Agora Financial’s 5-Minute Forecast reports that “in terms of major stock indexes around the world… there are few places to hide. The Euro Stoxx 50, a gauge of the big indexes in the eurozone, is down 24% this year. Germany’s DAX has fallen 20%. The CAC in France is down 22%. Britain’s FTSE is doing the ‘best,’ down 15% YTD.”In case you were wondering, the MSCI Asia Pacific Index is down 13% since the beginning of the year, the Shanghai Composite is down around 50% this year, Indian markets have fallen about 40%, Japan’s Nikkei 225 is down 12% year-to-date, Australia is down about 16%, Germany is down 20%, India down 32% and China is down 48% YTD. To name a few.

And, closer to home, the S&P 500 is down about 15% year-to-date, and the Dow is off about 14%, which when coupled with the ugly fact that they dollar is down about 7%, means that foreigners are getting whacked harder for investing in America than Americans! And I thought Americans were stupid! Hahahaha!

The Bank for International Settlements figures, “The current market turmoil in the world’s main financial centers is without precedent in the postwar period. Given the possibility of such a worsening economic and financial environment, it would not be surprising if asset valuations also came under further pressure,” made worse by an “uncomfortably long period of high inflation, along with slower growth.”

This is pretty gloomy news, which may explain why the latest survey of consumer sentiment from Reuters/University of Michigan fell to 56.4 in June, which shows that Americans are the gloomiest since 1980. And for good reason, too, as inflation in prices is going to keep getting higher and higher, because inflation in prices always follows inflation in the money supply, and money just keeps getting created by the idiot central banks of the world by the literal ton every day, as we learn from Ty Andros of TedBits newsletter, who gives us the Ugly, ugly News (UUN) that “The AVERAGE amount of M3 central bank money and credit creation is simply astonishing. It is clocking in at an average annual rate of 23%. Yes, that’s right, 23%.” Doug Casey of the International Speculator newsletter is a little more conservative, and says, “All over the world, but especially in the U.S., currencies are being inflated radically; M3 is rising at about 18% per year.”

To show the horror of that, Mr. Andros notes that a 23% rise in the money supplies, “Using the rule of 72…means those money supplies in one form or another are doubling on average every 3.13 years.” I involuntarily pee in my pants! Doubling the money supply in three years! This is insane! We are freaking doomed!

In case you were interested in knowing if there were any countries that are not a bunch of dirtbag, fiat-currency, inflationist morons, the answer is, unfortunately, “no”. But Mike Hewitt of DollarDaze.org writes, “The Swiss Franc was the best-performing currency of the 20th century, losing only 80% of its value.” Hahahaha!

And it is all going to get worse, too, and people will get more angry, and some of them will remember that The Magnificent Mogambo (TMM) always said that elementary mathematics and history prove that the majority of stock market investors must always lose in the long run so that a small minority of investors can make some meager gains (sometimes), and this losing majority must also pay the rapacious Wall Street financial services industry huge, huge, HUGE sums so that fancy-suited sharpies can make a lot of money ALL the time by “managing” all that money and making a complete failure of it, and the sting is mostly felt because the losing majority must also pay the government lots of taxes and fees levied on all the various handlings of this money, and they will blame me, like it is my fault that simple mathematics makes it inescapably true, or that the stupid, socialist/communist/fascist way that they vote has created a ravenous, cancerous monster that is going to destroy us all by necessitating that the Federal Reserve keep creating all the money and credit that the government needs to borrow, and these “majority losers” will sue the living hell out of their little “financial planner” or “account executive” that told such a lying piece of stupidity!

In short, the biggest and most damaging lie of all is that everyone can retire on the money they “invest for the long term” in the stock market. It can’t be done. It is mathematically impossible. You will lose more in purchasing power (as central bank monetary inflation destroys the currency by printing enough to finance the higher stock prices) than you will ever net in gains, and so the best, absolute best thing that can happen to the majority of investors is that they will invest the equivalent of a whole pizza today to get back a half a pizza when they retire, instead of merely a tenth of a pizza, if that! Hahaha!

Such are the just desserts of people stupid enough, with a media stupid enough, with an educational system stupid enough, and a government both stupid and corrupt enough to create a boom with a fiat currency, and to actually make a bet with everything they have that such a preposterous monetary system will not go bust, although it has, 100% of the time in all of history when any other country full of people stupid enough, with a media stupid enough, with an educational system stupid enough, and a government both stupid and corrupt enough to create a boom with a fiat currency.

The good news is that the astute can succeed where all others fail by merely buying gold and silver the whole time that the government is doing this, which is the easy way (”The Mogambo Way (TMW)). And we all love it when it is easy!

Well, I do anyway. And since it is easy to stop here, I will.

Well, after I make a pitch for buying gold, silver and oil. Now I’ll shut up. Just remember what I said. Okay, now I’ll REALLY shut up.

Source: The Biggest Loser of Purchasing Power

One such figure came up yesterday. The total ‘value’ of global derivatives – financial instruments which are priced on the back of the underlying assets that they track – has now reached a breathtaking $596 trillion, after a mammoth rise over the previous twelve months.

That started the warning lights flashing…

So what, apart from containing more noughts than a normal human being can cope with, is this titanic number all about?

Let’s start by putting it into context. We can do this by checking out what the world actually made last year. The overall value of goods and services produced is measured by Gross Domestic Product (GDP). And for 2007, GDP for planet earth was reckoned by the International Monetary Fund to be just shy of $65 trillion. No less an organization than the CIA has come up with a similar estimate, at £65.8 trillion, so it must be about right.

So when the Bank for International Settlements (BIS) tells us that last year the total derivatives market grew by 44%, its fastest pace since the Basel-based bank started keeping records just over ten years ago, up go the antennae straightaway. And when that figure of $596 trillion crosses the radar screen, equivalent to more than nine times world GDP, the numbers are looking quite scary.

The money at risk is equivalent to a quarter of world output

Of course, the $596 trillion is a ‘notional’ amount. It’s the nominal value of all the underlying assets against which bets have been placed. But the actual amount of ‘real’ money at risk is still a massive $15 trillion, equal to almost a quarter of world output.

And within the individual areas there’s one even more eye-catching statistic. The value of contracts in credit default swaps (CDS) – a form of market insurance that investors can buy to protect themselves against corporate bond defaults – more than quadrupled last year to $2 trillion, covering a notional $58 trillion of loan debt.

The very size of all these numbers is just about enough to give the jitters to anyone, on the basis that when things can go wrong, they probably will.

When I wrote on this subject before, one respondent claimed that the topline numbers aren’t important because derivative markets are beautifully balanced. His theory was that if every derivatives position were hedging a risk relating to a specific transaction or asset, then derivatives would actually stabilise the world economy. All those noughts would be good news.

Sounds a bit too good to be true. And there are three reasons to be sceptical about this optimistic line of thinking.

Three reasons to be worried

Firstly, what we can call knowledge risk. That’s when derivatives players don’t know what they’re getting into.

A story on Bloomberg at the end of April summed this up pretty well. The chief finance officer of an Indian company was persuaded by his bank to start dabbling in the currency derivatives market. Although the CFO explained to the bankers that he didn’t understand how these products work, apparently they chauffeured him round and bombarded him with charts showing how his company could make a profit with a zero investment.

Too good to be true? Clearly it was. Three months later, two of the contracts had turned sour, incurring losses of $1.5 million and prompting the bank to issue a bankruptcy notice to recover the cash. Meanwhile, our poor CFO had no idea that these derivative bets could go so wrong. But he’s not alone. Indian companies could lose up to $4bn on derivatives, according to Hong Kong-based brokerage CLSA Ltd. Naïvety? Maybe. But we’re all good at repenting at leisure.

Which brings us onto the next potential problem, counterparty risk. That’s when the deal you’ve just done comes unstuck because the people on the other side of the trade can’t settle their side of the deal. A bit like backing the Derby winner, then finding the bookie can’t pay up because he’s run out of money.

Indian banks may lose up to $400m if they can’t enforce derivatives contracts they’ve set up with smaller companies, says CLSA. This is because 10% of these smaller companies may renege on their agreements because they haven’t the cash to settle the deals.

And this is just one country. BNP Paribas analyst Andera Cicione believes that total world CDS losses could hit $150bn. As the CDS market is unregulated, there are no public records showing whether sellers have the assets to pay out if a bond defaults. George Soros himself has warned this week that CDS counterparty risk is “a Damoclean sword waiting to fall.”

What’s worse – and here we come to the third problem – some buyers have now found out that the derivatives they’ve bought haven’t matched up to “what it said on the tin”.

The ratings agency Moody’s has just admitted awarding incorrect ratings to $4bn worth of debt instruments because of a bug in its computer models. Some ultra-complex derivative products, known as “constant proportion debt obligations” and thought up at the height of the credit bubble, incorrectly received over-optimistic triple A – i.e. top notch – ratings. And it took Moody’s nearly a year to find the problem.

As the derivatives market gets bigger and bigger, stories like these only make us ask: do the people who play around in it really know what they’re doing?

Source: Why Derivatives are Getting Much More Dangerous

One such figure came up yesterday. The total ‘value’ of global derivatives – financial instruments which are priced on the back of the underlying assets that they track – has now reached a breathtaking $596 trillion, after a mammoth rise over the previous twelve months.

That started the warning lights flashing…

So what, apart from containing more noughts than a normal human being can cope with, is this titanic number all about?

Let’s start by putting it into context. We can do this by checking out what the world actually made last year. The overall value of goods and services produced is measured by Gross Domestic Product (GDP). And for 2007, GDP for planet earth was reckoned by the International Monetary Fund to be just shy of $65 trillion. No less an organization than the CIA has come up with a similar estimate, at £65.8 trillion, so it must be about right.

So when the Bank for International Settlements (BIS) tells us that last year the total derivatives market grew by 44%, its fastest pace since the Basel-based bank started keeping records just over ten years ago, up go the antennae straightaway. And when that figure of $596 trillion crosses the radar screen, equivalent to more than nine times world GDP, the numbers are looking quite scary.

The money at risk is equivalent to a quarter of world output

Of course, the $596 trillion is a ‘notional’ amount. It’s the nominal value of all the underlying assets against which bets have been placed. But the actual amount of ‘real’ money at risk is still a massive $15 trillion, equal to almost a quarter of world output.

And within the individual areas there’s one even more eye-catching statistic. The value of contracts in credit default swaps (CDS) – a form of market insurance that investors can buy to protect themselves against corporate bond defaults – more than quadrupled last year to $2 trillion, covering a notional $58 trillion of loan debt.

The very size of all these numbers is just about enough to give the jitters to anyone, on the basis that when things can go wrong, they probably will.

When I wrote on this subject before, one respondent claimed that the topline numbers aren’t important because derivative markets are beautifully balanced. His theory was that if every derivatives position were hedging a risk relating to a specific transaction or asset, then derivatives would actually stabilise the world economy. All those noughts would be good news.

Sounds a bit too good to be true. And there are three reasons to be sceptical about this optimistic line of thinking.

Three reasons to be worried

Firstly, what we can call knowledge risk. That’s when derivatives players don’t know what they’re getting into.

A story on Bloomberg at the end of April summed this up pretty well. The chief finance officer of an Indian company was persuaded by his bank to start dabbling in the currency derivatives market. Although the CFO explained to the bankers that he didn’t understand how these products work, apparently they chauffeured him round and bombarded him with charts showing how his company could make a profit with a zero investment.

Too good to be true? Clearly it was. Three months later, two of the contracts had turned sour, incurring losses of $1.5 million and prompting the bank to issue a bankruptcy notice to recover the cash. Meanwhile, our poor CFO had no idea that these derivative bets could go so wrong. But he’s not alone. Indian companies could lose up to $4bn on derivatives, according to Hong Kong-based brokerage CLSA Ltd. Naïvety? Maybe. But we’re all good at repenting at leisure.

Which brings us onto the next potential problem, counterparty risk. That’s when the deal you’ve just done comes unstuck because the people on the other side of the trade can’t settle their side of the deal. A bit like backing the Derby winner, then finding the bookie can’t pay up because he’s run out of money.

Indian banks may lose up to $400m if they can’t enforce derivatives contracts they’ve set up with smaller companies, says CLSA. This is because 10% of these smaller companies may renege on their agreements because they haven’t the cash to settle the deals.

And this is just one country. BNP Paribas analyst Andera Cicione believes that total world CDS losses could hit $150bn. As the CDS market is unregulated, there are no public records showing whether sellers have the assets to pay out if a bond defaults. George Soros himself has warned this week that CDS counterparty risk is “a Damoclean sword waiting to fall.”

What’s worse – and here we come to the third problem – some buyers have now found out that the derivatives they’ve bought haven’t matched up to “what it said on the tin”.

The ratings agency Moody’s has just admitted awarding incorrect ratings to $4bn worth of debt instruments because of a bug in its computer models. Some ultra-complex derivative products, known as “constant proportion debt obligations” and thought up at the height of the credit bubble, incorrectly received over-optimistic triple A – i.e. top notch – ratings. And it took Moody’s nearly a year to find the problem.

As the derivatives market gets bigger and bigger, stories like these only make us ask: do the people who play around in it really know what they’re doing?

Turning to the wider markets: