n interesting data came out from the Bank for
International Settlements. The global market for derivatives
soared to a record $370 trillion in the first half of 2006. It
is the highest ever and the bubble is bigger than any one can
The kind of euphoria in derivative trading has never been seen
before. The amount of outstanding credit-default swaps contracts
jumped by 60% at the end of last year. This year the rise is
even faster. It is a typical pyramiding technique. Money is
creating false concept of money and that in turn is creating
ever lager conceptual money. When the tide blow off and balloon
bursts, the catastrophe will be unimaginable. The 1929 debacle
and resulting depression will be miniscule to what is coming.
The derivatives were initially designed for hedging. It has now
become the instruments of trade. An example of what can happen
is as follows. Recently when Amaranth, the hedge fund, did bet
on the wrong side of the natural gas market, it lost billions in
days and went out of business drowning the capital of many
investors. But something more sinister happened in London credit
swap market. On the news of Amaranth's problem, the credit swaps
based on Amaranth funds collapsed creating massive problem for
the London credit instuments markets. Even the little hedge fund
was able to bring the market to its knees. Thinks what can
happen when many hedge funds collapse at the same time.
Remember 1987. Before the October crash public were arguing
about the fact that the market will not give an inch on the down
side. Every individual investor was in the elevator at the
Penhouse level. Finally when the crash came, the brokers did not
pick up their phones and Dow lost more than 20% in one day.
Something much more serious is getting cooked here. The
complacency level, the sentiment indicators and above all the
fundamentals are all ready to make the market collapse big time.