ANYBODY CONCERNED ABOUT THE ECONOMY TANKING? Why?

[Butterbean]

how do you mean? do you invest in them, or are you worried about the unknown dimensions of their impact on the markets?

I'm no good at articulating this type of thing since I only understand a small fraction of it 

Have you heard of this guy?  What do you think about what he is saying here?  I'd like everyone's opinon that would like to comment


By Jim Sinclair

Wednesday, September 5, 2007

It is not just coming -- it is already here.

I am convinced that all that has been anticipated since 1968 has now occurred. I see the mountain of over-the-counter derivatives that, including all types, exceeds $30 trillion. The mountain is shaking badly.

The situation now resembles the Weimar Republic (the German state from 1919-33) in the sense that the Weimar case study is predicated on planned currency destruction to avoid war reparations that got out of control.

The present situation is based on the ultimate sin of greed called over-the-counter derivatives. This mountain of unfunded special performance contracts is shaking and, as a product of declining US business activity and profits, will fall precipitously.

Before the fall of this unimaginably large mountain of garbage paper, all central banks in concert will prime the pump any way they can. Priming for this
purpose has no practical way of being drained. What is going to get out of control now is monetary inflation to offset the shaking mountain of over-the-counter derivatives. The beginning of this fall is in progress and will be history by 2012 or sooner.

Simply stated: This is it, today, now! Think the best but protect yourself under a worst-case scenario.

There is no more "if this happens, that will happen" scenario. It has already started to happen and the result will be a bull market for all commodities to a level that even the wildest (rational) bull cannot even imagine. The dollar is headed below the estimates of the biggest (rational) bear.

I take very seriously what I have said here. What I have just said I have never uttered before.

The over-the-counter shaking mountain of derivatives can't be fixed by trying to hide it. The problems cannot be fixed by any interest rate action. The problem will not even be fixed by a monetary inflation of unprecedented scope. The problem is coming home by 2012 or much sooner.

Keep in mind that the $20 trillion-plus over-the-counter credit and default derivatives generally have the following characteristics.

They are:

-- Without regulation.

-- Without listing on public exchanges.

-- Without standards.

-- Not in the least bit transparent.

-- Without an open market of the bid/ask type.

-- Dealt in by private treaty negotiations.

-- Without a clearing house.

-- Unfunded without financial guarantee of any kind.

-- Functioning as contracts of specific performance.

-- Of a character or ability to perform that is totally dependent on the balance sheet of the loser in the arrangement.

-- Evaluated by computer assumptions made by geeks, market-inexperienced mathematicians who assume religiously that all markets return to their normal
relationships regardless of disruptions.

-- Now in the credit and default category and are considered by accepted authorities as totaling more than $20 trillion in notional value.

-- Notional value becomes real value when the agreement is forced to find a real market for ending the obligation, which is how one sells it.

[Al-Gebra]

I'm no good at articulating this type of thing since I only understand a small fraction of it 

Have you heard of this guy?  What do you think about what he is saying here?  I'd like everyone's opinon that would like to comment

I read it quickly thinking I'd be able to dismiss it, but apart from the date he gives 2012, and the amount (NOBODY knows how much b/c this area is quite unregulated) he's right on.  And you only need my opinion    (maybe goatboy's, if he did indeed go to Wharton).

I have not heard of this guy.  But somebody I know well and work with testified in front of Congress after Long Term Capital (hedge fund run by the math whizzes he's ranting about) melted down in 1998. 

Derivatives serve as insurance, if you will. Most large commercial transactions cannot be insured in the usual fashion, so you create derivatives.  let's say Goodyear wants to buy $10 billion worth of rubber from a Brazilian firm over the next 20 years. 

the risks here for goodyear and the brazilian firm include
 - currency fluctuations (brazilian firm might be worried about the dollar falling if it's getting paid in dollars)
 - price of rubber fluctuations (price of rubber might fall or rise)
 - other credit risk, the buyer/seller might go bankrupt. there could be a war, etc.

so, the best way to offset these risks is to "hedge" against them.  You can do that by buying Over The Counter (no exchange/ unregulated) derivatives (derive their value from underlying elements such as stock, commodities).

Here, goodyear will want to buy derivative options to purchase rubber at a certain price to hedge against the risk of rubber price rising. 
the brazilian firm will want to buy options to sell the dollar in a certain range for the next 20 years (say, they can sell each dollar they receive for .4 of a pound for the next 10 years, and for .3 of a pound for the 10 subsequent years). that way they are protected if the dollar falls to .2 against the pound.
Let's say they buy $9 billion worth. that would be the notional amount.

they can buy these derivatives from large banks usually.  in theory, the bank will sell a related amount of options to people who believe the dollar will rise in value.  thus, if the dollar falls, they'll take the money from the people who thought it would rise and use it to pay the people who thought it would fall, and vice versa. here's where the math geniuses come in.  they create models for this kind of stuff.

A lot of these derivatives will never be exercised, and so won't cause problems. for instance, if the dollar rises to more than .4/pound,  the options will be unexercised.

If, however, people have bought trillions of options that price the dollar unrealistically (not taking into account a MAJOR UNEXPECTED EVENT, for instance), the options will be exercised  (NOTIONAL value becomes real value) . . . if the banks that sold the options cannot pay, you will have MELTDOWN.

Does this help?

Why because I'm a doofus?  Well, that's true  

Stella, are you fishing for compliments? 

It's unexpected b/c lay-people are not directly invested in derivatives.

[Al-Gebra]

edited my post to make it more readable.

[Eric2]

THE US DOESN'T GET ANY OF ITS OIL FORM THE MIDDLE EAST...ALL OF AMERICAS OIL COMES FROM MEXICO, CANADA, VENEZUELA AND NIGERIA...AND BY THE WAY MOST OF AMERICAS OIL COMES FROM CANADA.

CANANDA'S ECONOMY IS BOOMING BECAUSE IT ENTERED INTO A DEAL WITH CHINA...SUPPLYING CHINA WITH MUCH NEEDED OIL AND MAKING A KILLING FROM IT...

   So................kinda' like what I said then right? 

[Butterbean]

Stella, are you fishing for compliments? 

hehe no that's why I deleted it but by the time you quoted it I was too late

Does this help?

Yes, thanks!  Your explanation does help as I am trying to understand the whole scope of this derivative deal etc.

Al-Gebra what is your thought on what the dollar is going to do?  Last I looked it was approaching 76.  In your opinion will it continue to fall?    

[Al-Gebra]

hehe no that's why I deleted it but by the time you quoted it I was too late




Yes, thanks!  Your explanation does help as I am trying to understand the whole scope of this derivative deal etc.

Al-Gebra what is your thought on what the dollar is going to do?  Last I looked it was approaching 76.  In your opinion will it continue to fall?     

there's more downward pressure on the dollar right now . . . something's got to change w the fundamentals of this picture, and i'm not sure what will.  telling the iraqi govt to go screw themselves while we take their oil would be a political disaster, but would help us cut our huge deficits. 

[Butterbean]

there's more downward pressure on the dollar right now . . . something's got to change w the fundamentals of this picture, and i'm not sure what will.  telling the iraqi govt to go screw themselves while we take their oil would be a political disaster, but would help us cut our huge deficits. 

Did you happen to watch "Out of Gas" on CNN this afternoon?  I only saw bits and pieces but it was a type of hypothetical re: us running out of oil and the impact on the economy and the world.  I think they were using the year 2009 as the time period.