Jim’s Mailbox

Posted at 12:18 PM (CST) by & filed under Jim's Mailbox.

Hi Jim,

This is a very interesting and ominous scientific observation regarding derivatives and the inability of their creators to control them.

As the article states, the banksters have “created a monster they cannot control—a monetary system that operates at a level beyond human comprehension.”

It doesn’t get much scarier than that, does it?

Best regards,
CIGA Black Swan

Chaos, Derivatives, and Quantum Physics
By Cris Sheridan
05/11/2012

Every day the financial markets get more chaotic—a fact that couldn’t be made any more clear than with a recent revelation given by ex-physicist and author, Nick Dunbar, in describing a new level of complexity facing banks and derivatives. Ironically, Thurdsay night’s emergency conference call by JP Morgan of a massive $2 billion unavoidable loss is perhaps a confirmation of what banks are now starting to grapple with.

After attending a recent conference in Barcelona featuring some of the top thinkers in quantitative analysis, Dunbar says that the financial crisis has now left "quants grappling with a new landscape…that has turned the old world upside down."

What is this new landscape he’s referring to? One in which derivatives have become so chaotic that they no longer obey the classical laws of physics. The derivatives world now, he says, is beginning to operate at a level of mathematical complexity associated with quantum physics—specifically, a field known as "Quantum Chromodynamics".

Up until now derivatives mostly obeyed "simple" and definable mathematical models first invented in the 1970s. However, today, in the aftermath of the financial crisis, a new level of hyperconnectedness has resulted where "complex interactions between banks and within portfolios dominate the pricing of derivatives, as opposed to the behavior of the assets the contracts are supposedly ‘derived’ from." This math, he says, is the same for "unseen particles" like quarks and gluons "trapped within atomic nuclei."

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Greece Gets Hint of Leeway From Euro Officials
CIGA Eric

Liquidity floats all boats until the public can no longer afford to eat.

Headline: Greece Gets Hint of Leeway From Euro Officials

European governments hinted at giving Greece extra time to meet budget-cut targets, as long as the financially stricken country’s feuding politicians put together a ruling coalition committed to austerity. Calling talk of a Greek pullout from the euro “nonsense” and “propaganda,” Luxembourg Prime Minister Jean-Claude Juncker said only a “fully functioning” Greek government would be entitled to tinker with the conditions attached to 240 billion euros ($308 billion) of rescue aid. “The government would have to stand by the program,” Juncker told reporters after chairing a meeting of euro-area finance ministers in Brussels late yesterday. “If there are dramatic changes in circumstances, we wouldn’t close ourselves off to a debate over extending the deadlines.” Greece’s post-election impasse multiplied the signs of stress in European markets yesterday. The euro fell for the 10th time in 11 days and stocks surrendered a two-day gain. Bond yields in recession-wracked Spain, the next potential candidate for financial support, touched a five-month high.

Source: bloomberg.com

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Jim,

Perhaps an ancillary question about derivatives which approach 1 trillion trillion is not just how they relate to global GDP but also how they relate to the global total of equity and fixed income markets. This leads one not totally familiar with the situation to believe that derivatives are not much more than a huge amount of side bets one may see occur while watching professional sports-and some participants in the betting may not be able to pay off. What even justifies the entire structure (besides greed and corruption so perhaps I asked and answered my own question)?

CIGA Hal

Hal,

One quadrillion, one hundred and 44 trillion before the BIS changed their computer simulated valuation model. All are unfunded specific performance contracts.

You can’t compare that to any real market that clears. How do you think these institutions got their billions? By commissions? That is nuts.

OTC derivatives began this problem and are the end game of this misadventure.

Jim