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Thread: Derivatives ... risk free profits or a growing economic cancer ?

  1. #1
    Banned Melonie's Avatar
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    Default Derivatives ... risk free profits or a growing economic cancer ?

    Part 1 -

    (snip)"In the absence of derivatives the panic [caused by escalating interest rates = falling US T Bond prices - sic] would run its course and bond values, having absorbed the loss, would eventually stabilize at a lower level. In 1980 the runaway train [ interest rate derivatives - sic] could still be stopped before it derailed. But with a derivatives market of the present size such a panic would be tantamount to a stampede to sell up to $200 trillion worth of bonds which nobody wanted to buy. Nothing could stop this runaway train. The credit of the U.S. government would be ruined.

    The problem is not that delivery of non-existent bonds is expected at the maturity of contract. The problem is that there will be an irresistible run to dump non-existent bonds when the underlying bond starts losing value precipitously, that is, when interest rates repeat or surpass their 1979-80 performance of entering stratosphere. In that episode, it will be recalled, the largest American banks became insolvent as the value of bonds in their portfolios collapsed, making huge holes in the balance sheet."(snip)

  2. #2
    Sitri
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    Default Re: Derivatives ... risk free profits or a growing economic cancer ?

    Well selling short and being naked is the same thing. What they have done is legalize gambling in the stock market. Once you lose the requirement that you actually own the underlying security, it is just gambling for the big boys.

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    Banned Melonie's Avatar
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    Default Re: Derivatives ... risk free profits or a growing economic cancer ?

    ^^^ arguably, it's not gambling for the 'big boys' ... it's a guaranteed win ... because as noted elsewhere in the article the 'big boys' can create what amounts to a 'positive feedback loop' to bump the value of their derivatives contracts up and down by redirecting / pyramiding derivatives contract and/ or futures contract purchases or sales, with subsequent effects on the pricing of the underlying asset (but which the big boys don't necessarily own), which then circles around to affect the value of the derivative and/or futures contracts the 'big boys' already own.

    It is only the owners of the actual assets i.e. T Bonds and Gold Bars, that are at risk of losing, when those derivative and/or futures contracts depress the price of those assets !!! We've already had a 'rule change' by a commodity exchange (the LME) which essentially ruled out future short squeezes by obviating the need for futures contract holders to actually deliver the assets promised on the date promised (specifically, LME gold futures contract holders were told that they didn't have to actually go out and buy gold for delivery on the contract expiry date - because doing so would have sent the gold price skyrocketing - they just had to pay additional 'interest' in lieu of actually making delivery) !!!! Thus the 'big boys' avoided the losses involved in covering a short squeeze and every owner of gold bars got screwed out of a big potential gain. How does that constitute gambling on the part of the 'big boys' ?

    By this sort of perverse leveraged market manipulation via huge 'naked' derivative and futures contracts, IMHO it is the actual asset owners who are really absorbing the additional risk !!! This is what the author was referring to in regard to the potential collapse of banks who actually own US T bonds, whose value could be 'destroyed' overnight via the dumping of interest rate derivatives and/or T Bond futures contracts by the 'big boys'.

    ~
    Last edited by Melonie; 11-19-2006 at 06:53 AM.

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    Default Re: Derivatives ... risk free profits or a growing economic cancer ?

    The entire commodities exchange is full of bullshit. There is not much that can be done about it in a free market. It's the consumer's that get stuck holding the bag. Manufacturers don't have options to take their money elsewhere like an investor in the stock market and it's derivatives.

    The broker volume adds a hefty premium to everything we purchase. Oil/Gas being the prime example. I'm 27, the only time I've seen a pump go dry was Katrina, because there were no supply tucks running. Am I really supposed to believe the only thing keeping the pumps from going dry is because West Texas crude is 3 times more expensive now than 10 years ago? Nick Nayler couldn't have spun that any better.

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    God/dess Deogol's Avatar
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    Default Re: Derivatives ... risk free profits or a growing economic cancer ?

    ^^^ Agreed!

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