And yet another article from The Economic Collapse Blog – read ‘The Coming Derivatives Crisis that Could Destroy The Entire Global Financial System’ – reading time 5 minutes.  I suggest you read and think hard about what it says.

I periodically have written in these e-mails about the intuitive concern I have with the derivatives market and its apparent size and scope.  Most recently I expressed these concerns on October 5 (‘U.S. Banks – Derivatives – Must Read’ – reading time 2 minutes), and again on October 17 (‘Derivatives – Must Read’ – reading time 2 minutes).  The referenced Economic Collapse Blog article:

• Suggests the World Derivatives market may be much larger than the U.S.$600 trillion that I have mentioned in past commentaries – perhaps by as much as 2.5 times (U.S.1,500 trillion).  Frankly, I don’t think that matters much.  U.S.$600 trillion itself is 8 times the current estimated annual World GDP;

• Provides general definitions and commentary for and on Derivatives.  I suggest this is useful background to gaining a 50,000 foot view of Derivatives;

• References an April 2010 estimate of the aggregate market capitalization of all publicly traded stocks that then existed at about U.S.$36 trillion.  Even assuming that amount is as much as =/-U.S.$50 trillion (numbers quoted by Wikipedia in 2008), if U.S.$600 trillion in Derivatives actually are outstanding, that amount dwarfs the aggregate market capitalization of all world public companies by over 10X.  Even if this multiple is wrong Derivatives are known or thought to be extremely significant in U.S.$ terms.  It seems remarkable that Derivatives are getting comparatively little attention in the mainstream media or elsewhere;

• references (I think perhaps very importantly) a December 12, 2010 New York Times article titled ‘A Secretive Banking Elite Rules Trading in Derivatives’ – reading time 10 minutes.  That New York Times article begins:

“On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.  The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential”.

Think of that, and then wonder as I do (and I want to be clear here that this comment is entirely speculative on my part as I have no knowledge of U.S. rules and regulations in the context of such meetings) whether such meetings are ‘within the law’ in circumstances of U.S. competition, price-fixing, oligopoly, etc. Federal and State laws.  In any event, if indeed such meetings have been held in the past and continue to be held, that strikes me as very large ‘red flag’ that ought to cause investors and traders in the equity markets to think very hard about Derivatives and the possible consequences of their existence.

I try to make clear in these commentaries what I know and what I don’t know.  I don’t as yet know enough about Derivatives to ‘put in your eye’.  That said, I continue to intuitively be concerned that outstanding Derivatives represent a form of colossal financial market overhang that could produce an avalanche effect if there is another financial markets crisis ostensibly brought about by Eurozone Sovereign Debt, intransigent U.S. politicians, another technical recession in the U.S., a reduction in China’s annual growth rate, or one or more better understood current economic risks.

All up, all in, I suggest you read the referenced Economic Collapse Blog article, read the other articles and commentaries referenced in this commentary, struggle to become more knowledgeable about Derivatives, struggle to understand the possible economic consequences of their existence, and forward this commentary to anyone you know who invests or trades in the financial markets so they can do likewise.

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