"Total world stock market capitalization was about $37 trillion in 1990; it grew to about $51.225 trillion in March 2007. According to Morgan Stanley, the total world nominal value of derivatives stood at around $5.7 trillion in 1990; it grew to $415 trillion at the end of 2006.
Doing the math, it means the $ value of derivatives are about 8 times larger than stocks now, whereas in 1990 stocks were 6.5 times larger than derivatives. Hmmm!
Implications/guesses/comments:
1) There are too many derivatives in the world
2) The parceling out of those derivatives into smaller bundles for all to play the game doesn't seem to be reducing risks as “experts” expected.
3) They have never faced a serious test in this cycle
4) They have become increasingly complicated to price
5) Ratings agencies (S&P and Moody's) preferred fees to due diligence
6) Private equity is more interlinked to derivatives than most realize
7) Stress testing a derivatives portfolio can be tricky if you don't know whether or not the
counterparty (maybe one of the 3,000 hedge funds) will be in business
8) One wonders why stock prices aren't a lot higher given that massive amount of leverage
i.e. liquidity manufactured across the globe
9) Tied to point #7: It sets the stage for a massive global deflation, though everyone seems
to think inflation is the problem. (If we accept that inflation is too much money chasing
too few goods, then why isn't it higher with so much money generated since 1990?
Maybe the massive deflationary pump of billions of new labor market entrants and
overcapacity is stronger than experts realize.) A debt default is deflationary. And it
leads to forced savings, which adds deflationary pressures in a world driven by “drunken
sailor spending.”
10) There could be much, much further to go “on the downside” as funds rush for the rapidly
narrowing exits.
11) We want to pull the cover over our heads and go back to bed when we contemplate the
potential for a real market cleansing. We use the words “real market cleansing” because
we think the relative stimulus from central banks through rate cutting, in a world where
$415 trillion in credit craters, ain't going to have much impact.
So, if your friend turns to you today, or anytime in the near future, and says this: “You know
something, there are going to be some real bargains in the market soon!”—we suggest its time
to find a new friend."
BLACK SWAN TRADING
From http://www.blackswantrading.com
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