insane compulsion to amass more and more unnecessary Riches, Wealth and through that, Power over their fellow humans. Had the highest ranking decision makers of the Financial and Political World adhered to the time honoured proverb of: “cut your coat, according to your cloth” the World, Mankind, and Mother Earth, our one and only sustainer, of Life, and Home would not now be cascading down the slippery slope towards Total Chaos, War, Famine, and Destruction. The concept of “Noblesse Oblige” means nothing to these people and they are incapable of seeing their moral responsibility and understand that we, all of us, are passengers on Planet “Titanic” Earth and in the End will sail, or sink into oblivion together anyway. By now we have got to the Stage, that Economic life, Television, Newspapers, Culture, just about every facet of human life is controlled by these, in reality inferiority complex ridden, Mad Morons. The gap between Rich and Poor is wider than ever before in the History of Mankind, and instead of getting smaller it is increasing day by day. To paraphrase World War II British Prime Minister Winston Churchill: “Never in the Realm of Human History have so many been exploited, taken advantage of, manipulated, smilingly sent to financial ruin, abject poverty, hopeless despair, or even death, by so few.”
    The pictures below perhaps offer us the way we should follow to solve this problem.

    Atilla Levay

  • Pingback: Arrivederci Berlusconi | ForexWorldBlog

  • John Loren

    Subject: Re-hypothecation =

    Newest Biggest British Surprise = Far Greater than Derivatives

    __ Derivative bomb is only the tip of the iceberg.

    ………Explains what ” What ” Happened at MF Global !!

    **********************Bigger than ALL the Sub-prime /

    Video:

    http://www.realecontv.com/page/6262.html

    Click Above

  • http://one-world-unite.blogspot.com peace lover

    This is surely why God prohibited interest and gambling. while these people playing around with the non-existing value “assets”, there are people who scrapping ration from the island of garbage disposal. where did all the resources went? wasted as excess on the silver plate after a “big boy’s” meal. Where is the love? to create nuclear, atom shall be separated and exactly by doing that, they separated humanity for this destructive, short term power. lets embrace peace as how Buddha tought us. let the peace get us out from the tribulation as mentioned by Jesus. It may be too late to reverse the time-bomb, but never to late for embracing the love, and seeking the hidden truth.

  • GERN

    NATIONALIZE THE ENTIRE MONETARY SYSTEM..THROW OUT THE MONEY CHANGERS…. ABSOLVE THEIR WEALTH…. PUT THEM ON TRIAL …..INSTALL NEW BANKING SYSTEMS WITH STRICT REGULATIONS …”THE NEW PEOPLES BANK OF AMERICA”

  • Pingback: 22 Red Flags That Indicate That Very Serious Doom Is Coming For Global Financial Markets

  • shogun_01

    damn, reading news like this makes me sick to my stomach… and its true the worst of it not even mentioned is hypothication of collateral by banks… to an infinite amount.. just look at what banks re-hypothicated… most plegdged over 50% of their collateral!

  • Keith Bailey

    If you allow banks to fail as they should,or any bussines have the first time the market forces would have taken care of it like it used to untill goverment got involved. Human nature will not correct itself without a little pain

  • http://ssco@ionet.net terry

    Let us preparwrw for excitingg trip

  • http://ssco@ionet.net terry

    We are due for some exciting times

  • Dana

    There’s a lot of info in this report, especially as it relates to sizing up the derivatives market. It presents the market as of the 4th qtr of 2011 so it’s pretty recent data.

    http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq411.pdf

  • Godzilla

    Nature points again and again the folly of man.

    Godzilla!

  • Godzilla

    Nature points out again and again the folly of man.

    Ohhhh, no. There goes Tokyo. Oh,no,

    Godzilla!

  • John

    This is troubling news.Fortunately I produce some of my food and live near farms where I can barter for what I need. When this happens I would be willing to work for the things that are needed.I have a small machine shop where I can repair or fabricate items for trade.This would be far from an ideal lifestyle,but it might be a way to survive.If everyone barters their goods and services for goods and services that they need the inpact could be lessened.Though it would do my heart good to see these wallstreet/banksters planting and working fields by hand. I hope none of this happens.

    • Credulous Dolt

      Oh. for *****************, stop. Fix the real problems in your life. The chances that you’ll be hunting for dinner with a pointed stick are nil.

  • Doug Danzeisen

    If I understand correctly then derivatives are nothing more than a bet, they are not tangible assets, and they became legal due to the repeal of the Glass-Steagal act? So in reality they generate vast profits out of nothing, as unless the agreed upon event come to pass the fee is total profit. Is that about it?

  • kenezen

    Notional Derivatives (mostly Credit Default Swaps CDS) fit your description. and I really enjoy your site and agree with much of it. A few things.
    Listed Derivative tranches were developed in the low to middle eighties. Tranches are genetically altered “Strips” of securities formed to reflect specific investor needs. some were high yield and illiquid some were mundane low yield better credit and liquid. They were formed generally as Interest only strips (IO)or Principal only strips (PO). IO strips generally go higher in value when interest rates go higher. PO strips go higher when when Interest rates go down. They are value bearing. These are derivative strips with value. There were in the 80′s the first really complex modeling done to these strips to protect inherent value in rising and falling interest environment. Econometric models were used to predict cash flows given movement. Today even more sophisticated models are employed and Synthetic trades in multiple markets are placed at the same time to protect or enhance value. Calculitic econometric models that would make Einstein blush are used to coordinate the hedge and asset!
    I hope this helps.

    • ThePhamwaaOfShardu

      Yeah, OK, Kenezen; IOW it’s a casino. Bets are made on event outcomes. There is no real asset other than the money flying around, and event the worth of THAT is questionable.

      So I buy a house. I get a mortgage. The lender gives me the money and gets payments with interest.

      It should all stop there. Trading derivative instruments like they’re pork bellies is pure insanity, born of greed and megalomania.

      Stop it. Just stop it.

  • stevemcfadden

    The sure bet is total monetary collapse of pandemic global proportions at some point in the future. There is absolutely no possibility that this will not happen. Pray up…be ready. I’d be shocked if it is not within 5 years. The Rapture of the church could precede this event….hope so. Just so you know…this is just a big guess! That’s all.

Emergency Essentials/BePrepared
Agora Financial
Thrive Life
FEMA Hates This

Austin Coins
Family Survival Plan - Check This Out!

PRI Advanced Fuel Treatments

High Blood Pressure?
Liberty Metals
The End Of America?
Panama Tours
ecb125e
Facebook Twitter More...