|
262 trillion dollars in OTC (Over the Counter) Interest Rate Derivatives! Yes, 262 trillion is the notional amount of OTC Interest Rate Derivatives which existed as of June, 2006. This figure was 24% higher than six months previously. So reports the Monetary and Economic Department of the Bank for International Settlements ("BIS" - - the Central Bankers Bank) in its November, 2006 report "OTC Derivatives Market Activity In the First Half of 2006". To be sure, the Gross Market Value of those derivatives is listed at a "mere" 6.549 trillion dollars. And Global OTC derivatives total credit exposure is listed at a "mere" 2.032 trillion dollars for that same period. Yet, these are very large numbers….and they represent ever increasing risk. Similarly, the "notional amounts of Foreign Exchange Derivatives increased by 22% to 38 trillion dollars, while gross market values rose by 14% to 1.1 trillion dollars…," according to the BIS Monetary and Economic Department. So why should the individual investor care? There are several reasons. Perhaps the most important is that derivatives typically create a multiplier effect. They multiply, often by many times over, potential risks as well as potential profits. One need not think back too many years to remember the Long-Term Capital Management (LTCM) debacle. LTCM traded in derivatives, inter alia, so as to multiply profits and, ostensibly, hedge against losses. The derivative positions were ostensibly protected by complicated risk management protocols designed in part by two Nobel Laureate advisors. Unfortunately, the risk management protocols failed, and the massive derivatives leverage served as a catalyst for LTCM itself to collapse. Unfortunately also, the liabilities were laid off on an assembled consortium of other banks and bankers at an emergency meeting attended by U.S. Federal Reserve officials. LTCM's derivatives debacle had very real negative consequences and could have brought down the entire financial system. Yet it could happen again on a much greater financial-system-wide scale as the OTC derivatives totals continue to increase in scope and size. Thus the risks are not merely limited to hedge funds making the wrong "bets" in a "perfect adverse storm." There are many other ways a universe of OTC derivatives can implode. One of these is the failure of one or more significant counterparties to derivatives transactions, thus creating a domino effect. Counterparty credit worthiness is essential in a derivatives based financial universe because it is the counterparties which make good (or default) on the derivatives contractual promises. So it would take just one significant counterparty failure to create a domino effect and to cause a Long-Term Capital Management type crisis, or worse. The bottom line is that as OTC derivative totals increase and the number of OTC derivatives counterparties increases, the risk increases. Deepcaster believes it is only a matter of time until we get another "perfect storm." And it is this eventuality that Deepcaster's Fortress Assets Portfolio is designed to protect against. And we should not fail to note that there are two other significant risks to whole derivatives system. The first is lack of transparency. OTC derivative are typically private contracts between private parties the terms of which are not typically disclosed to the public. The second is what Deepcaster has elsewhere described as "Juiced Numbers" - - i.e. the Fed-led Cartel's manipulations of the markets and the government's manipulation of data (see Deepcaster's "The Mega Manipulation - Juiced Numbers IV: How The Government Gets The Statistics It Wants, Markets Get Manipulated, Citizens Get Deluded and Worse"). Regarding "Juiced Numbers," John Williams has created an excellent Newsletter "Shadow Government Statistics" at www.shadowstats.com which is a welcome antidote to Federal Reserve and government data manipulation. In late November, 2006, Shadowstats issued its report of the "real" numbers as opposed to the government ones. Williams found that annual money supply growth, calculated as if M3 had been continued (the Federal Reserve discontinued the calculation and release of M3 figures earlier this year), indicates that the annual money supply growth as of 3/4 of the way through 2006 was approaching 10%. A 10% increase in the money supply signals massive monetary inflation! Coupled with the massive credit inflation of recent years, we are truly in a massively inflating economy. Of course, the Fed-led Cartel's manipulation of a variety of markets has temporarily masked this hyperinflationary reality and has, coupled with the juiced CPI numbers, created an illusion of deflation. Late in this year of 2006, the United States government's CPI number was just under 2% but shadowstats.com (which calculates it the old fashioned way) indicated a 9% CPI rate of inflation. As well, shadowstats.com real numbers show the U.S. GDP contracting by nearly 2% a year rather than the government number of plus 2% per year . Conclusion: while the Fed-led Cartel has created the illusion of deflation, in fact what we have is stagflation. A declining GDP and massive increases in credit and money supply and OTC derivatives are facts. It is only the "juiced numbers" and manipulated markets which disguise this stagflationary reality, albeit only temporarily. In Deepcaster's view this explosion of derivatives cannot continue because, inter alia, the amount of derivatives necessary to maintain the Cartel's control of the markets continues to increase. This is similar to the situation in which the volume of drugs which a drug addict has to use has to continually increase to achieve the same "high." And at some point the desired effect cannot be obtained at all. Thus, Deepcaster's policy in identifying investments with "Fortress Assets" potential is that one must not only consider fundamental and technical analysis but also interventional analysis and real data to protect and enhance wealth. Deepcaster's portfolio and prospective choices reflect just that position. Indeed, Deepcaster has just issued a Market Alert in which we forecast a significant takedown in three major market sectors. Significantly, these forecasts are based on fundamental, technical and interventional analysis.
CONTACT
INFORMATION
DEEPCASTER FORTRESS ASSETS LETTER The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
