CRASH2: More derivatives, no reforms, investors nervous, experts smug. It’s not a good look.

by John Ward
One of the fundamental reasons why Bullishness about the global business and markets outlook is so widely believed around the World is the assurances we get on a daily basis that first, there are green shoots appearing; and second, there won’t be another financial collapse, because “lessons have been learned, reforms have taken place, there is new regulation, and now we should all move on to the next stage in growth”.
Most of the green shoots I read about do not bear much empirical examination: in some cases, the colour of the object looks suspiciously like gangrene to me. But the real Truth of just how little “reform” has occurred – and how in fact the financial plates-in-the-air construct has become even worse over a decade – is almost completely unknown….even among the younger end of professionals.
Irish financial guru and allround sceptic Chris Quigley sent me this table last week – if it doesn’t convince you that Doom is coming, nothing will:
Look first at 2. – the total REAL currency in circulation that you and I use every day. Then go to 11. and look at the so-called “notional” value of derivatives. Silly bits of paper valued at light years beyond any real worth are 300 times the ‘value’ of real cash. Now go to 3., and see that the actual (as opposed to trading) value of derivatives is sixty times less than the notional figure…..but still five times the value of cash money. Now look at 4., and note that even the real value is 37% of Global gdp.
We got to here from an excellent starting point: farmers expecting a good crop in July could go to the bank in March and get cash in advance to develop the farm, by issuing discounted crop value derivatives to the bank. Thus, crop is harvested, bank makes a turn on it, farmer invests in farm, everyone happy.
Over the last fifty years, a discounted value benefiting those who supply fresh food to human beings has been turned into an interbank trading scam benefiting only the sellers, shareholders and directors involved on all sides….to the point where, at a fire sale, the real money it would raise is only one sixtieth of what’s in the bank’s valuation as an institution.
“That will never happen,” says the banking sector – which is a lie on several dimensions. First of all, it already happened after 2009: bogus “investment” packages full of worthless derivatives were a major part of the trillions spent on QE buying it up to bail out idiots with tertiary frontal-lobe syndrome. Second, it was supposed to be regulated, but Wall St spent billions on lobbying to stop it: the imbalance is now twice what it was in 2007. Third, if every single major bank around the globe is so overvalued in overall Reported Accounts estimation, can you imagine how several rapid re-evaluations from $37 a share to, say, £1.85 would play out across the already nervous bourses around the Globe?
But we need to be real here well within the confines of such a broader vision of disaster: even if I’m talking total drivel, how can it be beneficial to economies creating productive jobs that employ poorer people to be in possession of a banking system that contributes absolutely diddley-ding-dong squat zero to that…….and whose nefarious activities benefit a mere 0.05% of the Earth’s human population? That question is nothing to do with politics, but has everything to do with econo-cultural sanity.
As Quigley comments:
“Nearly 16% of world GDP is income earned on dividends, interest and
rent: 9.5 Trillion dollars. A further approximately 15 % is earned by banks
through “fractional reserving”: 9 Trillion dollars. Thus annually nearly 18.5
Trillion dollars, or 31% of world GDP, is income earned but unworked. This is the
financial reality behind the phrase: ‘the money system is not physically working and is therefore virtual not real’.”
I will be returning to Christo’s extrapolations along the way, for they are never less than lively and objective. But in the meantime, The Matador turns to other Picadors offering a deadly thrust into the Bull’s jugular.
____________________________________________________________________________________________St James’s Place (SJP) chief investment officer Chris Ralph says encouraging clients to stay invested has become one of the firm’s biggest challenges, Investment Week reports.

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 SJP clients, he admits, “have been wanting to take profits on their investments for the past two years. Our clients’ big concern has been whether now is the time to get out, having seen attractive returns for so long after a nine-year bull run”.
Astonishingly, Mr Ralph added, “That is a bad idea because if you had exited the market in the past two years, you would have missed significant gains. 2016-17 was a great example to tell people about why it is difficult to time the markets.”
Seems a tad odd to suggest to one’s clients that the past is a sure guide to the future. Especially if the past is a volcanic magma just waiting to blow the top off Vesuvius.
But then, advice is easily diluted by things like bonuses, year-end results and so forth.
The reading for wise observers to take from this is surely, “Market credibility is stretched so gossamer-thin, it is no longer fit for purpose as a preventative of diabolical birth”.
Hat-tip to Clive Hale for spotting this one.
 And finally today, yet another reason to be cheerful about market futures falls squarely on its nose. “We must listen more to the experts,” says the Left; or at least, it does when the experts agree with them. When the opposite is true, they cease to be experts.
Either way, this is what the “experts” said last time:
In late 2006, David Lereah – a chief economist working in the property and construction sector – wrote a book whose title  “Why the Real Estate Boom Will Not Bust” was probably the all time hostage to fortune.
Michael Youngblood managing director of asset-backed securities research, Friedman Billings Ramsey & Co said he felt property prices could “easily jump 17.5% during 2007”. They did the almost exact opposite.
On March 5th 2008, CNNMoney opined even during the event:
‘the only thing that matters now is whether the slump will be much, much worse than expected or last far longer than midyear. Here’s why I see a favorable answer to that question: except for the mortgage crisis, the economy hasn’t been all that far out of balance. Although the economy is slowing now, for four years it hasn’t had a negative quarter. It also hasn’t grown at an unsustainable rate for more than a quarter or two…what’s key is that the economy hasn’t been way out of line and in need of a trip to rehab.’
I particularly love ‘except for the mortgage crisis’. “But except for the shooting, Mrs Kennedy, how did you like Dallas?”
The following month, Big Banana Olivier Blanchard of M.I.T. declared:
“The state of macro is good….The battles of yesteryear are over, and there has been a broad convergence of vision. And in the real world, economists have things under control, because the central problem of depression-prevention has been solved.” 
Blanchard went on to become the chief economist at the International Monetary Fund.


The Matador shall return!


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