All The Money In The World

This is an article/chart from CBSMarketwatch. It is very interesting and totally terrifying.  Derivatives are not wealth. They are the potential destroyers of all wealth.

The problem is that we do not even understand how these vehicles really work, you don’t get to just say BECAUSE. If you have not seen the movie ‘The Big Short‘, you should. It does a good job breaking down these concepts into easy to understand chunks.

Look, I get it. You can’t just invest in bullets and hybrid seeds.

I use the markets and leveraged risk to play the money game too, but you better bet I also have a reserve of hard currency (precious metals) and assets I can eat. Every good financial obsessor gets paranoid about something lurking in the economy.


(awesome photo by Rasmus Berggreen)

I can’t help thinking of that quote from Einstein;

“I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.”

It feels to me like derivatives are the nuclear weapons here. I feel like if this House of Cards ever comes tumbling down, the next economy will be back to shells and fur pelts.

Is your Panic Room up to snuff?

‘Derivatives are weapons of mass destruction’ – Warren Buffet

‘I am telling you, the world’s first trillionaires are going to come from somebody who masters A.I. and all its derivatives and applies it in ways we never thought of.’ – Mark Cuban

A derivative is a financial security with a value that is reliant upon or derived from. An underlying asset or group of assets—a benchmark. The derivative itself is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset.

The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes. These assets are commonly purchased through brokerages.

6 thoughts on “All The Money In The World

  1. I have a much more relaxed attitude towards derivatives. Maybe it’s because I work in the industry and I also trade derivatives for profit in my own account.
    First of all: derivatives did not cause the global financial crisis. Lax underwriting standards and people defaulting on their mortgages caused the crisis. The CDO and CDS mess was the symptom, not the cause of the crisis.
    Also, when counting derivatives, adding up the notional is vastly exaggerating the true risk of the positions. There are a lot of spread strategies out there that have very large total notional positions but minimal economic risk. Example: I can go short an S&P500 e-mini futures put at 2405 and long a put at 2400 points. My maximum loss is $250 (5 times a multiplier of 50), even though the combined notional is $240,250 =50x(2400+2405).

    But I do agree that derivatives should not be counted as wealth. It’s a zero sum game!

  2. As a fellow derivatives apologist I guess I am obliged to chime in here too (although my own use of derivatives strictly excludes any leverage).

    As ERN mentioned, pretty much all of the however-many-trillions (or quadrillions) of notional dollars offset each other. It makes for a great visual, but I don’t think it’s really that scary.

    But the chart is still scary overall.

    The part that is scary (to me anyway) is our collective debt to equity ratio in the face of slowing global population growth. Unlike the derivatives that does point in one direction.

    I can’t imagine “the great restructuring”, whenever and however it happens, being very pretty.

    Nothing wrong with having some arable land and ammo just in case…

  3. Great post – love the graphics of all the money in the world. Coming from the banking industry, I’m also a seasoned trader of derivatives once in a while. It’s a way to express your views. Reading your post I was immediately reminded of a scene in the movie “The Big Short” where people in a casino started making bets on the outcome of another bet. Cheers!

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