Friday, 8 May 2009

The Derivatives Elephant In The Room

I've come to the Asian Development Bank's annual jamboree in Bali, where today's unofficial theme was elephants in the room.

In a seminar on the direction of global markets, Mark Mobius, the well regarded emerging market investor and part-time Bond villain, said that there was value in some emerging markets but that the direction of equities in the coming months would depend on the two elephants in the room: the "wall of money waiting to get back into the market" and derivatives.
Mobius isn't the first fund manager to try to talk up the market - just look at Anthony Bolton's ongoing attempts. But, in fairness to him, he did point out that there was a large risk to this positive scenario in the shape of derivatives. He quoted a figure of $500 trillion of outstanding derivatives (you can decide for yourself which "outstanding" he meant) globally, or about 10 times the total annual economic output of the whole world.

And, according to Mobius and a contact of his who works at the SEC, no-one in the financial world understands how these products really work, which means that the threat of a massive blow-up is un-measurable. He said that he'd seen mid-sized retailers in South Korea and Mexico that had gone bust after investing in complex derivatives when they should have selling rice and tins of beans.

The money is driving the crippled world economy rather than the fundamental economy underpinning the financial sector. We are witnessing a false reality.

On the one hand too much money may be chasing too few equities in the markets, inflating prices, while on the other hand losses in the Derivatives markets are threatening to wipe out various banks and businesses who are caught up in this activity.

Derivatives contracts must be nullified and made void (as pointed out by Webster Tarpley) and measures taken to deal with inflation caused by too much money chasing too few equities in the markets.

[Posted at the SpookyWeather blog, May 8th, 2009.]

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