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Wednesday, May 17, 2017

derivatives


DERIVATIVES ARE GROSS

The information in this article comes from a book I got at the library, “The Road To Ruin” by James Rickards.  I don’t really recommend any of his books, as they are a bit on the irritating side.  All “One World Government” and financial celebrity name dropping and a lot of repetition needing to be skipped over.  Don’t get me wrong, you could do worse things with your money, as he does cover a LOT of interesting items  seen few other places.  I just have my reservations.  Get a library copy before you buy any, to make up your own mind.  I did that in reverse because I’m bullheaded and such.  This article is about derivatives, as his reasoning and background information is quite good and I wished to pass it on ( any failure to translate properly is mine alone-the source material is impeccable ), but before we go there, a bit of his history on the cascading failing of complex systems is also worth sharing.  It is worth it as it has a lot more relevance to our current situation than the oft used Roman or Mayan collapse sprouted about by the legions of Uber Slow Collapsers. 

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From a 1300 BC wreck it was determined that the Bronze Age civilizations were engaged in “international” trade.  An area of some 16 million square miles, from the Baltic Sea to Sudan and from the Indus river to Spain was involved.  These were multiple civilizations.  The Hittites, Egyptians, Mycenaens and Mesopotamians.  For whatever reason still undetermined, a cascade failure caused all these kingdoms and empires to collapse ( most likely climate change, probably drought in an area mostly hydraulically challenged to begin with ).  All the issues that cause problems were exasperated by the change and the proverbial Perfect Storm gathered.  It is never one thing that causes collapse, but many.  Here is the important part.  It only took about fifty years for the collapse to play out, and that was followed by 300 years of Dark Age, only ending with Athens and Rome rising to power.  This was anything but a slow collapse.  Of course the fifty years is approximate and just because we’ve been in decline the same amount of time doesn’t mean our time is up based on this example ( although, for other reasons… ).  It just means not all civilizations get centuries to collapse like Rome did.  And it does mean that Dark Ages are part of the collapse process.

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Another divergent path the author took was examining the family fortunes of some pretty low key Europeans which lasted seven or nine hundred years ( in the books section on preserving wealth ).  It is rare to find an American family that keeps its wealth for much more than one century, so nine of them is pretty amazing.  You have to withstand empires crashing, Black Plagues wiping out half of the population ( the 25% cited statistics do not account for the initial 70-90% mortality as they average the rates over fifty years.  The last years of the plague only took 10-20% of the population, owning to immunity, so the Plague should really be feared far more than it is lead to believe ), communist purges, famines and invasions and all the rest.  The formula for parking wealth, outside of your income stream investments, is a third gold, a third art and a third land.  Obviously this is an elite level investment strategy not easily duplicated by any middle class folk, but it does highlight portable wealth  alongside food production as time tested investments.

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Okay, enough of that.  Let’s look at the history of derivatives ( the history begins with the Orange County collapse and the late ’80’s Black Monday, but those where just warm-ups to the following ).  Solomon Brothers almost went bankrupt in ’91, the result of getting caught in their attempt to illegally corner the market on Treasury bonds.  They used the standard derivatives complex trading strategies ( best left undetailed as there is a bunch of arbitrage and counter bets and shorts and longs and carry trades and then it just really gets complicated from there ) already introduced in the last five plus years.  Well, long story short as part of the plan to contain the mess the CEO Meriwether was forced to resign.  Then, like an ex-wife or a bad penny he reappeared a few years later leading LTCM, those of the Russian Debt Default fame ( for those who hate finances as much as algebra, most of you, I’m sure you didn’t follow these events.  No matter, as the details aren’t important ).

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LTCM was really the first true global meltdown scare.  The others were just pre-game warm-ups.  The scary part to keep in mind was that these rocket scientists pretend to be smart and edu-macated but are really at base just greedy whores without the street sense of an illegal bookie.  They leveraged their financial bets at 300 to 1.  Let’s put that into prospective.  If I have thirty five cents in assets, and have pledged that as collateral in multiple bets adding up to $100, if 36 cents in bets goes bad the whole $100 is in danger.  These are moronic levels of leverage.  So, LTCM thought they were smarter than the average bear, made these insane levels of bets in the derivatives market, and then acted all surprised and butt hurt when those sneaky commie bastards said, hey, western oligarchies, suck my junk, you can shove those post-collapse loans up your ass.  As you may or may not have finally come to realize, I am no fan of central banks and their thievery and was rooting for the Russians. 

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Now, keep in mind that the one company just described was almost responsible for a global financial crash.  No big deal, right?  We had just gone through the Asian Flu financial meltdown and other than all those pesky little Ornamentals losing their life savings, the Very Important People over in American weren’t really affected by and large ( not that we noticed, even if behind the scenes there was the Tech Wreck issue and the Y2K issue which might have been an Intelligence Industry false flag which might have targeted older systems for these financial shenanigans while the new, supposedly upgraded for Y2K systems weren’t as hackable, although I freely admit that scenario might be way too Tinfoil Hat ).  But the takeaway point is that every Fix And Fail event just gets bigger and bigger, the contagion harder and harder to stop.  Orange County to Stock Market crash to Solomon Brothers to LTCM to the 2008 crash.  Each was exponentially larger than the last.  Because nobody in power is remotely interested in stopping this immensely profitable money machine.  They just go back to Doubling Down On Derivatives.  And why stop?  There is literally no other way to make money financially anymore, as real economic activity has pretty much stopped.

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Tomorrow, we finally cover the meat of this article, the danger of gross derivatives exposure as opposed to net.

END

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5 comments:

  1. Student loans.
    Derivatives.
    There is really NO way to collect on student loans if the students who got the loans are living on welfare or crime. Sure you can cut back their welfare, but there is no other asset to really reasonably attach.
    And I worked for a for profit 'college' as an instructor. It sucked majorly. I saw 50%+ drop out rates before graduation. Of the bare handful of students I saw graduate most do NOT work in the field. Many were coming in with a little welfare to work money a couple with GI bills, but most were ex-cons who were being sold a bill of goods regarding being able to work in the IT field (really, you think some no-name for profit college degree will convince an employer to allow you to have access to some of their most valuable and expensive assets when you are an ex-con????!!!) The handful who made a go of it successfully had almost all worked in the field prior to attending.
    So here most of these students are.
    Example a single mother of 4 on welfare, with a record, drops out after getting $25k in debt. Debt will compound in interest, and servicer wants her to pay back $500+/month.
    She will never be earning enough money to pay back the loans.
    Who then will be on the hook for the loans?
    The US federal government for @70-80%.
    The remaining 30-20% ? privately traded derivatives based on private student loans currently earning on paper 7% interest But the source debts isn't ever going to perform anywhere near that level. And soon everyone is going to realize it.
    Maybe students will finally get real consumer protections against the rackets (like bankruptcy).
    Pop goes the balloon.
    OR the US federal government starts rounding up the former students in default and sends them all to work camps. (after all the debt was against a future claim on the labors of the students, since they aren't laboring efficiently enough, the government will have to organize it. At gun point if necessary...)
    Of course the revolution that will follow that will be quite messy.
    POP goes the balloon...

    ReplyDelete
    Replies
    1. Perhaps rather than work camps, merely community service. No backlash, the FedGov bails out the banks that way?

      Delete
    2. Have you seen the road side trash clean up road crews? Sure they get the roadside cleaned up. Eventually. But they are in it for a # of hours. Not miles cleaned. And it shows.
      Backlash as soon as some one gets injured or cant do the work demanded.

      Delete
    3. Well, how do they motivate/keep safe now? Been going on for awhile.

      Delete
  2. 1177 BC: The Year Civilization Collapsed (Eric Cline, PhD)

    https://www.youtube.com/watch?v=bRcu-ysocX4


    somebody may find this interesting

    great hair

    ReplyDelete

I must moderate-trust me. You don't want to see what happens otherwise. Sometimes it takes awhile to respond as I only check two or three times a day. No N-Bombs, nothing to get me libeled. Otherwise, have at it. If you criticize me, make sure to praise my hair first.