1. The real number is in excess of US $1.4 quadrillion notional value. The method of valuation was changed to hold to maturity, a cartoon.
2. Notional value becomes full value upon bankruptcy.
3. It is already melting down.
4. The chances of this happening soon are reasonably good as the real why of this ongoing disaster is coming into focus.
Derivatives: A $700+ Trillion Bubble Waiting to Burst
April 19, 2009
J. S. Kim
In the past three years, while banks all over the world and Wall Street were imploding, while some $40-$50 trillion of capital was being destroyed in global stock markets, one financial market kept growing. That market is the financial derivatives market.
According to the Bank for International Settlements [BIS], the global Over the Counter [OTC] derivatives market has grown almost 65% from $414.8 trillion in December, 2006 to $683.7 trillion in June of 2008. On the BIS’s own website, there are no updated figures for the notional derivatives market since June 2008, so we can likely assume, with some margin of safety, that this market has now grown to more than $700 trillion. Comparatively speaking, the total market cap of all major global stock markets is approximately $30 trillion.
Before I discuss how financial products could grow more than 65% during a time period when financial companies were imploding all over the world, let’s review the definition of a derivative, because this will explain how this market of financial products keeps becoming more valuable at a time when the value of many capital assets are sinking like a rock in an ocean.
According to Wikipedia:
Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying). The underlying value on which a derivative is based can be an asset (e.g., commodities, equities (stocks), residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates, exchange rates, stock market indices, consumer price index [CPI] — see inflation derivatives), weather conditions, or other items. Credit derivatives are based on loans, bonds or other forms of credit. The main types of derivatives are forwards, futures, options, and swaps.
Because the value of a derivative is contingent on the value of the underlying, the notional value of derivatives is recorded off the balance sheet of an institution, although the market value of derivatives is recorded on the balance sheet. Over-the-counter [OTC] derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds…Because OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counterparty risk, like an ordinary contract, since each counterparty relies on the other to perform.
Jim Sinclair’s Commentary
This period in history will be titled “The Death of the Dollar.”
With that the power of Asia rises.
China seeks oversight of reserve currency issuers
China sovereign wealth fund plans more investments in Europe: report
By Lisa Twaronite, MarketWatch
Last update: 5:28 p.m. EDT April 18, 2009
SAN FRANCISCO (MarketWatch) — Chinese Premier Wen Jiabao called for more surveillance of countries that issue major reserve currencies, according to published reports Saturday.
Wen did not specify the United States in his remarks at the Boao Forum for Asia in China’s Hainan Province. But Chinese officials have recently expressed their concern about their country’s investments in dollar-denominated assets.
“We should advance reform of the international financial system, increase the representation and voice of emerging markets and developing countries, strengthen surveillance of the macro-economic policies of major reserve currency issuing economies, and develop a more diversified international monetary system,” Wen said, according to China’s official Xinhua news agency.
Wen told the conference that China’s economy was faring “better than expected.” China said last week that its economy grew at an annual rate of 6.1% in the first quarter, a slowdown from 6.8% in the fourth quarter of 2008.
Wen said China would seek to expand currency swap agreements that are seen as a step toward eventually making the yuan more of a global reserve asset.
Jim Sinclair’s Commentary
Bloomberg’s revealing of the tenuous position of the $USD is attention catching.
The Money Bunnies would faint stone cold if that came from Bloomberg TV.
There is no way dollar support will survive 2009. It simply will NOT!
China wants control over the economic monetary acts of a reserve currency nation (posted for you today). This is a direct dollar challenge if you have the experience to hear.
Washington in general could be dense and egotistic enough not to know what is coming down the pike.
“Geithner’s climb-down from the manipulator charge is about pragmatism. He is aware of the fragility of international support for the dollar.”
Geithner’s Biggest Problem Is Dollar, Not China: William Pesek
Commentary by William Pesek
April 17 (Bloomberg) — It’s a bit rich for U.S. politicians to berate Treasury Secretary Timothy Geithner for not labeling China as a currency manipulator.
Perhaps Senator Lindsey Graham, a South Carolina Republican, hasn’t seen a newspaper in the last 12 months. With near-zero interest rates, the likely issuance of trillions of dollars of government debt and massive taxpayer-funded bailouts, the U.S. will soon make China look like a manipulation piker.
Memo to Graham and his ilk: Your economy has lost any moral high ground as it drags the world down with it. That will be even truer as the dollar eventually pays the price for ultra- loose monetary and fiscal policies. And it will.
Sure, China manipulates the yuan. Everyone knows that, including Geithner; he said so during his January confirmation hearing. It’s also widely recognized that a stable yuan is propping up the U.S. financial system. Its $2 trillion of reserves are a direct result of China manipulating the yuan.
Geithner’s climb-down from the manipulator charge is about pragmatism. He is aware of the fragility of international support for the dollar.
Jim Sinclair’s Commentary
Of all our international problems this is the most serious.
It holds the potential of upsetting the social order as every worker depends on their retirement funds, many of whom have been taken down by the OTC derivative massacre.
Having read the warning letters required to be sent to the pension fund contributors, I can assure you they do not bare the facts.
Potential pensioners are clueless.
Having paid into a private pension for the last 10 years, my answer to your question (Are pensions a waste of money?, Cash, last week) is yes.
The value of my fund is about 30% less than the amount I’ve paid in over the years. I’m also paying into an occupational pension, though only because my employer adds 6%, but, like the private pension, this has plummeted in value.
Forget about the tax-free capital gains claimed by Tom McPhail – the stockmarket has gone nowhere for 10 years. Only the prospect of dividends has given any hope to pension savers. But Gordon Brown has been taxing these since 1997.
Only fund managers make money out of pensions. They take annual fees regardless of performance. This also means you have to keep paying into a pension just to stand still – stop and its value falls each year thanks to charges.
Phil Gooch, by email
Are pensions a waste of money? In my opinion, they are. The big advantage for a man, let’s call him Mr B, investing in an Isa instead is that it is then his money to do with as he pleases. If Mr B dies at 80 there could be money remaining that could be left to his partner or children.
It is possible to take a quarter of a pension pot as a lump sum , but the rest has to be given away to strangers in a pension company. If you pay tax at 40%, do not wish to leave an inheritance, and plan to retire early, then maybe a pension is for you. But not for me.
Jim Sinclair’s Commentary
If you think this is unusual then you never heard the term, “Pay to Play,” common in the financial industry.
As pension funds financially implode watch the fall out of “Pay to Play.”
In State Pension Inquiry, a Scandal Snowballs
By DANNY HAKIM and MARY WILLIAMS WALSH
Published: April 17, 2009
The inquiry into corruption at the New York State pension fund started simply enough. Alan G. Hevesi, the former comptroller, was accused of using state workers as chauffeurs for his ailing wife.
But by the time Mr. Hevesi resigned his office in late 2006, investigators for the Albany County district attorney’s office were examining a more troubling problem: allegations that Mr. Hevesi’s associates had sold access to the state’s $122 billion pension fund, using one of the world’s largest pools of assets to reward friends, pay back political favors and reap millions of dollars in cash rewards for themselves.
“We knew this was not going to be a case we could handle ourselves in Albany County,” recalled P. David Soares, the Albany County district attorney.
In 2007, Attorney General Andrew M. Cuomo’s office and then the Securities and Exchange Commission took over the inquiry, which has ballooned into a sprawling investigation involving some of the most prominent players in New York’s political and financial worlds.
Hundreds of investment firms have been subpoenaed. Three people have been criminally charged and another has pleaded guilty to a felony. And the scandal has grabbed the attention of Wall Street, as members of the investment establishment’s top tier now face scrutiny.
Jim Sinclair’s Commentary
We spoke of Jim’s Formula as a key to the dollar.
Here is your confirmation that the 2006 Formula did give you an outline of what lays ahead, how it would occur and how it would eventually take the dollar down.
The Formula will play out as the most significant of all criterion for this chapter that history will define as “The Death of the Dollar.”
Just think if someone had listened to my warnings from 2000 to the present on OTC derivatives.
Just think if people had given the Formula the credit it deserves.
Even now evil spirited people would rather deride than be advised.
They could still have gotten pig rich without destroying the world in the process.
The destruction has been done. Now even Taleb cannot help them.
You can protect yourself. You must protect yourself from perpetual spin.
Study the lessons below, please.
GEAB N°34 is available! Summer 2009: The international monetary system’s breakdown is underway
In this issue of the GEAB, our researchers anticipate the different forms a US default will take at the end of summer 2009, a US default which can no longer be concealed concealable from this April (most taxes are collected in April in the US) onward (10). The perspective of a US default this summer is becoming clearer as public debt is now completely out of control with skyrocketing expenses (+41%) and collapsing tax revenues (-28%), as LEAP/E2020 anticipated more than a year ago. In March 2009 alone, the federal deficit has nearly reached USD 200-billion (way above the most pessimistic forecasts), i.e. a little less than half of the deficit recorded for the entire year 2008 (a record high year) (11). The same trend can be observed at every level of the country’s public organization: federal state, federated states (12), counties, towns (13), everywhere tax revenues are vanishing, suffocating the whole country with spiraling debts that no one can control anymore (not even Washington).
The next stage of the crisis will result from a Chinese dream. Indeed, what on earth can China be dreaming of, caught – if we listen to Washington – in the “dollar trap” of its 1,400-billion worth of USD-denominated debt (1)? If we believe US leaders and their scores of media experts, China is only dreaming of remaining a prisoner, and even of intensifying the severity of its prison conditions by buying always more US T-Bonds and Dollars (2).
In fact, everyone knows what prisoners dream of? They dream of escaping of course, of getting out of prison. LEAP/E2020 has therefore no doubt that Beijing is now (3) constantly striving to find the means of disposing of, as early as possible, the mountain of « toxic » assets which US Treasuries and Dollars have become, keeping the wealth of 1,300 billion Chinese citizens (4) prisoner. In this issue of the GEAB (N°34), our team describes the “tunnels and galleries” Beijing has secretively begun to dig in the global financial and economic system in order to escape the « dollar trap » by the end of summer 2009. Once the US has defaulted on its debt, it will be time for the « everyman for himself » rule to prevail in the international system, in line with the final statement of the London G20 Summit which reads as a « chronicle of a geopolitical dislocation », as explained by LEAP/E2020 in this issue of the Global Europe Anticipation Bulletin.
Jim Sinclair’s Commentary
This is coming fast and NOW!
Markets are in total denial.
Pakistan in great danger, says Musharraf
Islamabad: The former Pakistani President, Pervez Musharraf, said on Sunday “The country is in great danger,” and added that the people should not get bogged down by minor issues and focus on bigger challenges.
“Pervez Musharraf said that the country was in great danger and advised all to shun looking into the past,” the News International reported.
Before leaving for Saudi Arabia, General (retired) Musharraf urged upon the nation to focus on the current myriad challenges. The people, instead of bogging down in minor issues, should think about the future of Pakistan, Pakistan News quoted him as saying.
Talking to mediapersons at Islamabad airport, General Musharraf said the people playing with the Lal Masjid issue were enemies of the country.
“Only 94 persons were killed in Lal Masjid, who were terrorists. If any action is initiated against me, I will respond to it,” he said.
Islamist Leader in Pakistan Reveals Troubling Plans
By Pamela Constable
Washington Post Foreign Service
Sunday, April 19, 2009; 4:52 PM
ISLAMABAD, April 19 — A potentially troubling era dawned Sunday in Pakistan’s Swat Valley, where a top Islamist militant leader, emboldened by a peace agreement with the federal government, laid out an ambitious plan to bring a “complete Islamic system” to the surrounding northwest region and the entire country.
Speaking to thousands of followers in an address aired live from Swat on national news channels, cleric Sufi Mohammed bluntly defied the constitution and federal judiciary, saying he would not allow any appeals to state courts under the Islamic Sharia law system that will now prevail there as a result of the peace accord signed by the president Tuesday.
“The Koran says that supporting an infidel system is a great sin,” Mohammed said, referring to Pakistan’s modern democratic institutions. He declared that in Swat, home to 1.5 million people, all “un-Islamic laws and customs will be abolished,” and he suggested that the official imprimatur on the agreement would now pave the way for Sharia to be installed in other areas.
Mohammed’s dramatic speech echoed a rousing sermon in Islamabad Friday by another radical cleric, Maulana Abdul Aziz, who appeared at the Red Mosque in the capital after nearly two years in detention and urged several thousand chanting followers to launch a crusade for Sharia law nationwide.
Jim Sinclair’s Commentary
This is the World’s biggest problem and a major point of upset for markets.
It has gone hot and is getting critical. Money cannot stop this.
Diplomacy equates to money and cannot stop this.
Fears for Pakistan grow as Taliban make gains
Sun Apr 19, 2009 8:38am BST
By Robert Birsel – Analysis
ISLAMABAD (Reuters) – Pakistan has repeatedly vowed action to stop militants but analysts say denial and dithering and a seething resentment of the United States among the Pakistani people have stymied effective policy.
Escalating violence by militants and the consolidation of their grip in some places, and infiltration into others, have raised fears about the spread of Taliban influence.
Nuclear-armed Pakistan falling under the sway of al Qaeda-linked militants is a nightmare scenario for the United States and Pakistan’s neighbors, and would doom U.S. efforts to stabilize Afghanistan.
“There’s a great sense of angst, a sense of unraveling,” said Adil Najam, professor of international relations at Boston University.
“It seems that everyone has lost control, including the military, of where things are going. I don’t think they’ve given up the fight, it’s just they don’t seem to know what they can do,” he said.
President Asif Ali Zardari secured more than $5 billion in aid last Friday after telling allies and aid donors in Tokyo he would step up the fight against militants.