Scary new numbers on derivatives - from Eric Sprott in Toronto

[Guest]

Excellent update on some surreal derivatives proliferation numbers.

sprott_derivatives_mushroom.jpg

Link here: http://www.sprott.com/pdf/marketsataglance/12_2007.pdf

Yeah, and Merry Christmas to one and all.

[rabot10]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

Excellent update on some surreal derivatives proliferation numbers.

[ATTACH]154[/ATTACH]

Link here: http://www.sprott.com/pdf/marketsataglance/12_2007.pdf

Yeah, and Merry Christmas to one and all.

Lukester what are all these derivatives being traded? How about a little training for the small brains on the board thanks

rick

[Nicolasd]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

All revelant details can be found on the bank of international settlement web site

http://www.bis.org/press/p071219.htm

[Guest]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

Lukester what are all these derivatives being traded? How about a little training for the small brains on the board thanks - rick

Rick, you gotta be kidding, or you are tweaking me. I must understand a lot less about derivatives than you, who formerly worked at a hedge fund (yes, I know you hate my always mentioning that).

Seriously, my grasp of derivatives is minute. I merely noted what sound like some explosive, exponentially growing numbers in this Sprott article and wanted to call it to iTuliper's attention.

Lukester

[Rajiv]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

over-the-counter derivatives outstanding as at June 30, 2007 (see chart
below) now stands at $516 trillion,
.
.
.
the turnover (i.e. trading) of
derivatives amounted to $681 trillion in the third quarter

These numbers are mind boggeling -- $100,000 for every man, woman or child on this planet? -- Are these people plain NUTS These are hugely toxic levels of financial obligations -- if these implode, it is equivalent to the impact of the total explosive power of the world's nuclear arsenal in its ability to destroy human society.

[Guest]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

Rajiv -

When you see this kind of explosive, exponential growth [a quadrillion in notional obligations?], the entire pile of derivatives will probably self-destruct. Somebody correct me if I'm wrong, but isn't this by definition an unsustainable trajectory?

Derivatives on this scale don't "correct back to a mean". They either continue, or they cease, and the "ceasing" seems a *large* unknown quantity.

Does anyone have a word of advice on what investment class is safe in a derivatives implosion?

[Rajiv]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

This is what you get when you try to hedge risks with these "Financial Instruments" -- somebody is ultimately left holding the bag. Hedging can only work on the small scale -- ultimately risk cannot be hedged -- it is a game of musical chairs -- and when the implosion happens is when world conflagerations take place.

I know many of the "quants" who invented these instruments -- the underlying assumption in all these instruments is that each individual transaction will not affect the viability of the system -- and my experience is the exact opposite. And whenever I have brought this up to these people -- there is active disbelief on their part -- and they have never looked at the data that I have provided.

Once I learned the lesson, I have not touched a derivative -- and I would never touch one again -- in other words "Never trade with assets you do not own!"

In any derivative situation -- you are taking on debt obligations -- in other words you are trading assets you do not own free and clear!

[Guest]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

They will sink the resk of us non-players regardless when this thing blows.

[rabot10]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

Rick, you gotta be kidding, or you are tweaking me. I must understand a lot less about derivatives than you, who formerly worked at a hedge fund (yes, I know you hate my always mentioning that).

Seriously, my grasp of derivatives is minute. I merely noted what sound like some explosive, exponentially growing numbers in this Sprott article and wanted to call it to iTuliper's attention.

Lukester

Lukester I sold puts and call on the futures market, does not meke me an expert on all Derivatives

[grapejelly]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

Rajiv -

Does anyone have a word of advice on what investment class is safe in a derivatives implosion?

I think physical precious metals. Not paper gold, but real gold.

[Nicolasd]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

By extension anything physical , not only PM but also other metals , oil , coal , brick and mortar ( outside the hot zones of the subprime ),etc.

[grapejelly]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

By extension anything physical , not only PM but also other metals , oil , coal , brick and mortar ( outside the hot zones of the subprime ),etc.

guns, food, liquor, ...

[jimmygu3]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

guns, food, liquor, ...

Sounds like a derivative-implosion party at grapejelly's! I'm in.

[c1ue]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

The numbers are huge, but what really matters is how many of these derivatives are 'in' or close to 'in' the money.

Admittedly, the 'in' circle is much larger with all of the crazy credit crunch/volatility going on, but nonetheless the truism still holds.

The other question is how many people are on which side of the boat.

As with many investment plays, when too many people see 'easy money', then that's when the pyramids collapse.

[DemonD]

Re: Scary new numbers on derivatives - from Eric Sprott in Toronto

I think a lot of derivatives are going to get slaughtered as the bond insurance companies start defaulting. the whole counterparty risk thing is something I feel we are going to start hearing a lot about over the next 6 months.