The TreeceCo Report
By David Treece
Apple has sold a whopping ten million new iPhone 6s, setting a new record in sales for the tech giant. It could get to the point where Apple requires that you put down $200 to reserve your spot in line to get the new iPhone 7, but let's say you decide after you put down the $200 that you want the Samsung Galaxy phone instead.
You're out the $200, right? Or you could sell your spot on the waiting list to a friend, and let's say you knew that the iPhone was sold out. There would be no more orders for the new phone, so you could sell your spot in line for $400. You made a $200 profit, but you didn't know for sure you could do that.
It was risky because what if the new iPhone 7 did not work well and it was a total piece of junk? You would not be able to sell your spot in line if you found this information out, and you would lose your $200.
This is a very basic example of how derivatives work. Large investment banks, typically the largest banks, have taken their money and leveraged it with derivatives. Interest rates are so low that banks make little profit loaning out money, so they have been incentivized to make risky bets to get a return on their money.
According to Forbes the U.S. had $223 trillion in derivatives exposure at the end of 2012. The U.S economy produces roughly $15.5 trillion of gross national product per year, which means that one year of derivative exposure equals 14 years of gross national production.
According to the International Bank of Settlements, which is the central bank of the world, there are $441 trillion in interest rates derivatives worldwide. Things will go awry quickly when interest rates tick up. Interest rates matter because these risky bets have been made based on what interest rates will do.
Remember Lehman Brothers? They had $600 billion in derivatives exposure, which caused their collapse in 2008. That was the largest bankruptcy in history and this began the "Great Recession." Things did not get better. They actually got much worse in the derivatives market.
Nobody knows which snowflake will be the one that ignites the avalanche, but at least now we better understand what is causing the avalanche. However nothing is being done to stop its impact.
This begs the question, where is your money? Is your life savings at risk? Protect what you have before it's a distant memory of days gone by. Call our office at 704.717.4848 to schedule a free meeting.