Saturday, July 3, 2010

The Derivative Monster

The "derivative monster" still lurks in these financial waters.  I just finished Michael Lewis' latest bestseller, "The Big Short", which chronicles the details behind the mortgage meltdown.  At the core of the crisis were collateralized debt obligations (CDOs) a form of derivatives.  I still think that derivatives will be the core of the major meltdown that still lies ahead.  The reason is that a small "bet" can control a significant amount of dollars.  It has been reported that $700 TRILLION of derivatives exist worldwide. These options have way too much leverage.

I'm confident on the "what", but the "when" is very unknown.  This financial casino can only keep the gamblers at the table for so much longer.

Weiss Research's team just released this in a report:
-Fact: The U.S. derivatives that helped cause the last debt crisis are merely being shifted around like deck chairs on the Titanic.
-Fact: Nothing whatsoever is being done about the derivatives monster overseas, which is more than TWICE as big.
-Fact: Most important, despite months of debate and thousands of pages of legislation, the two biggest risk-mongers of all — the Treasury and the Fed — didn't even get a slap on the wrist. They got more power.

Every contraction cycle needs a culprit.  Derivatives will be the blame for this one.

"Jim Puplava posted a great article on the banks last year...especially focused on those with large derivative positions. JPM Chase has an incredible derivative position."
Random Roving, August 18, 2002 (pre-blog email days)

The wild ride continues!!
"In February this year he ranted every week on his radio show about 'naked short selling', 'credit default swaps', and 'derivatives'. I was originally unfamiliar with these terms and was amazed last week when they became front page news."
Random Roving, September 30, 2008

"We've just seen the beginning of the derivative implosion. Remember, Warren called them 'weapons of mass destruction'."
Random Roving, January 1, 2010

No comments: