Maggie's Farm

a simple question. when does it become time for the american citizen to protect america from the enemies within when it becomes apparent that the federal government will not do it?

The theory of the liberals – a category into which I place Bush, at least in the recently ended Karl Rove era - is that the government can make America into such a wonderful, welcoming society that even homicidal maniacs can be permitted to walk among us unchallenged. We don’t have to know who’s in our country. We just have to know that the wonderful, caring government will somehow magically transform them into good citizens.


As this mini-9/11massacre in Newark showed, this theory is flawed. Sooner or later, the Beltway crowd is going to have to realize that we need to know who is in our country. Otherwise, something really dreadful will happen. Maybe some foreigner will even do something really horrendous, like try to blow up the World Trade Center.


Oh, wait, they did that already – twice. The public got the message here in New Jersey. Funny how no one in Washington seems to have noticed.

http://www.frontpagemag.com/Articles/Read.aspx?GUID=05FE20DE-9FD0-4BB7-A276-CB18B42A01DD

LAOGAI

Laogai ? Mean anything to you at all? Laogai, Laogai.

Well chances are really ,really good that you support laogai weekly. Probably big time. Collectively we support laogai in the trillions of dollars.

Laogai are Chinese slave labor camps. They make things. Not just things but things for American markets. Hell everything you by now is made in China and most of it is made by slave labor.

Demonstrators from Tienemen Square, and the interior unrest in China keep these Laogai humming. To quote Kristin Jones in Dangerous Assignments:


Mass incidents” is the term the Chinese government uses to describe demonstrations, riots, and group petitioning. In January 2006, the Ministry of Public Security announced that there were 87,000 such incidents in 2005, a 6.6 percent increase over the previous year. Protests over corruption, taxes, and environmental degradation caused by China’s breakneck economic development contributed to the rise. But some of the most highly charged disputes have occurred over government seizure of farmland for construction of the factories, power plants, shopping malls, roads, and apartment complexes that are fueling China’s boom

http://www.cpj.org/Briefings/2006/DA_spring_06/china/china

They take the displaced and force them into Laogai so we can buy our toys, clothes and just about everything you can mention at our favorite American store for cheap. Yeah, for the lives of old men and women and children...I guess life is cheap...at least we don't have to look at them.

So enjoy Labor Day and next time you make up a shopping list , write at the top of it LAOGAI and remember the slaves who saved you a dollar.

Derivatives-- Who'll Break the Global Bank at Monte Carlo

What do you see as the worst case scenario?
Most are surprised when I respond:

Economic collapse triggered by the popping of the derivatives bubble. Many people that are involved in the periphery of the investing--including most small investors--have never even heard of derivatives . They may have heard of 'hedge funds", but they don't understand what they are. Yet in terms of the sheer number of Dollars, Yen, and Euros traded, these investments represent the biggest financial market of all .

What are derivatives? The Derivatives Primer* sums it up nicely in one sentence: "Derivatives are financial contracts designed to create pure price exposure to an underlying commodity, asset, rate, index or event." Another way of putting is it is that a derivative contract is a secondary or "derived" wager on the future price of an investment in an underlying market. It is much like the futures markets for stocks, bonds, and commodities. But a derivative can be something even more speculative. A derivative can be a bet on a incremental market change in yet another bet on an incremental change--in effect a hedge on a hedge, or bet on a bet. Derivatives are traded globally, and are less regulated than other financial markets. All traders like to hedge their bets. And these days they typically use exotic derivative contracts to do so.

Derivative contracts can be traded in just about anything: stock, bonds, commodities, credit (here we are talking about subprime loans and mortgages), interest rates, or currencies. You can place a derivative bet on next year's price of QQQ (the aggregate price of all NASDAQ stocks), or you can place a bet on the price of tea in China. A corporation can make a forward rate agreement (FRA), predicting the interest rate that it will pay on money that it plans to borrow for a factory expansion in two years. An agreement to borrow or lend a certain amount of principal at a specified interest rate and time.You can bet on the future of the futures market in pork bellies. Economist Robert Chapman summed it up best when he wrote: The point everyone misses is buying derivatives is not investing. It is gambling, insurance and high stakes bookmaking. Derivatives create nothing

How big is the derivatives universe? As William Shatner would say: "Big, reaalllly big!" The scary thing is that the volume of derivatives trades is much larger than their underlying markets To give you some perspective, here is a quote from economist Gary Novak, The total annual product of the globe is around $30 trillion. I estimate that the total value of the global real estate is around $70 trillion. A few years ago, Alan Greenspan said the amount of derivatives on the books was $200 trillion. More recently, the figure was stated to be $300 trillion. Now, someone is saying $770 trillion That's a lot of zeroes.

Economist Robert Chapman was one the first to warn the public about the full implications of the derivatives bubble. More recently, there have been many others, most notably Michael J. Panzner, (best known as the author of Stock Market Jungle), who last year penned The Coming Disaster in the Derivatives Market, and Gary Novak, who wrote Derivatives Creating Global Economic Collapse. In a July, 2003 commentary titled "He's Forever Blowing Bubbles" (about Alan Greenspan), Dr. Gary North encapsulated the greatest risk of the ever-expanding hedge trading universe: "The derivatives market is an interconnected system of debts and credits that are based mainly on expected earnings of assets of all kinds. Sellers of expected earnings discount them in a highly leveraged financial futures market. Winners and losers offset each other in any transaction. It's a zero-sum game: for every loser, there is a winner, assuming – the central assumption on which our civilization rests – the loser pays off. If he doesn't, "the knee bone's connected to the thigh bone; the thigh bone's connected to the hip bone." It's cascading cross defaults time!"

The first really big indication of the potential risk of derivatives came in 1999, when the heavy-into-hedges trading firm Long-Term Capital Management (LTCM) collapsed. At the time, they were carrying $1.4 trillion (that's trillion with a "T", not "B" for billion) in derivatives on their books. But LTCM had only about $4 billion in net asset value, with assets totaling over $100 billion. Again they had about $1.4 TRILLION in derivatives bets on the table when the house of cards collapsed. They were quietly and quickly bailed out in joint effort between the U.S. Federal Reserve and some big banks, minimizing the public outcry. (Unlike the Enron collapse, with the LTCM collapse, few small investors were hurt.) In testimony before congress about the LTCM mess, former Fed chairman Al Greenspan noted ominously: "...on occasion there will be mistakes made, as there were in LTCM and I will forecast without knowing who, what or where, that there will be many more. I would suspect there are potential disasters running into a very large number, in the hundreds."

Robert Chapman pointed out that had not the Federal Reserve and the big lenders stepped in on the LTCM debacle, the markets would have had to absorb an $80 billion hit. At the time that LTCM went down in '99, only six banks had notional derivatives exposure above $1 trillion. But there are now dozens and perhaps a hundred or more private banks, investment firms, central banks, and national governments with that much derivatives exposure.

Before the 1999 LTCM debacle, there were some forewarnings of derivatives disasters:

The 1994 bankruptcy of Orange County, to the tune of $1.6 billion, due to some incredibly naïve and foolhardy investments in derivatives by one man that handled investments for the county.

The 1995 failure of the 233-year old Barings Bank, $27 billion in derivatives bets gone bad were reportedly the result of unauthorized futures and options trading by just one man, described as a "rogue employee."

The Asian financial crisis of 1997, where derivatives "played a key role."

The Future

The global derivatives universe hums along nicely in times like these--in times like we've had since 1988. There are no nasty LTCM-type headlines. In such times market changes are gradual and incremental. For example, a derivatives trader makes a tidy profit when he bets that the Dow Jones will be 2.2% higher next year instead of the generally expected 1.9% Or another bets that higher fuel costs will put the pinch on bird guano miners in the South Pacific, curtailing their annual profits. What the hedge book boys have never encountered is a market with huge swings--something like the equities markets of the 1929 to 1935 era. If that volatility were to occur today, many derivatives traders would surely be wiped out. Their losses would be monumental. Again, we are talking about somewhere between $300 trillion and $770 trillion presently on the casino table. These are boggling figures. The risks, in absolute terms, are incalculable. Don't forget that directly or indirectly, central ("state") banks and national governments themselves are now inextricably tied to the derivatives trading universe. They are not just "dabbling in derivatives". Rather, they are in derivatives up to their necks. If and when the global derivatives bubble ever pops, it may topple not just trading companies like Goldman Sachs, or corporations like GM, Daimler-Chrysler, or RCA, but entire nations. I'm not kidding.

The derivatives market was relatively small when the U.S. markets had their last big hiccup in 1987, and it was even smaller when the commodities markets went through their last big spikes in 1978 to 1981. The whole derivatives universe has grown up since then. So we are in essentially uncharted waters, with no way to predict the effects of huge markets swings on the derivatives markets. The hedge boys will be entering terra incognita. The big market swings will blind-side the hedge traders. Some will get hurt very badly. The implications could be huge.

As another precursor of trouble ahead, the latest hedge fund fiasco was reported in September of 2006 by Bill Bonner and Lila Rajiva: "Hedge fund Amaranth Advisors [an Energy derivatives firm] managed to lose $4.6 billion - about half its entire value - in a matter of just a few days through a sensational miscalculation of the price of natural gas futures in the spring of 2007. Today's news tells us the figure has now grown to $6 billion."

In closing, my advice is to do your own form of hedging: Hedge against the future follies of the big hedge funds by diversifying out of dollars and into tangibles. You can expect trouble to occur when you start to see radical swings in interest rates or in the stock and bond markets. I predict that someday there will be big, bad, financial news about derivatives in the headlines. How big? Reaalllly big.

dervitives primer

http://www.financialpolicy.org/dscprimer.htm


credit derivatives

http://credit-deriv.com/introduction%20to%20credit%20derivatives%20article%20by%20Vinod%20Kothari.pdf

Rufus,

It isn't a situation where someone made the 6 billion. It's not sand in an hour glass that goes from one side to the other.

It is possible to have wealth simply vanish and therein is the entire problem with hedging upon hedging upon hedging. If it unravels, trillions of dollars vanish, the value zero. Not even a note from the hedge fund manager(s) saying they're sorry.

Just zero ... no one ends up with a dime.

Rufus,
I've read much of your thoughts on other sites. You have great insight and I've enjoyed learning from you.

The point I am making is that we have both read about pre WWII Germany and how people were just buring money to stay warm. It had no value beyond the heat generated by it's destruction.
The beaver dam if blown up by dynamite makes splinters out of limbs and the rushing water carrying them away, along with the river rock eventually pulverize that tree or limb into nothingness.
Hedges are totally synthetic, a formula in a computer. The wrong turn by the "hedged item" and a missed factor in the calculation for that and you get LTCM or worse. In any event the capitol put up to make the formula a dynamic is erased, kaput.

I always recall that one of the smartest men ever Bertrand Russell along with Alfred North Whitehead, wrting in the Mathematica Principea took to page 379 in the !ST Edition Vol. I to prove , using logic, that 1+1=2.

When I hear of derivatives/hedges using formulations by smart but lesser men I know that the " uh oh" facotr will find it's way in, sometime ,someplace.