March 6, 2009

$700 trillion. Say it with me folks. $700 trillion. Three quarters of a quadrillion. Hey, what's that in the corner of the room?


There are some numbers that are so big that our little monkey brains can't handle them.

This is one of those numbers I'd suggest.

The world is not going back to normal after the magnitude of what they have done.

The $700 trillion elephant

There's a $700 trillion elephant in the room and it's time we found out how much it really weighs on the economy.

Derivative contracts total about three-quarters of a quadrillion dollars in "notional" amounts, according to the Bank for International Settlements. These contracts are tallied in notional values because no one really can say how much they are worth.

But valuing them correctly is exactly what we should be doing because these comprise the viral disease that has infected the financial markets and the economies of the world.

Try as we might to salvage the residential real estate market, it's at best worth $23 trillion in the U.S. We're struggling to save the stock market, but that's valued at less than $15 trillion. And we hope to keep the entire U.S. economy from collapsing, yet gross domestic product stands at $14.2 trillion.

53 comments:

Anonymous said...

citation needed.

vanilla ice said...

What the F is a derivative contract?

Anonymous said...

Yes, there is an asymptote in the economy. There is an infinite they powers-that-be cannot get around. The only option is controlled reboot. The irony is that the organic economy is fine and will do fine if we kill this thing and move on. The only problem is that most of the rich will have to loose their "wealth" in the process. Not to some abstract poor which they have feared for hundreds of years but because in a modern economy you cannot not buffer money for longer than a few years. This a revolution brought about by globalization and the digital economy and just as the buggy whip has become obsolete so has the idea of leveraged capital. It is kind of like what Napster did to the record industry. You can no longer make money by leaveraging ownership whether it is a RAP song or a dollar bill.

Don't worry but be aware. Freedom and free-markets are not dead. A new economy will emerge and will be much better than the old one. Just get used to the idea that all that you truly own is what you can carry.

DP

too much debt said...

Actually a billion is to big for our briains to comprehend. Let's put it in a form we can understand.

This costs 6 billion.

http://en.wikipedia.org/wiki/File:GHW_Bush_CVN_77_Carrier.JPG

Think about that the next time AIG gobbles up 40 billion.

Trillion. Forget about it.

consultant said...

We're toast. The gangsters have one. Most people are sheep. Stupid sheep at that (did you vote for Bush-twice!).

Did I say we are toast?

Anonymous said...

As I have pointed out. these derivetives make it hopeless.

satan said...

I remember the last time the government did this in 1991 I said “this financial debacle is clearly contrived and designed by motive to reallocate wealth and keep the ignorant masses in bondage to their leadership”. I still feel the same; if our money is fundamentally solvent then supply and demand would dictate that run away demand would cause an increase in interest rates. Obviously, this is not what happened. Now to further prove my motive theory I issue my next long term prediction. “Once property values adjust, banks will raise interest rates”. This will be done in the spirit of patriotism and as a repair to the cause of the current crisis. WAKE UP FOOL! THE REAL MOTIVE IS THE EXTRACTION OF YOUR LABOR. Your financial independence is not in the interest of government. Governments interest is to keep you working so that it may enlarge itself.

Devestment said...

I remember when Keith had to start approving posts because of all the REIC morons hijacking the blog.

Anonymous said...

No tranparency, stoneage!

Anonymous said...

I'm going back into mom's basement now.

k.w. - Southern Ca. said...

Well, this all just keeps getting worse and worse - nearly 700,000 jobs lost just this February - those are depression era numbers.

The (3) areas which are showing some kind of hiring are education, government and healthcare - all of which are bloated and wasteful.

The administration has to make some really tough decisions if it's going to resolve this accelerating catastrophy - and that means cutting salaries and benefits across the board in all these wasteful public service areas.

Here in HB Ca., you can still find firemen and policemen routinely spending their time flirting with girls at the beach, tinkering with their ever-broken boats or drinking suds at the local pubs in the area.

When will people wakeup that all these people are nothing but a drain on the system, and that several can be laid-off with little or no difference in actual offered service?

Without these cuts, this nation is doomed to a really nasty downturn into the worst depression anyone could ever imagine.

Wasteful spending cannot continue in a few sectors of our economy while the private sector continues being punished in hire taxes and lay-offs.

it's just money said...

"WSJ -- Can Ruth Madoff Keep the Penthouse?

Lawyers for Bernand L. Madoff, the alleged Ponzi scheme operator, have asked that assets worth almost $70 million be exempt from his case because they are actually owned by his wife, Ruth, and have no connection to the fraud. While numerous victims were destroyed financially by the multibillion-dollar scheme, if Mr. Madoff’s legal team gets their way, Ms. Madoff would be allowed to keep the apartment in New York’s Upper East Side, $45 million of municipal bonds, and $17 million in cash held at Wachovia bank."

JaneZ said...

Hey Nick, you need to check into this program:


Wednesday, 4 Mar 2009
Second Liens Forgiven: Are You Kidding Me?
Posted By: Diana Olick

Second Liens: While eligibly loan modifications will not require any participation by second lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program in order to reduce the overall indebtedness of the borrower and improve loan performance. Servicers will be eligible to receive compensation when they contact second lien holders and extinguish valid junior liens. Servicers will be reimbursed for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien.

So in an effort to help borrowers stay current on their newly modified loan, which is at a nice new 31% debt to income ratio, the government is also going to pay cash money to get servicers to totally wipe out second liens. When I heard this I thought there might have been something funky in my morning muffin........

http://www.cnbc.com//id/29513414

Anonymous said...

As per Buffet and a good piece by motley fool, we're in the t-bills bubble, and like other bubbles the good times seem endless.

> How endless? On the face of it, endless enough that the Obama administration has proposed trillion-dollar deficits for the foreseeable future.


Dudes, this ain't going to end well. Buy guns.

Anonymous said...

Unemployment filings surge Friday, GM on brink of BK, What does the stock market do in respnse?

Goe UP.

Sheeple, It's ALL rigged.

Madoff may plead guilty floated in MSM looking for public outrage, none forthcoming.

Stock Market Goes UP on Madof News.

It's All Fucking Rigged.

Anyone trading stocks deserves what they get.

America, corrupt, fat, dimb and lazy.


I WANT MY WATERMELON!

Anonymous said...

" Hey, what's that in the corner of the room?"

And it's got Goldman Sachs written all over it...

casey said...

A trillion here a trillion there, does anyone care anymore?

Did you guys see idol thursday?Looks like simon made a new friend, the gay dude with piercings and tatted up.I wonder if they went home together.Clay aiken would be proud.

Nascar qualifying on later so don't bug me with your financial problems.

Anonymous said...

Keith,

Great point man. I hope we don't have to go through a writedown of these complicated pieces of paper.

When do you think we'll see a turn-around (or at least a plateau) of the currect crash??

I have been saying S&P 500 will go down to 600. This seems to be around the corner and this derivative timebomb has not even exploded.

What do you think??

Dny

Ron Paul is right! said...

Don't worry, Captain Lightbulb will fix EVERYTHING! Just get some internet in all the libraries, change all the lightbulbs and replace the government fleet with hybrids and things will be just peachey!

I brought this up with family the other day(they are starting to lsten to me now and ask for my advice). Lets say dow to 3000 or 2500, just for giggles. Do you think American's would find a way to oust Obama? I bet they would. If everyones retirement took that big of a hit, I'm betting he wouldn't even make to the end of his term. It's getting close now, he better wake up and realize.

Anonymous said...

Let's be honest.
Much of that 'notional' bullshit is simply pie in the sky bullshit. It's not only time for homeowners and individuals to take responsibility of their poor decisions. It's also time for gamblers and their CDS and other derivative gambles to f"cking man up and realize that even if they won the bet, their bookie ws broke. Well, that's just part of the game. If your bookie is broke, well, you f*cked up by giving him your money. Yes, I'm pissed off that we are paying off European gamblers who bet w/ a bookie aka the London Office of AIG.
Anton Chiguhr

Anonymous said...

Unrelated to this, but anyway:

http://www.smh.com.au/opinion/obamas-economic-saviour-savaged-as-keating-lets-rip-20090306-8rk7.html
or
http://tinyurl.com/ckh5ft

For the non-Aussies Keating was the Treasurer and then Prime Minister of Autralia from '83 to '96. He's the most arrogant man Australian politics has ever seen, and made a rather large mistake with monetary policy by not accounting for lag back in the day. But, as much as his opponents will deny it, he oversaw the restructuring of the Australian economy including a necessary recession (the voters really didn't like his "recession we had to have" excuse - but it was the truth).

The article is written by someone who doesn't exactly love Keating, but still it sounds like Keating gave a great speech on Geithner the idiot.

Oh how I miss question time with Keating in mocking mode.

PowerBall investor said...

Citigroup, a major 'player' in the derivatives con game, is now selling its stock for a dollar.

The price of a lottery ticket.

Ironic.

Anonymous said...

Have you retired from posting?

Mitesh Damania said...

Why aren't these people in jail? They're obvious terrorists.

Anonymous said...

(Money) More than 10% of the stocks in the S&P 500 trade for less than $5. And with the market continuing to fall, more big-name firms could hit 'penny stock' status.

So what's the significance of this? Falling below $5 can often feel like a death sentence for a stock. That's because some mutual funds and other institutional investors like pension funds have explicit rules in their charters that prohibit them from owning stocks with a price lower than $5.

And if big money managers are forced to sell, that has the potential to create a massive flee for the exits by other investors.

Anonymous said...

.




AS GWB SAID SO ELOQUENTLY: "THIS SUCKA GOIN' DOWN. HEEEHAAA!"



.

Guss said...

Well, at least for this Second Great Depression we will be blessed with 20-30 million illegal immigrants to console us.

By the way, the next Black Swan will be when the children of these 20-30 million illegal immigrants reach voting age and seize control of the country. All the children of these illegal immigrants born in the US are automatically US citizens. Illegal immigrants know this and thus come to the US to have their kids. They have been doing this for at least 10-15 years. Thus, these children will shortly reach voting age. And when they do in sufficient numbers, the US will have a major voting block, most likely the controlling voting block. This voting block will demand that their illegal immigrant parents be retroactively made US citizens, with full retroactive rights to social security benefits based on their imputed, unreported, and untaxed income. After all, they'll claim, it's only fair.

And when this happens, please don't act surprised.

Prisoner No. 6 said...

There exists no tool to handle anything like $700 trillion.

The arithmetic that arrives at this figure is, of course, chancy at best. But that can be said of so much of the arithmetic that's been bandied about these last 30 years, since the deregulation of the 80s opened the doors for alleged smart guys to make money off money making money, without any of that being tied to any kind of true industrial or physical value creation.

If the measure that have been taken by Obama and the Fed do not slow things down to a point where people are willing to put the blinders back on and believe in the system, then yes, we are heading all the way down to DJIA=0.

The $700 trillion figure, as best I can wrap my head around it, represents the total value of all contracts for goods & services that exist now & in the future that have been at all imagined or put down either in paper or in electronic form, with some sort of notional obligation put on them. (I.e., I will rent this office building in Hong Kong for the next 99 years, paying X amount in rent, to be adjust according to schedule Y, etc. etc.)

Are all of these contracts, goods & services now no longer in existence? Is there no meaning to them whatsoever?

These are big questions, and the mere fact that someone is asking them means that we stand upon the precipice of The Pit.

PFL0W said...

this is one of the best, simplest, clearest examples that we really can't wrap our minds around this, isn't it folks?

Mo Rage
www.moravings.blogspot.com

I Kahn O'Clast said...

The number is entirely misleading. Most of them "net off" in the sense that some might be long security X while others will be short the same. Once netting is taken into account the market is much, much smaller.

Let me give you an idea. Say that last year I went long Mexico 5-year Credit Default at a spread of 100 for a notional $1 million. A year later when that spread reached, say, 200 and I want to take profit, I could either net out with my counter-party OR I could short a new contract at the new level at the same notional size. I would now be flat Mexican risk (with a paper profit) but would have two outstanding contracts each notionally worth $1 million. You would say that there were $2 million in derivative contracts. My accountant would say that I have some small unrealized profit but that the two trades netted out.

Anonymous said...

Do you still want to invest in MBS when you know you know borrowers can not pay you back your principle investment.

Aren't foreign investors better off putting their money on a zero percent saving account at home rather then lose their saving oversea on MBS.

http://sfbay.craigslist.org/
forums/?ID=118169078

Question:

So if this thing passes and judges are allowed to restructure loans on primary residences by reducing principal, extending the term, modifying interest rates, etc.

What is the fall out?

Reply: The fallout is

What is going to happen to the private mortgage lending industry because of this? When you have a society where contracts are not taken seriously, no one wants to risk their money by investing it there. There is a reason no one wants to invest in Zimbabwe. When Rhodesia became Zibabwe after Great Britian left, it was the breadbasket of Africa.

Our kids and those who want to get a mortgage in the future will either have to pay more for them because someone is going to declare bankruptcy and get their mortgage 'cramdown' by a judge. The investor has to eat it.

gwk said...

well it was bound to happen you know with all this republican interference going around stopping frankie lymon from his work hugo chavez has called on the united states to follow the path to socialism as if were not already but coming from our neighbor to the south it really means something so i salute you the %54 who voted for change you know who you are yes you still waiting for a car or kitchen or a house maybe even a job and thank you also to all our blog brothers for helping elect the current occupant but you didnt know anyway dow down over 3000 points have a good weekend

Anonymous said...

Got bullets? This won't end well.

Anonymous said...

"Got bullets? This won't end well."

--------------------------------

Good luck finding them. I went to Turners today, and they are cleaned out. No guns in stock. Only a few bullets. I went to the coin store next door to pick up a few ounces - only had 2 American Eagles, no Buffalo's, a couple of Chinese Panda's (which I won't buy - you know it's not gold, probably some toxic crap that looks like gold). The guy next to me cleaned out the one ounce bars, so those were gone as well.

Something is up...

i've had it said...

I don't buy this idea of $700 Trillion of anything. There must be an accounting thing going on here.

Whatever derivative contracts were taken out, these folks just have to take the fall. Their loss...too bad. They gambled with these things and it blew up in their faces.

If we continue to bail out these bastards we surely will go bankrupt.

Went2puke said...

We'll end up re-living the golden years of the seventies! There is so much unwinding going around that wages, savings, stocks, housing, food, energy, gold, raw material prices and values will go back to the seventies' levels-- and yeah! The size of the population will go back to where it was then! You're asking me how? Use your imagination and you'll figure it out...

Anonymous said...

Derivatives contracts are not the problem, congress trying to make good on them is.

I had a contract with Stan that the DOW would stay above 10K. Every month it did Stan paid me $100. If it ever fell below that threshold, I'm required to pay Stan $1Billion. When times were good, my monthly balance sheet looked great. Now I'm in financial trouble "on account of the economy" and need roughly $1B to keep from going bankrupt. And if I go bankrupt, Betty will loose $2B...so it really is much cheaper to pay me off than let the "whole system fail."

Got it kids? Get to know Stan.

Nigel said...

Keith,

I don't know where you got your numbers on this, but you've hit the nail on the head.

Here are the numbers I do know. The residential mortgage backed securities market in the US is about 10 trillion dollars.

Collateralized debt swaps (derivatives) are 28 trillion dollars. That leaves 18 trillion in CDS that is not tied to an underlying mortgage. Right now, that paper is worthless. That's what's killing the banks and the US government can't afford to bailout 18 trillion of garbage.

Now if your numbers are right, then God help us all...

Matt C said...

Keith,

Bill Murphy is on Howestreet talking about the blow up of JPM, and the 200 tril in derivatives that is gonna blow.

GO GATA!

Anonymous said...

I Kahn O'Clast,

Then it's time to cash out...

But the counterparty to your profit making long position goes bankrupt and doesn't pay you a cent.

Now you can't afford to pay the counterparty to your loss making short position so you don't pay them a cent.

Now they can't afford to pay some other counterparty whom they went short to balance their long position with you.

The insurance company went bankrupt too, and the government is sick of bailouts.

Can you see that that net out stuff is crap when parties start dropping like flies?

Anonymous said...

"Got bullets? This won't end well."

You do know that if a gun becomes a useful part of American life, that night vision, FLIR masking smoke grenades, encrypted UHF radios, radio control reconnaissance drones, and proximity detecting energy weapons will be be even more useful right?

Anonymous said...

"...Our kids and those who want to get a mortgage in the future will...have to pay more for them..."

On a lower price with a lower tax bill.

Better to buy expensive assets with cheap money you say?

Anonymous said...

700 trillion in derivatives? my , my ....gee keith, i believe you were talking about a recovery earlier in the week. so i ask you. with losses in the trillions, how can there be a recovery?

Anonymous said...

hey keith, did you by chance listen to cnbc today? david faber was talking about how the main conversation he is having with many wall street types is about guns and ammunition and food etc.....

oh Lordy....

Anonymous said...

Anonymous vanilla ice said...

What the F is a derivative contract?

March 6, 2009 2:19 PM<<<<

financial weapons of mass destruction.

does anyone believe this just happened by accident?

Anonymous said...

OT but FYI

Rush Limbaugh is now the Obama White House enemy no 1.

In the midst of a financial crisis, in the midst of a 25 year high in unemployment and rising layoffs anticipated in the months to come;
this Great Messiah can have a team of people devote their time, energy and resources to take out a talk show host.

This is what America has become, a man elected into office, to bring succour to a demoralised nation.

'A new era has arrived', 'hope and change'; BUT he has no time to develop an honest economic blueprint for the country's future BUT he has the time and resources to try and bury a nobody like Limbaugh ???

What kind of an intellectual Pygmy have you put into the Oval Office ???

Is this the kind of person you can believe in ?

Do you really believe he is capable
of leadership ?

In my opinion, this man is already running his campaign for another '4 More Years'

100% pure unadulterated POLITICIAN.

And he is going to need campaign funds, WHO do you think he is going to touch ???

You know the answer.

MR BOUGHT AND PAID FOR

Bukko_in_Australia said...

Hey last Anon -- what's the deal with Buffalos? They ARE fer sher real gold, right? We had 10 amongst the coins we dropped off in Zurich last year. (We did that so we could sell them at a moment's notice if we decide to, without the hassle of getting a local buyer to take them. I trust Swiss honesty and efficiency, because we're not with UBS.)

Our banker took the Maple Leafs at face value -- they're accepted as standard of identity coins, no assaying needed. But he gave us the stinkeye with the Buffalos. Not him, exactly, just the bank rules did not automatically OK Buffaloes like they do Leafs, Eagels, K'rands and a few others. They were eventually credited to our account, but Buffs don't seem to have the same cachet as better-recognised dubloons. Why is that?

Anonymous said...

I work for a Financial company that was worth 98 million as of Sept 09 ( currently worth 79 million as of March) and the owner, who has been in business for 20 years, used the word "capitulation" for the first time on the phone since I've worked there. Thats where we are folks! No need to debate it any longer.

Saul said...

"The world is not going back to normal after the magnitude of what they have done."

Whenever I read this I feel it needs correcting because, well, they are STILL DOING IT. It sounds a bit like it's all in the past, and it isn't.

Anonymous said...

Since there no unemployment topic. I'll post the news.

14% African American
10% Mexican
7% White
7% Asian

1.5 million over the age of 55.

Hardest hit - Factory and construction workers.

Total 4.5 million.. 8.3%

les said...

The stock market should simply be the buying and selling of stocks. No shorts, no options, no calls, no puts, no derivatives, not even margins.

But, geniuses have to turn it into some kind of ponzi scheme.

America is rigged.

PFL0W said...

les is right--

no shorts, options, calls, puts, derivatives, margin calls and for damn sure, no hedge funds. does "hedging your bet" mean anything to us?

well put.

it won't happen but it sure as heck ought to.

Mo Rage
www.moravings.blogspot.com

Scott said...

Source appears to be http://www.marketwatch.com/news/story/The-700-trillion-elephant-room/story.aspx?guid={024DB809-8506-4AA9-83BB-B053FD4E1C11}