Source: International Forecaster Weekly
With so much counter party exposure, with trails no one could ever follow, now you can understand why Central banks keep this market up at any cost.
Bob Rinear | April 26, 2017
For the weekend I wrote about why nothing seems to bother the market. Not wars, not falling sales, not a 1% or less GDP, not false flag attacks, not missiles flying through the night….nothing. And we revealed to you the reason, the Central banks have bought up 1 Trillion dollars worth of financial assets in just the first quarter.
Then I went on to explain why. See, there’s so many things “connected” to the markets, that if the markets were allowed to fall, the ripple effect would be huge. Consider a pension plan that is allowed to keep a certain percentage of their money in stocks. That plan might be the life savings of 25,000 people. But if the amount they have vested in the market was to be slashed by say 50%…that’s a lot of people that just saw their retirement go to hell in a handbag.
So, we’ve got pensions, insurance companies, sovereign wealth funds, etc, that count on a market that’s stable…to always rising. A big hit in the financial markets puts a lot of people on the wrong end of a bad situation. So just this alone is reason enough that the central banks of the world want to keep markets “up”. But there’s more to the story, much more.
Our world works on credit. Virtually everything you see from the moment you get out of your house to the time you come home is only there because of some form of credit. As you drive down your own street on your way to work…you’re probably in a car that’s been financed or leased. That’s credit. Those houses you pass on the left and the right, are 97% financed via mortgage. That’s credit.
The road you’re driving on was probably financed via a bond sale in your township. That’s credit. As you pass the gas station, the gas in those tanks was probably financed via the futures spot market, that’s credit. And the truck that delivered it was part of a fleet financing deal. Not to mention the 30 year lease the gas station itself has with BP. That’s credit.
From the food you eat, the trucks that bring it, the fuel they burn, the clothes you wear to you name it…it’s all based on credit. Somewhere in the chain, credit has been applied. Maybe it’s 20% down and the balance in 30, maybe it’s 60, maybe it’s 30 years. But make no mistake, if credit stops, everything stops.
Well this is why you hear the word derivatives so much. Remember when Warren Buffet called derivatives the “financial weapons of mass destruction?” Well one of the reasons for him saying that is because there’s somewhere around a Quadrillion worth of them floating around. The Bank of International Settlements (BIS) data shows around $700 trillion in global derivatives. Along with credit default swaps and other exotic instruments however, the total notional derivatives value is about $1.5 quadrillion
A credit derivative is a financial instrument that transfers credit risk related to an underlying entity or a portfolio of underlying entities from one party to another without transferring the underlying(s). The underlying’s may or may not be owned by either party in the transaction. The common types of credit derivatives are Credit Default Swaps, Credit Default Index Swaps (CDS index), Collateralized Debt Obligations, Total Return Swaps, Credit Linked Notes, Asset Swaps, Credit Default Swap Options, Credit Default Index Swaps Options and Credit Spread Forwards/Options.
A derivative, put simply, is a contract between two parties whose value is determined by changes in the value of an underlying asset. Those assets could be bonds, equities, commodities or currencies. The majority of contracts are traded over the counter, where details about pricing, risk measurement and collateral, if any, are not available to the public.