Bill Bonner at The Daily Reckoning writes,
"One of the wild cards of the doomsday scenario is
the performance of the derivatives market. No one
knows exactly what is in some of these instruments
... and no one knows how they will hold up in a
crisis."
Instantly, The Mogambo was on his
feet, finally able to show off for Bill Bonner,
and then maybe he will notice me and be impressed,
and maybe invite me to his office and offer me a
drink, and then we'll sit around discussing this
and that and gradually getting more and more
sloshed, and then I'll bring the conversation
around to pizza, and how he ought to send out for
a pizza to be delivered, and we while away the
time waiting for it by getting more drunk and
talking about how he ought to give me a nice,
cushy job at Agora Publishing making lots and lots of
money with a benefit package
that would make a CEO blush, but which
surprisingly involves no work or effort of any
kind. A figurehead of some kind, maybe.
So
I say, "Hey! Over here! Mr Bonner! I know! I know
what will happen in a crisis, because I know what
the crisis is, which is that derivative holders
will not be getting the money they were supposed
to be getting, because the guys who owe them the
money are already bankrupt, because they didn't
get the money they were supposed to get from guys
who were bankrupt because the guys who owed them
money were bankrupt, and they are all bankrupt
because they put up a lousy US$3 of their own
money, and borrowed another $97 to buy an asset
worth $100, and now that asset is worth only $90!
Hahahaha!"
The place was suddenly silent
at my rude interruption. I immediately got
nervous, seeing my career going up in smoke, and I
hurriedly said, "And so not only is the entire $3
investment of the investors gone - wiped out - but
they owe $7 more on top of that! Hahahaha!"
As usual, neither Mr Bonner nor anybody
else was impressed with my stupid analysis, and he
tries to keep the conversation above such petty
things like dollars and cents, and says that the
theoretical underpinning of the economic calamity
is that, "One thing we do know here at The Daily
Reckoning is that they will not hold up as
expected. We know that because the assumptions
behind them were, fundamentally, nonsense. The
most sophisticated mathematical model in the world
is not worth a campaign promise if the theory
behind it is wrong. And the idea that you can
model future prices on the basis of past prices
with any predictive reliability is simply wrong."
I thought he was going to bring up how
Black Swan events make their predictions wrong, or
how the very thought of modeling the complex human
behaviors of fear and greed with simplistic
equations in a computer is ludicrous and laughable
(but only if you disregard the sheer magnitude of
the damage these nitwits have done), but even more
worrisome is the amount of money that has been
lost, as, "so far this year, new derivative sales
are off 93% from the year before".
Oops! Without demand, supply becomes overwhelming, and
prices plummet, and without new derivative sales
to finance the existing clot of derivatives,
things go from bad to worse!
But before I
could really work into another Screeching Mogambo
Tirade (SMT) about how the supply/demand thing
rules the world, Dan Amoss from Strategic Short
Report illustrates it perfectly by reporting that,
"Many CDOs could be worth less than 5 cents on the
dollar."
And that means, even to a
simpleton like me, a loss of 95 cents. Ugh.
Richard Daughty is general
partner and COO for Smith Consultant Group,
serving the financial and medical communities, and
the editor of The Mogambo Guru economic newsletter
- an avocational exercise to heap disrespect on
those who desperately deserve it.
Republished with permission from The Daily Reckoning.
Copyright 2008, The Daily
Reckoning.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
