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CS Evaluation: Do Financial Derivatives Signal Destruction? cont’d

CS Evaluation: Do Financial Derivatives Signal Destruction? cont’d

Sure, derivatives were partially the cause of the GFC, and are still a danger because nothing was done post-GFC to reign in the largely unregulated global shadow banking system (which includes derivatives and derivative trading). On the other hand, what Snyder does not point out is that of the top 25 banks it is approximately the top 10 that hold the large majority of derivatives. Note how the derivative amount markedly decreases with the last bank he lists, Wells Fargo.

Regional banks hold little or no derivatives – so it is primarily the top national banks that are at risk. Second, yes, Jim Rickards warned about a derivatives collapse in his 2014 book, The Death of Money, predicting it would happen within a few years, which is right about…now. Still waiting Jim. CS is a (temporary) subscriber to his newsletter and he and his publisher send out a warning that the world is about to crash about three times a day (which always includes an opportunity to buy whatever it is they say will save you – from them, of course). Third, Rickards doesn’t know for sure why Buffet (Berkshire Hathaway) is holding all of that cash. Apple holds more cash percentage-wise than most companies and apparently its primarily to take advantage of investment opportunities when they appear. It makes sense Berkshire would do the same. Fourth, yes, Warren Buffett did write that little quip about derivatives over a decade ago – yet today he owns Goldman Sachs and Wells Fargo stock! And quite a lot of it. Hmmm…guess he doesn’t believe their derivative trading is going to hurt them too much.

Any bank trading in derivatives has safety over safety protocol designed to protect themselves and their stockholders. Does this mean they can’t lose a lot of money or the derivatives market is a good or safe thing? No. Only one thing is certain about derivatives – No one completely understands them or the risk or safety involved. No one knows how interconnected they really are or what the total risk exposure may be. Therefore, no one – not even Rickards or Snyder knows if or when they might collapse and when they do what the damage will be.

Fifth, and last, loan issuance of itself does not indicate an immediately upcoming economic downturn.

As usual, CS counsels wisdom, balance, and diversification relative to the Chicken Little cries about the world’s imminent collapse. Remember, everyone who bailed out of the stock market and other investments and put all their money in gold, silver, and mining stocks from 2011-2013 is down 30-40% – minimum – and still crying.