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"... a $500 trillion derivatives meltdown,"

By HEY YOU   2016 Jul 3, 4:42pm   657 views   10 comments   watch (0)   quote

Brexit could trigger a $500 trillion derivatives meltdown, by forcing the EU to allow insolvent member governments and banks to write down debt. Italy is in financial crisis and is already petitioning for that concession. How to avoid collapse of the massive derivatives house of cards? Alternatives are considered.

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1   Tenpoundbass   1417/1419 = 99% civil   2016 Jul 3, 5:06pm  ↑ like   ↓ dislike (1)   quote    

All of that wont matter to people on the side of leave. They weren't leveraged in EU debt.

It's the little guy that wins without socialism. regardless of the pounding the fat cats take.

2   Strategist   2026/2031 = 99% civil   2016 Jul 3, 5:22pm  ↑ like   ↓ dislike   quote    

HEY YOU says

"... a $500 trillion derivatives meltdown,"

No such thing. You are worse than Shakespeare.

3   APOCALYPSEFUCK_is_ADORABLE   1347/1347 = 100% civil   2016 Jul 3, 6:02pm  ↑ like   ↓ dislike   quote    


4   iwog   2224/2226 = 99% civil   2016 Jul 3, 8:54pm  ↑ like   ↓ dislike   quote    

LOL @ citing Zerohedge bullshit.

5   Ceffer   870/870 = 100% civil   2016 Jul 3, 11:03pm  ↑ like   ↓ dislike   quote    

Buy gold! Beat the cannibal anarchists with ingots!

6   indigenous   259/259 = 100% civil   2016 Jul 3, 11:40pm  ↑ like   ↓ dislike   quote    

How is that possible with counter party risk? Not to mention the volume.

7   Dan8267   3636/3684 = 98% civil   2016 Jul 4, 12:16am  ↑ like   ↓ dislike   quote    

When the Google suggestion includes profanity, you know it's a universal opinion.

8   HEY YOU   1062/1062 = 100% civil   2016 Jul 4, 8:23am  ↑ like   ↓ dislike   quote    

There's plenty of smoke & mirrors,hidden agendas,rigged games,tilted tables.
What's so bad is that so many think that nothing bad can happen to their personal economy
because they know the status quo will never end.
Business as usual. Hang in there,we will all be billionaires.
Your pension,401k, IRA & all market investments are fully guaranteed.
Nothing like a sure thing.
The only wise economic move is to take on more debt.

Can you pay off your debt in a sudden downturn?
Counter parties never lose?

9   iwog   2224/2226 = 99% civil   2016 Jul 4, 12:30pm  ↑ like   ↓ dislike   quote    

I covered this before. AT NO TIME is there ever $500 trillion at risk. Nearly all derivatives have offsetting derivatives. A $1000 loss is offset by a $1000 gain somewhere else.

This is like the housing meltdown where everyone concentrated on the default rate and the bank carnage while no one (except me) talked about the former home owners who cashed out and were now millionaires, and then everyone was shocked beyond belief when prices started racing back up just three years later.

Unlike the housing market, where ALL the at risk money was dependent on home prices, most derivatives are bet on all sorts of markets going in all sorts of directions.

10   BayAreaObserver   1082/1083 = 99% civil   Jul 11, 4:02pm  ↑ like   ↓ dislike   quote    

Derivatives Trading Legend: “As Little As A 4% Decline In One Day Could Start A Critical Crash”

So, the ultimate, and frankly the only, question one cares about is identifying the tripwire that would tip our system into disequilibrium and force a self-sustaining reduction in risk (leverage/convexity).

And this is where the conference paid for itself. While most speakers declined to answer, one panel proposed that many of these passive portfolios can be synthetically constructed as long an Index plus short a +/- 4% out-of-the-money strangle. Thus, it seems possible that as little as a 4% decline in a single day could be enough to create critical mass; and this does not seem terribly inconsistent with many current risk parameters.

A decade ago institutional investors supported only 20% of Hedge Fund assets; presently, these investors (with a concomitant demand of narrower risk limits) make up 80% of the asset class. Since it is common for as little as a 6% drawdown to ignite a “stop out” procedure at many Liquid Alternative portfolios, it does not seem unfounded to think that risk reduction measures may preemptively commence near this 4% inflection (strike) point.

This commentary is not a call from Cassandra, but I will note that while every low point in Volatility does not lead to a calamity, extremely low Implied Volatility precedes every financial market dislocation. The purple line below is a variant of the MOVE Index that is once again kissing its thirty-year nadir.

To be clear, the focus of this commentary is to highlight that a negatively convex profile governed by a rules-based (quantitative) risk management process can be quite unstable in a volatile environment. So, if there is an investment implication to be derived from these observations, it would be that sizing is more important than entry level to enable one to ride out (unexpected) bouts of extreme volatility.

Chairwoman Yellen’s protestations to the contrary, forget the data, it will take care of itself; watch the major policy debates in D.C. The urgency Republicans feel to fulfill Trump’s campaign promises will likely lead to parliamentary maneuvers to quickly garner 51 votes. This rush may blind them to possible second order effects: A short-term win, but a Pyrrhic Victory.

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