"... Derivatives bubble explodes five times bigger in five years
Wall Street didn't listen to Buffett. Derivatives grew into a massive bubble, from about $100 trillion to $516 trillion by 2007. The new derivatives bubble
was fueled by five key economic and political trends:
1. Sarbanes-Oxley increased corporate disclosures and government oversight
2. Federal Reserve's cheap money policies created the subprime-housing boom
3. War budgets burdened the U.S. Treasury and future entitlements programs
4. Trade deficits with China and others destroyed the value of the U.S. dollar
5. Oil and commodity rich nations demanding equity payments rather than debt
In short, despite Buffett's clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.
Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the
world's clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier's window at a racetrack or casino, where you'd place a bet or
cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs
for the tainted drugs and lead-based toys we buy.
To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary
* U.S. annual gross domestic product is about $15 trillion * U.S. money supply is also about $15 trillion * Current proposed U.S. federal budget is $3 trillion * U.S. government's maximum legal debt is $9 trillion * U.S. mutual fund companies manage about $12 trillion * World's GDPs for all nations is approximately $50 trillion * Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion * Total value of the world's real estate is estimated at about $75 trillion * Total value of world's stock and bond markets is more than $100 trillion * BIS valuation of world's derivatives back in 2002 was about $100 trillion * BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion ..."
Here are two other informative sites on the subject:
I know what some are gonna say on this (that 401k should not be shifted), but I moved my 401k to stable value funds on 10/3 (blue arrow on chart). Pretty damn close to the peak. I didn't see the big money supporting the 14k levels and wanted to preserve my money.
Let me know what you think of the idea...my url is on the chart. Come say hi. 8)
From this no-win situation, the Fed seemingly pulled a rabbit from a hat. The news, as it is gushingly told, is that the Fed has acted decisively to inject liquidity into the faltering financial system by loaning $200 billion worth of Treasuries - securities as good as cash - in exchange for mortgage backed securities. The implication is that banks that are loaded down with toxic, faltering, MBS's can just trade them in for Tbills. That's basically how I heard the news described on CNBC today, between the oohs & aahs at the record-breaking stock market rally.
Gushing and hype aside, the real news is this: Today the Fed announced that it would loan Treasury securities to primary dealers for a period of 28 days, in exchange for AAA-rated mortgage securities, at a discount. The first weekly auction will not take place until March 27th.
What does it mean? It means the Fed is expanding its role as a pawnbroker. Banks can bring their crappy loans in to the Fed and exchange them for risk-free Treasuries for a few weeks until they (the banks) can hopefully get back on their feet. But like with all pawnbrokers, there are a few caveats: The exchange won't be one-for-one; banks will have to take a haircut (discount) on their crappy loans. How much? That part hasn't been worked out yet. Oh, and the loans can't be that crappy. They've got to be AAA-rated paper. The banks will have to leave the super crappy toxic stuff at home. The Fed doesn't want that and that window isn't open, yet. Every 28 days the loan will have to be renewed, and seeing that the Fed is a bank, fees will most certainly apply. ..."
From Jim Sinclair's site on the characteristics of OTC Derivatives:
"... Please review the following 13 characteristics of over the counter derivatives posted in various forms as far back as 2000:
Behind the curtain of silence the sub prime loan problem, better described as a global meltdown of credit and default derivatives, continues. The reason for
this condition is an attempt to value that for which there is no value. It is spreading globally as you have seen.
Keep in mind that over the counter derivatives generally have the following characteristics:
1. Without regulation. 2. Without listing on public exchanges. 3. Without standards. 4. Therefore not in the least bit transparent. 5. Therefore without an open market of the bid/ask type. 6. Dealt in by private treaty negotiations. 7. Without a clearinghouse. 8. Unfunded without financial guarantee of any kind. 9. Functioning as contracts of specific performance. 10. Financial character or ability to perform is totally dependent on the balance sheet of the loser in the arrangement. 11. Evaluated by computer assumptions made by geek, non market experienced mathematicians who assume religiously that all markets return to their normal relationships regardless of disruptions. 12. Now in the credit and default category alone considered by accepted authorities as totaling more than USD$20 trillion in notional value. 13. Notional value becomes real value when the agreement is forced to find a real market for ending the obligation which is how one says sell it. ..."