Friday, December 29, 2006

Biggest bubble of 'em all

I briefly talked about the housing bubble, and I encourage my readers to research it.

But the biggest, scariest bubble, the fat mama of all bubbles, is the derivatives bubble.

What the heck is a derivative? Basically, it's a hedge fund. We've all heard that term, even if we don't understand exactly what it means. I barely do, so please follow the links and read 'em.

Since I've never had enough money to invest in anything, I have trouble getting my brain around all this weird financial stuff ;-). Derivatives primer here.

I've long thought of investing in the stock market as gambling. It is, and yet it isn't. Technically, stockholders own something that's [hopefully] of value - a piece of a company.

A derivative is much more speculative. It's a wager on the future price of an investment in an underlying market. It's like the futures market for stocks, bonds and commodities, except more so. It can even be a hedge on a hedge, and thinking about that one makes me dizzy.

The volume of derivatives traded is huge - many times bigger than the global GNP. Yet it creates nothing. So a ginormous amount of money is changing hands all over the world, wagers done on margin, and the money doesn't exist. How can it? It's bigger than the world GNP. It's a gigantic weird complicated impossibility.

It's a bubble.

What does this all mean? When the derivatives bubble bursts, the stock bubble and Crash of '29 will look like a mere blip by comparison.

Here's Warren Buffet on the topic, very worthwhile reading.

What to do? Live below your means. Put by some extra food. Learn a new DIY skill. All of these are good planning for hurricane country anyway. There are folks that recommend keeping some silver or gold coins at home in case banks collapse.

And if you pray, it's prolly a good time to do that too.

PS - The big spaces between paragraphs are because of blogging through Performancing Firefox. Sorry 'bout that!

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