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Thursday, April 19, 2012

City of Dreams

I've been harping on the incredible threat represented by the $250 trillion in almost entirely off-the-books, unregulated derivatives market -- 95% of which is should be but isn't on the books of the top five US banks.

It's an astounding 550 times the tier 1 capital on the books of these same banks -- all of which are considered too big to fail.  Looking at it another way, a two-tenths of 1% decline in the value of those derivatives could wipe out all tier 1 capital altogether [see: The Wipeout Ratio.]  If that weren't bad enough, it's dwarfed by the global derivatives market of $707 trillion.

It's hard to appreciate just how much money we're talking about.  But, does an outstanding job of putting it into perspective, focusing on the 9 largest banks' $228.72 trillion in exposure.

Take the time to read this, and please pass it along. Click anywhere on the nice pretty picture below.


  1. What an eye opener on derivatives. Thank you for the lesson... I think. How depressing. The whole thing is in for an epic fail at some point it would seem....

  2. Epic is the perfect word, right?  They insist that they're running matched books, and that everything nets out; but, these are the same people who tanked the world economy when they misjudged real estate - arguably a much simpler asset class to understand and predict.  And, the degree to which these things are pledged/re-pledged/sliced/diced/hypothecated...

    I seriously doubt anyone truly knows what the real risk is. Who are the walking dead?  Who are the ultimate counterparties?  Who would know?  Which key institution, large or small, will fail and knock over the first domino? 

    According to The Economist, there are only $115 trillion in developed country assets in the world ($48T in residential real estate, $14T in commercial, $20T in equities, $20T in govts, $13T in corps.)  But $707 T in derivatives.  Yikes.

  3. I've seen some of their other works, but I like this new one!  Those "double" towers of $1T (really $2T) are mind boggling.  Yes, an EPIC FAIL is in the works, but like most things evil, it will go kicking and screaming and clawing before finally succumbing to the inevitable outcome.

  4. So what is real anymore? If money is simply a figment of our imagination, worth simply the faith we give to it, why can't we simply develop more leverage, more derivatives, more illusions, as it is all based on illusion anyway.

    I don't want to belittle what is happening here, but truly, the whole thing is so whacko one has to question humanity's reasoning. And the more we look into the nature of things, perhaps it's all an illusion anyway.

    Even science questions whether it is wave or particle, both, neither, and how a wave/particle can be in two places at the same time. Even more crazy is the fact we now know the nature of what is as being influenced, if not outright determined, by consciousness. So whether it is wave or particle and it's behavior is influenced by the one observing it.

    Hence, perhaps money and derivatives are nothing more than a collective shared illusion. The waves we study in EWT are perhaps patterns of consciousness. When sentiment shifts, so does the market. Hence, even our markets are a result of consciousness.

    So what is real? What can we really "bank" on anyway?

    Sorry if this is too metaphysical, but truly, derivatives and the whole ponzi-illusion discussion must include what humans bring to it. The whole thing is truly unreal... many would say unbelievable.

  5. Thought-provoking, DL.  I think questioning humanity's reasoning is a great place to start.  As an amateur historian, I assume those in the future will regard this period in time with just as much derision as we do, say, the middle ages.  What is reasoning, but the stories we make up to rationalize what we want to do?

    The one thing I'm sure of is that in 2112 (assuming we survive that long) school children will poke fun at our simplistic 2012 understanding of matter.  But, I completely agree that the nature of what's being observed is in the eye of the beholder.  And, there's enormous power in being able to influence others' observations.

    IMO, the financial system, as an artificial construct, is no more or less than perfect than its makers/owners -- who, subject to the same human struggle between fear and greed as everyone else, aren't capable of operating anything in a strictly linear fashion.  Hence, the inevitable cycles -- whether defined by Prechter, Fibonacci, etc.

    Money is real only because the majority of people agree it is.  Countless times in history, a society has rejected the official value of its currency.  What hubris that we have convinced ourselves this time is different, that we've finally got it figured out. 
    Again, this is the story TPTB tell so they can rationalize the lining of their own pockets.

    Every derivative contract is an insurance policy against undesirable outcomes -- mainly bad investment decisions.  Insurance doesn't nullify the costs of screwing up, it merely spreads them across a large pool of stakeholders.  As we've learned the past few years, TPTB have no qualms about sharing the costs of their screw ups with the rest of us.  That's what makes a number like $707 trillion -- $100,000 for every man, woman and child on the planet -- so frightening.