Finance, derivatives manipulating the markets? The analysis
Our memories of financial damage procured by subprime mortgages, through the “packaging” of CDOs (Collateralized Debet Obligations), composed of tranches of securities with different risks and returns, and with the presence of another instrument called CDS (Credit Default Swap), against the risk of insolvency of the issuer of a debt, have left a legacy that is still visible today; to put it simply, in practice derivatives are nothing more than a vulgar bet, complicated, but still one wager. On Thursday 9 August 2007 the biggest financial crisis since 1929 was revealed, affecting economies all over the planet.
Today I searched the internet for numbers that would tell me why even in 2024 the world stock markets will continue to produce performances that have a different price compared to the real data and all this in spite of the interest rate increases perpetrated by the Central Banks. Those who are unfamiliar with the financial markets, the stock markets in particular, think that all this is due to a strong sense of investment and/or speculation among savers in general. Is that so? Maybe there is something else influencing this abnormal growth? Could it be, in this case, once again, the hand of the DERIVATIVES? Here is a series of numbers, taken from:
NOTIONAL VALUE OF FINANCIAL DERIVATIVES MARKETS*
ITALY€ 14,167 billion in June 2023
EUROPE€ 314,000 “year 2022
WORLDWIDE$714,744 “1st half of 2023, approximately 6.5 times global GDP.
*(The notional value represents the total value of an underlying asset in a contract, separate from the value of the contract itself.)
Ritual question: Do you also think that the financial markets are a bit “drugged”? By chance, as happened in 2008, one beautiful night or morning, could we wake up in the depths of a “beautiful” financial crisis and perhaps with a shortage of liquidity? Institutions that use derivatives generally always fall on their feet for a variety of reasons, for example with downside hedging derivatives or even worse with government help. Here is a table that perhaps gives meaning to my words:
And now a couple of interesting facts. The highest the Dow Jones reached was 40,000, while the Nasdaq reached 19,900 points both in May 2024, a notable difference from 2019 and all this with about two years of the pandemic in between. Strange? To conclude, can we think that banking and financial institutions always land on their feet like Ercolino? (Puppet from the 70s that got up when it fell). Or will we see a domino effect? The prospects and the data are certainly not in favor of calm markets, however what we could expect is a massive intervention by the central banks that do not make the burdens fall, directly or indirectly, on families and companies because those who govern them are paid handsomely for “think” (Think Tank) about scenarios which, although they may be disturbing, provide solutions to avoid causing the markets and savers to fall into the famous panic selling and with the “vulture” speculators who use “short sales” adding downward downward, obviously always to the detriment of savers. We are in May and so to close I quote a wise 20th (twentieth) century proverb from Wall Street and, for two good reasons to follow it: 1. of a historical/seasonal nature; 2. for a psychological aspect. Sell in May and go away.
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