This guy knows whats up, great video

part 1
http://www.youtube.com/watch?v=uo_Q-vvW7iw

part 2
http://www.youtube.com/watch?v=k4qIRG_7-tI

5/11/2009 12:38:44 AM

I stopped after he incorrectly described the "$531 trillion" derivatives market. It is apparent he doesn't understand the difference between gross notional values and netted obligations. To provide an example of the magnitudes of the former and latter in the CDS market, the settlement of Lehman CDS totalling $72 billion in gross notional value ended up being only $5.2 billion after all trades were netted. In other words, only 7.2% of that total notional value was net exposure. Additionally, the Bank for International Settlements estimates the gross notional value of all over-the-counter (OTC) derivatives to be $683 trillion. Of this, $458 trillion are interest rate swaps, forwards and options, which have been around for decades, are rather benign and primarily used for hedging. Using the gross notional values for these, too, provides an extremely inaccurate depiction of net liabilities given the notional value is not swapped, but rather is only used to base interest payments.


http://www.bis.org/statistics/otcder/dt1920a.pdf

5/11/2009 10:33:40 AM

here's my amateur opinion.

in 2006 (in USD terms)
the world GDP was ~ 47T
the totality of world equity values was ~ 113T
the total value of all derivatives was ~ 426T


think of it in the following terms:

in general business practice, if you're a moderately sustainable business, you're worth 2x sales. therfore the 113T as a ~ 2x multiple of 47T holds water.

in general if you make a $100k a year, would you take out a $1M life insurance policy? yeah, most likely. so to the extent that all the calls and puts, default swaps, and collataeralized debt obligations in the world are insurance, the valuation of 426T as a ~ 10x multiple of 47T holds. to the extent that however many of the calls and puts are speculation, its a zero sum game, and those speculators can lose their shirts.

anything north of that relative equilibirum of 2006, made equities & derivatives overvalued as a whole. the meltdown of 2008 took out anything north of the 2006 equilibrium. this is pretty much what happened with mortgage backed securities/credit default swaps, as that whole lot of derviatives was set up and traded in an unsustainable manner.

what we're spending the next few years doing is reverting to the mean, which means we'll spend a while below that 2006 equilibrium.

...


now, what makes markets shoot past equilibrium? aren't they supposed to be "efficient"? i contend that they are "semi-efficient", much the way DNA replication is "semi-conservative". the transmission of information and the cascade of biological events (life being a dynamic equilibrium) that ensue from that transmission is imperfect. its the stuff of academic debate.

in my opinion the inefficiencies in our markets were fueled by overly cheap oil, and hence overly cheap liquidity. the short and hard run up of crude to 150 USD per barrell brought the momentum in the economy (and hence liquidity) to a screeching halt. so much so, that 50 USD per barrell by itself can't restart that momentum. the pendulum is about to swing the other way for the next few decades.

its the stuff of a whole other, longer discussion, but i think its a more rational discussion than these types of videos of people blaming the world's problems on a few 'elites" -- i clicked around on some of the other lyrics this guy put out, and not to my surprise, it seemed to be the traffic of all his other song and dance.

5/11/2009 11:46:44 AM