Tuesday, March 11, 2008

Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen

Derivatives the new 'ticking bomb'

Let's put that $516 trillion in context of some other monetary data: *U.S. annual gross domestic product is about $15 trillion. *World's GDPs for all nations is approximately $50 trillion. This cascading "domino effect" was brilliantly described in "The $300 Trillion Time Bomb: If Buffett can't figure out derivatives, can anybody?" published early last year in Portfolio magazine, a couple months before the subprime meltdown. Columnist Jesse Eisinger's $300 trillion figure came from an earlier study of the derivatives market as it was growing from $100 trillion to $516 trillion over five years. Eisinger concluded: "There's nothing intrinsically scary about derivatives, except when the bad 2% blow up." Unfortunately, that "bad 2%" did blow up ...subprime mess"

Posted by happyrenterz @ 09:40 PM (999 views)
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8 thoughts on “Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen

  • happyrenterz says:

    “The fact is, derivatives have become the world’s biggest “black market,” exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today’s slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.”

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  • “weapons of mass destruction”

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  • planning4acrash says:

    propertysnake.co.uk, read all about it, 121,398 reduced prices, at reductions of up to 50%.

    FIFTY PERCENT!!! Woah boy, off we go, . It’ll be 250,000 properties reduced up to 65% by the year end. Yes, its only one property at 50%, but its a threshold, and a sign of things to come. The first of many, me hopes!!

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  • It’s by far the biggest credit bubble ever and derivatives – ‘creating money out of nothing’ – make it the most highly leveraged. But don’t worry – we’re told that it hasn’t yet spread to the ‘real’ economy. Funny how the financial services sector leads the real economy in the good times and becomes ‘unreal’ when things implode.

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  • Are they sure it’s not 515 trillion or 517 trillion?

    How can anyone arrive at such an incredible valuation for a system that has become so opaque, no-one really understands it anymore?

    The problems in the financial markets clearly go far beyond the issue of careless mortgage lending in the US, and there is now an urgent need to wind down the casino culture in Wall St, and find out how many of the chips were counterfeit..

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  • voiceofreason says:

    The debate has moved on so far from being about inaccurate and biased reporting last year.
    Remember trying to educate the average journos about how not to compare building soc deposit yields with BTL yields. Because a 95% loan on a BTL is a massively leveraged (derivative) play. Not an investment like putting money in the bank. Because the bulk of profit is made from the capital increase.

    Great days !

    Where are they now ? At least we get some half decent reporting by Evan Davies, Preston and the Authers in the FT. Forget the Times muppets though – a dead loss apart from the lovely Merryn 🙂

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  • Hardly news. Derivatives will exist as long as financial markets do, as ‘black markets’ as this article suggests they are or as actual black markets. Derivatives will always (and have always) outweighed other markets in notional terms BECAUSE they are derivatives, and intrinsically create leverage over the underlying securities. The most famous of the early financial crash examples was down to derivatives (Tulip Crisis). Even without derivate contracts there are always real possibilities of a spectacular crash in markets – just look at the example of Black Friday (and also note the similarities to the upcoming $200B treasury issue).

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  • happyrenterz says:

    @ 51ck-6-51x It is the scale of the problem that is dangerous. This balloon has is only 7 years old.

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