Forum Thread

Derivatives bad.

Reply to ThreadDisplaying 1 - 15 of 29 1 2 Next
  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
    Are you sure you want to delete this post?
        
    Forget about the microscopicically small market of derivatives that stabilize perishable product markets. Look at the quadrillions of dollars that half of which are betting on total chaos. Every derivative has a party and counter party. One party bets on the positive outcome and the other bets on the negative outcome. It is easier to influence a bad condition than a good condition. Derivative trading is exclusive to big money traders. People of power, on both sides, are trading in derivatives. That begs the question why should the world suffer fools who's best interest is the failing of trillions of dollars of businesses???
  • Liberal Democrat
    Democrat
    Colorado Springs, CO
    Are you sure you want to delete this post?
        

    Chet -- You seem to have an obsession with derivatives, interjecting meretricious rants on derivatives into various threads...kind of like Trump tweets. Most people in any case probably don’t give a shit or have little idea of what derivatives are, except that they probably perceive them negatively based on the role a small segment of the derivatives, the Credit Default Swaps, played in the Great Recession.

    I don't know what your purpose is in continually bringing them up, and I certainly admit to not understanding your logic. Maybe your whole purpose is to bait me into a discussion. Okay, for one more time I will share my understanding of derivatives. I spent quite a bit of time trying to understand them years ago, but decided it's not worth my time.

    First, for those who might be even slightly interested, a derivative is a financial contract whose value is based on, or "derived" from, a traditional security such as stocks and bonds, mortgages, assets such commodities or market place indices. There are thousands of different types of derivative contracts traded daily on global financial and commodities markets; they can be grouped into four basic categories: futures contracts, forward contracts, option contracts and swaps. They serve an important need for the business community with over 94 percent of the 500 world’s largest companies using them to manage cost variability and other risks in their worldwide business operations.

    One of the obvious advantages of derivatives is that businesses do not have to maintain large cash reserve accounts for potential downside risks in the markets. Having transferred that risk to companies or individuals that specialize in risk management means that they have more capital to invest in other opportunities that create jobs. Furthermore, derivatives act to stabilize volatility in segments of the market.

    The sellers of derivative contracts are "hedgers". In the commodities markets they include businesses that produce, ship, process or otherwise handle the products – oil and gas producers, refiners, mining companies, grain millers or individuals like farmers that cannot afford the volatility in markets and want to lock in future prices or interest rates or currency rates for future stability in their businesses. In the financial derivatives markets, the players are banks, investment firms, mortgage lenders, insurance companies, hedge funds, currency traders and governments.

    The risk decisions that sellers make are not unlike those of the average homebuyer is faced when evaluating a fixed 15 or 30-year fixed rate mortgage versus an adjustable rate mortgage. They are hedging. Derivative trading, like decisions on home mortgages, then is essentially buying an insurance policy against possible future adverse market conditions. Derivative contracts, “insurance policies”, are sold and resold in the market place as interest rates or other market factors such as foreign currency exchange rates continually change. The higher the market volatility, the more they are sold or traded in the global market place. Longer term futures contracts and options help tamp down volatility.

    The buyers of derivatives are the “speculators” – professional money managers, financial engineers, and highly-experienced investors including banks and hedge fund managers who make it their business to understand risk in certain markets. They perform a valued need to the businesses who do not have expertise in the matter but need more stability in prices, interest rates, and currency rates to provide assurances to their stakeholders. And in return they take a share of the profits as compensation for taking the risk that the business could not afford.

    The ease with which players can enter the market has also given rise to many small-time gamblers – those lacking the expertise in the specialized markets but are attracted by the potential of big gains through margin trading. Many of them end up losers. The professionals try discourage the gamblers from trading in the market by pointing to the immense risk.

    There have also been highly knowledgeable but less scrupulous players primarily in the over-the-counter derivatives market engaging in fraudulent activity driven by greed. The Bernie Madoff Ponzi scheme is just one example of bad actors who were largely able to conduct their illicit activities because of the lack of oversight or incompetence by regulatory agencies in the over-the-counter derivatives market.

    You have often quoted a $1.2 quadrillion figure as the size of the derivatives market. That number is not a product of conventional arithmetic like the Dow Jones Index, but rather the high-end of a range of estimates based on complex mathematical models. Dr. Paul Wilmott, a mathematics professor at Oxford University who makes money selling books on the subject has been attributed as the source, but I could not find any specific references in his books and articles to the $1.2 quadrillion figure. Nevertheless, that number is bandied about in the blogosphere taking on a populist kind of “shock and awe” cause by critics of the derivatives market. Other sources put the number closer to $700 trillion.

    Nevertheless, one needs to understand that the estimate is based on “notional values”. The notional value, or more accurately the notional principal value, in derivative contracts is not a real value because the principal in the derivative contracts never changes hands.

    For example, there is a good chance your house mortgage is being traded in the derivatives market, but the buyers and sellers of your mortgage are not buying and selling your house -- only the mortgage. And the notional value of a 30-year mortgage with interest can be quite high with the interest payments exceeding the original principal. Factor in the millions of house mortgage contracts traded daily in the swaps market, or the value of millions of bushels of grains, or the millions of barrels of crude oil traded, or millions of ounces of precious metals as well as interest and currency swaps and one can certainly visualize how the notional value number can aggregate in size…in the hundreds of trillions of dollars if not the quadrillions of dollars estimated with mathematical models.

    The Bank for International Settlements (BIS) based in Switzerland compiles statistics on the gross market value (rather than notional value) of global the over-the-counter (OTC) market. They estimate the gross market value of the OTC global derivatives at $11 trillion at the end of 2017. This is a decline from $15 trillion at the end of 2016 and $35 trillion from its peak in the second half of 2008 reflecting the reduced market volatility, primarily in interest rates. The BIS does not compile statistics for equity, commodity or credit derivatives contracts commonly traded in the exchanges

    In any case, there are no available statistics in the exchange traded derivatives markets that are comparable to gross market values as calculated in the OTC markets. That is because exchange traded derivatives, i.e., futures markets, are commonly marked-to-market on a daily basis. Any losses or profits are adjusted daily, and hence there are no “unrealized profits or losses” in the exchange futures markets to report.

    Therefore, only notional values can be used to compare the relative sizes of the exchange and OTC markets. The analysis is further complicated because the exchanges regularly report volumes (number of trades) as opposed to monetary values. To get a more meaningful comparison, the volume numbers need to be converted to value numbers by applying average costs. On that note, the Chicago Mercantile Exchange report of 2014 using BIS data put the notional value of the global derivatives market in 2013 at $710.2 trillion. The exchange traded part of that total was calculated at $64.6 trillion or 9 percent of the total notional values of global derivatives. I could not find updated numbers for 2017.

    In summary, the notional value serves a purpose in comparing trends or the relative sizes of the markets but it has no relation to the amounts of money changing hands daily on the exchanges or over-the-market. Suggesting that there are "quadrillions of dollars" being gambled by big time "people in power" gamblers in the derivatives market earns you four Pinocchios, kind of like Alexandria Ocasio-Cortez's tweet that the Pentagon could not trace, document, or explain $21 trillion in Pentagon spending. That earned her four Pinocchios as well.

    Chet there are lots of websites with tutorials on how the derivatives markets works. I would suggest you spend some time understanding derivatives before ranting about them again.

  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
    Are you sure you want to delete this post?
        
    Schmidt, Defending the results of a law that almost destroyed and continues to eat away at our economy is beyond comprehension. Democratic???
  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
    Are you sure you want to delete this post?
        

    Schmidt said:

    "Chet there are lots of websites with tutorials on how the derivatives markets works. I would suggest you spend some time understanding derivatives before ranting about them again."

    There is a small segment of futures in place before 2000 that have some benefit.

  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
    Are you sure you want to delete this post?
        

    Schmidt, This charge is an indefensible outright lie by you that you made up. I have never said this:

    "Suggesting that there are "quadrillions of dollars" being gambled by big time "people in power" gamblers in the derivatives market earns you four Pinocchios,"

    Schmidt, You need to apologize for the lie. My attack on derivatives has very clearly been that quadrillions of dollars are stagnated. I have never used the word gambled. I would be thrilled to death if the quadrillions of dollars were invested in jobs producing ventures. You need to abandon your rightwing attack on what should be the Democratic party. Don't embellish to try and defend your misunderstanding of the economy. Here is something for you to read to understand derivatives.

    Warren Buffet on Derivatives

    PDFFinTools › docs › Warren Buffet on Deri...


    I view derivatives as time bombs, both for the parties that deal in them and the economic ... On a micro level, what they say is often true

  • Liberal Democrat
    Democrat
    Colorado Springs, CO
    Are you sure you want to delete this post?
        

    "Billions suffer because a few choose to make money by depriving billions of a living wage. If the 1.2 quadrillion dollars stagnated in pure gambling derivatives were invested in producing goods and services there would be world wide prosperity. Why not regulate derivatives to a very narrow direct benefit tied only to perishable assets subject to uncontrollable natural conditions" -- Chet Ruminski, October 18, 2017.

  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
    Are you sure you want to delete this post?
        
    Sorry Schmidt but not even close. Not that it makes any difference to you but I was describing the nature of derivatives being gambling. You choose to turn it into something completely different inferring the nature of the traders as being gamblers. I have no problem with money invested/gambled. My attack is on the non/productive unregulated economy destroying derivatives. Your illogical defense of derivatives that even Bill Clinton says the law legitimizing is wrong is revealing. Coupling that with your opposition to free college because you feel students should have some skin in the game identifies a right wing Republican. Keep up the conservative status quo support and you might have a chance to elect Trump again.
  • Liberal Democrat
    Democrat
    Colorado Springs, CO
    Are you sure you want to delete this post?
        

    Chet -- This is what I find so annoying about your posts. You deflect criticism by picking out one point and making it the issue. Out of curiosity I did a keyword check on the word "gambling" in this website and found that you used it some 20 times in just the past year alone. It's always with respect to Wall, Street, the stock market and/or derivative trading which you call "gambling". You have called for "criminalizing gambling" and have called the futures derivatives market as "simply non productive entities that stagnate money." You have claimed that "legalizing gambling in the stock market has cheated millions out of a living wages." A few more quotes:

    "If the 1.2 quadrillion dollars stagnated in pure gambling derivatives were invested in producing goods and services there would be world wide prosperity."

    "Build the real economy by repealing the laws that allowed money to be diverted from goods and services into pure gambling on the outcome of stocks. Legislate prosperity instead of poverty."

    "Invest in jobs producing living income businesses. It is there for the asking except for the money hoarding job killing financial gambling of the last 40 years."

    "Money that was available for jobs investing Tsunamied into derivative gambling . Destroying hope and opportunity on its way to futures gambling."

    "For many years now the Democrats have sat idoly by while Republicans passed laws that let Wall Street divert money from jobs to gambling."

    "The only thing restricting prosperity here and around the world is the quadrillion of dollars tied up in non productive speculating gambling schemes."

    "Just do the right thing and criminalize gambling in trading."

    "Gambling should be criminalized in wall street..."

    Okay there's more. Somehow I interpreted your many posts as conflating investing in the stock market and/or derivatives as "gambling activities" that should be criminalized because the money that the businesses and investors put into those activities could be better spent by investing in jobs for the "lower classes". Criminalizing that so called gambling, and "legislating prosperity" somehow in your mind means that there will be jobs for everyone and poor people would prosper. Is that my correct reading of your many posts?

    The difficulty that I have with your premise is that it assumes that the "money hoarders" would be willing to put their money in even higher risk investments whose sole purpose it seems from your viewpoint is to create jobs rather than profits for the stakeholders. And who are the money hoarders that might risk putting money into your new business? Perhaps a bank or maybe a venture capitalist or maybe a relative with a big 401K invested in the market who is willing to cash it in to support your new venture?

    This article, Startup Business Financing , is of interest. Financing of a new business to create jobs can come via debt financing or via equity financing. Debt financing includes borrowing money from a bank, private parties (friends and families), taking on more credit card debt, leasing, angel investors or venture capitalists. On the other hand, you can capitalize your new job creating business via equity financing, that is giving an ownership stake in your business venture to the "money hoarders". If it's a big enough idea to create millions of jobs, well an IPO can be sold on Wall Street and once your new venture is up and running, "gamblers" can buy stock in your company on Wall Street if it's doing well...or sell it short if they think it's going to fail. Ha.

    In any case, no one, even relatives, will risk investing their money without a firm business plan on how the business is expected to thrive to pay off the debt and make a profit for the lenders. Most of all the loaners will look at you the individual entrepreneur to determine if you have the expertise and experience to not only launch but also manage a new business. Most businesses fail because of bad management. That's why Sears filed for bankruptcy. That's why Tots R Us filed for bankruptcy. And why thousands of other enterprises big and small fail every month.

    But there are always hedge funds willing to start new ventures with parts of the failing companies to keep people employed. Good example, Craftsman Tools, now selling their quality products in Lowes and other stores rather than smaller market from sales in dingy Sears mall stores.

    As a final point, I know Chet that you do not read my posts except to grab some lines to deflect. You do that to me and others in this website in true Trump fashion, and I expect you'll do it again with this post...cherry pick something out of it to attack me and ask for an apology. You are so predictable.

    Chet I am hammering you on you misguided obsession about Wall Street and the derivatives market. I suggest you just leave it and move on. You make valued contributions in this website on other topics but your obsession with derivatives casts a shadow over the other contributions. I for one tend to disbelieve your posts until I have fact checked them, whereas others in this forum have built up a level of trust that I can take at face value what they say.

  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
    Are you sure you want to delete this post?
        

    Well said Schmidt. I especially appreciate a logical response minus inuendo. I remember an uncle of mine, a coal miner, having one of the first Polaroid land cameras in 1950. I remember friends of mine that didn't go to college working in the printing business in Dayton OH buying new cars every year. I remember other buddies working at Wheeling Steel buying houses at age 20. I remember other buddies working on the RR buying houses. cars, fishing boats, I don't remember people going bankrupt over medical bills, I don't remember popular street corners occupied with broke, homeless people asking for help. Some people think our degeneration of the generations is a natural evolution sustained by marketable skills. I know the only reason poverty, suffering and early death is an evolution of money from a tool into a commodity. My goal is to increase the velocity of money and relegate money back into a tool to facilitate the trading of goods and services. The most atrocious attack on our civilization is the amount of money used to securitized positions instead of being invested in jobs producing ventures. The country is made of citizens deserving equal opportunity. The only thing denying opportunity is the worldwide quadrillions of money used to secure the unregulated unproductive derivative trading. There is no defense for the money strangulation derivative market. I have no problem with the futures market used to stabilize price and product of perishable goods. I read everything you write. How do you think I know about your skin in the game college loan defense. Since I have been on the sight I have made radical predictions based on intuition and logic that have all come to pass. Seems like you ought to recognize that and join in.

  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
    Are you sure you want to delete this post?
        

    Schmidt, How do you answer charges like the following???

    "These individuals say the problem then and now can be described in a single word: derivatives.

    dcbar.org/bar-resources/publications/wa...

  • Liberal Democrat
    Democrat
    Colorado Springs, CO
    Are you sure you want to delete this post?
        

    Chet -- Quit throwing that quadrillion number around. It is irrelevant to the discussion. I discussed the notional value before, and in particular how that "quadrillion" number is determined. It is a bogus number for the arguments you are making. The biggest players in the over-the-counter market that drives that number are big corporations. They primarily engage in interest rate swaps and to a lesser extent currency rate swaps to manage their business. This extract from the Money Changers website explains it further:

    "Generally, the two parties in an interest rate swap are trading a fixed-rate and variable-interest rate. For example, one company may have a bond that pays the London Interbank Offered Rate (LIBOR), while the other party holds a bond that provides a fixed payment of 5%. If the LIBOR is expected to stay around 3%, then the contract would likely explain that the party paying the varying interest rate will pay LIBOR plus 2%. That way both parties can expect to receive similar payments. The primary investment is never traded, but the parties will agree on a base value (perhaps $1 million) to use to calculate the cash flows that they’ll exchange.

    "The theory is that one party gets to hedge the risk associated with their security offering a floating interest rate, while the other can take advantage of the potential reward while holding a more conservative asset. It’s a win-win situation, but it’s also a zero-sum game. The gain one party receives through the swap will be equal to the loss of the other party. While you’re neutralizing your risk, in a way, one of you is going to lose some money."

    From the above you can see that the notional value of the exchange might be $1 million and that's what the Bank for International Settlements will show in their statistics as the notional value. However, the Bank for International Settlements will also show the market value for that particular exchange as zero. For more insight you can view the Bank for International Settlements report of May 2018: Statistical release: OTC derivatives statistics at end December 2017

    They show charts of the notional values of the various derivative contracts. Interest rate swaps are by far the largest category. Currency related derivatives are second.

    The biggest players in this game of interest rate swaps are corporations and banks. Corporations do it to manage their risk profile and manage debt. They trade in big quantities and that's why the derivatives swaps in interest are the biggest component of the over-the-counter market in derivatives.

    That particular money involved in interest rate exchanges is not "stagnating". It is a part of everyday risk management in big corporations, and as I said before 95 percent of the world's largest 500 corporations engage in derivative trading, mostly in managing interest rates on their debt. The money they save in interest rate swaps can be used towards other investments -- job producing ventures -- that help grow the company and ad jobs.

    The examples of your buddies from the past have no relevance to the derivatives market. You cannot blame the derivatives market for the plight of the homeless, much the same as you cannot blame the derivatives market for the plight of Sears. There are many factors affecting employment in this country with technological innovations probably being number one followed by changing market conditions -- e.g. customer preference for internet sales versus shopping in big mall department stores. Global competition is also a big factor but tariffs and tariff wars are not the answer to protect jobs as a whole. All they do is move the jobs around.

    I am a big supporter of education and job retraining. There have been many government and company sponsored programs for education and job retraining, some successful but many not so. And I also support Carlitos "Job Guarantee" to provide some income while the person learns a new trade. However, much of the onus is on the individual and how he/she is willing to accept a change of life experience at a lower wage and maybe a new local.

    As I look at my local newspaper there are plenty of high paying jobs available now. The only problem is that the person has to have the right skills. With the tighter jobs market, some employers are hiring the less skilled and training them. But some for various reasons are not employable. We've had those discussions before, but the point I make is none of that is related to the derivatives market. That market works to reduce risk and add jobs rather than take money away from other ventures.

  • Liberal Democrat
    Democrat
    Colorado Springs, CO
    Are you sure you want to delete this post?
        
    Chet Ruminski Wrote:

    Schmidt, How do you answer charges like the following???

    "These individuals say the problem then and now can be described in a single word: derivatives.

    dcbar.org/bar-resources/publications/wa...

    That article was written in 2010 before the passage of Dodd-Frank. Dodd-Frank addressed the most significant of the problems in the derivatives market related to transparency in the over-the counter market and in particular credit default swaps. Go to the CFTC and SEC websites to check on the progress of the regulations being written to conform with Dodd-Frank.
  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
    Are you sure you want to delete this post?
        
    Schmidt Wrote:
    Chet Ruminski Wrote:

    Schmidt, How do you answer charges like the following???

    "These individuals say the problem then and now can be described in a single word: derivatives.

    dcbar.org/bar-resources/publications/wa...

    That article was written in 2010 before the passage of Dodd-Frank. Dodd-Frank addressed the most significant of the problems in the derivatives market related to transparency in the over-the counter market and in particular credit default swaps. Go to the CFTC and SEC websites to check on the progress of the regulations being written to conform with Dodd-Frank.

    You didn't answer my question of how do you answer the charges. You continually say I don't understand derivatives so how do you answer multiple people that say the same thing I say.

    Dodd- Frank is under constant attack and under Dodd/Frank conditions are almost the same they were prior to Dodd-Frank.

    Schmidt said:

    "Go to the CFTC and SEC websites to check on the progress of the regulations being written to conform with Dodd-Frank"

    Here is what is generally happening with Dodd-Frank and it ain't good.

    By Alan Rappeport and Emily Flitter

    • May 22, 2018

    WASHINGTON — A decade after the global financial crisis tipped the United States into a recession, Congress agreed on Tuesday to free thousands of small and medium-sized banks from strict rules that had been enacted as part of the 2010 Dodd-Frank law to prevent another meltdown.

  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
    Are you sure you want to delete this post?
        

    Schmidt said: "I am a big supporter of education and job retraining."

    That is good but it useless in improving the living conditions to the level that the lowest IQ worker has all their needs met through monetary rewards from a job or income supplemental program.

  • Liberal Democrat
    Democrat
    Kenosha, WI
    Are you sure you want to delete this post?
        
    I don't think a common everyday working person gives a fuck about a derivative.