Wall Street Financial Truth

Chapter 21 How do rich people make money (4)
Generally speaking, the futures index is like a weather forecast, which is a prediction of the direction of the stock market.Traders and fund managers will both ponder the direction of the market after hours, and when making a final investment decision, they will all check the futures index to find "fair value".The fair value refers to the relationship between the stock market index and the futures contract.If the futures index is higher than the stock market index, it usually indicates that the market will open higher; otherwise, it is an indication that the market will open lower.The level of the futures index often causes traders and fund managers to purchase or ship goods through the over-the-counter market (OTC) after the market.

However, futures are often not so accurate, just like weather forecasts often make mistakes, futures often change direction suddenly overnight.Generally speaking, the closer the market opening time is, the more reliable the futures index estimate will be.In North America, you can hear the electronic media report about the information between the two before the market opens, and you can also get a variety of similar information from different sources for reference.Stock index futures have become the main battlefield for big funds, big financial institutions and big investors to play big money games.

In the international futures market, it is generally necessary to use a margin account to specifically operate the buying and selling of futures, and in the margin account, at least 25% of the market value of the total trading position is required, that is, a financial leverage of 1:4 is applied.The margin account for futures refers to a lower proportion than the margin account for general securities, only 5% to 10% of the total price.

Think about it, margin plus futures, that is leverage plus leverage.It can be seen that the profit or loss of speculation in the futures market can be dozens or even thousands of times the principal.Due to the high risk, once a professional trader misses, the consequences will be even more disastrous.The collapse of Barings Bank was caused by futures speculation.

Barings Bank is one of the oldest banks in British history, founded in 1762 by Sir Francis Barring.Bahrain can be regarded as a century-old store, and has always been known for its steady style. How could it collapse as soon as it said it?Of course, some of the details were also factors that contributed to Bahrain's collapse, but in general, it was mainly in the hands of Nick Leeson, a so-called "superstar" in the trading industry in Singapore who can control the Nikkei market .

In the past, Barings made money from the commission of arbitrage trading (Arbitrage) in the two markets of Singapore and Osaka, which did not have much risk.Because Li Sen was bullish on the Japanese stock market, he bought a large number of Nikkei futures without authorization, and did not take measures to prevent risks, resulting in continuous losses.

Li Sen wrote in his autobiography "Crazy Trading": "On February 2, I had more than 23 futures contracts. I bought everything that could be sold in the market." That night, Li Sen left the trading floor He never went back, and the crazy move of losing his mind caused him to lose so much that it brought down Barings Bank.On February 6, Barings Bank officially declared bankruptcy, with a total loss of 2 million pounds (equivalent to 26 billion U.S. dollars), and it only took three days for a century-old store to close down.In the end, Leeson was thrown into a German prison.After the collapse of Bahrain, it was sold to ING Group in the Netherlands at a symbolic price of only 9.27 pound.

Li Sen's story tells us that if you miss out on futures and futures, it will be like a weapon of mass destruction. Even if it is as big as a century-old store, it will only take an instant for the building to collapse.However, if the futures index is operated properly, players will also abide by the law, which can play a balanced and stable role in the market.However, the market is easy to hide dirt. For example, the hype of bulk commodities such as oil, grain, steel and brass is the place where financial predators in the futures market make money.

In 2011, the situation in the Middle East and North Africa was turbulent, because in those countries, oil was the lifeline and main pillar of their economy, not only led to an immediate rise in oil prices, but also the international futures market rose close to historical highs, because this is the last time for ultra-high oil prices Good excuses.But if you think about it carefully, the political situation in Libya was not clear at that time, and once it calmed down, wouldn't it still produce oil no matter who was in power?Moreover, the oil produced by those countries with unstable situation accounts for a very small proportion of the world.It seems that the factors of artificial manipulation of ultra-high oil prices are even greater.

However, for Wall Street, which is afraid of chaos, the "great time" has come again.The same drama was played by Goldman Sachs once. In August 2008, the global crude oil futures market was raised by financial speculators from $8 a barrel to a record high of $30 a barrel.Because oil is the blood of industry, a country’s economic development cannot do without it, and it is currently irreplaceable and reserves are dwindling. It is a tried-and-true tactic on Wall Street to profit from the sharp rise and fall of oil prices.

Since 2003, China has become the world's second largest oil consumer after the United States, and its dependence on foreign oil has also increased from 2001% in 29.1 to more than 2010% in 55, resulting in China's crude oil futures market trading Frequently, it also brought huge losses.

Everyone will definitely ask, why is this?
Because the golden age of ultra-stable oil prices is over.For example, in the 1970 years before 50 in the United States, the price of oil hovered around US$20 per barrel for a long time after inflation factors were removed.However, since the oil embargo began in 1967, the oil crisis in 1973, the energy crisis in 1979, the oil surplus in the 80s, and the soaring oil price in the 90s, the price of oil has fluctuated. In 2008, it broke through 147 per barrel. Dollar.

In fact, the factors that lead to fluctuations in oil prices are nothing more than the following:

First of all, it is an indisputable fact that oil is getting less and less.According to the law of supply and demand in economics, once any commodity becomes less and less, its price should rise.But this law cannot be simply applied to oil prices, the key lies in pricing power (this must be written in another article to make it clear), so oil prices often completely violate the law of supply and demand.

When the oil price rises to a certain level, countries will pay close attention to the development of green energy. In the future, green energy may replace part of oil, which will lead to a drop in oil price.

The most critical point is that the world economy has always been closely related to politics.Today's global oil transactions are settled in U.S. dollars. When the U.S. needs a weak U.S. dollar, oil prices rise; but in the long run, when the U.S. needs a strong U.S. dollar to maintain its hegemony (by selling U.S. bonds), oil prices will fall.

The combination of these factors is the mystery of the ups and downs in oil prices.

As a business, however, almost all of them are obsessed with reducing risk in order to maximize profits.But things often don't go as planned.Businesses have long had limited opportunities to reduce risk, and they have always been at financial risk.Not only that, even if the company really makes a profit in hedging, it must be based on the premise that the dollar does not depreciate.Therefore, currency depreciation is like a nightmare, making it completely impossible for companies to control the amount of profits, especially the aviation industry.

The operation of an airline is naturally inseparable from petroleum, and only with petroleum can aircraft take off.If the price of oil goes up, you lose money because costs go up.If the price of oil goes down you make a profit because your costs go down.Therefore, operating an airline is a very risky industry.

The tools invented by Wall Street-derivatives such as options and futures seem to be able to fight against nightmares, which seems to mean that companies can hedge to reduce business risks.But the problem is that derivatives cannot help them completely eliminate risks. If they are misused, they are more likely to lead to bankruptcy, including financial institutions that are proficient in the industry, such as Bear Stone, Lehman Brothers, Merrill Lynch, Mobil Bank, and Barings Bank. , There are countless companies that have suffered huge losses.Chinese companies are not immune either.

In 2008, when many analysts and economists of Goldman Sachs announced that the international crude oil price would break through 200 US dollars, or even 400 US dollars a barrel, companies such as Air China, China Eastern Airlines and Shen Nandian could not hold back, At the price of more than 140 US dollars a barrel, either buy spot crude oil for storage, or buy a large number of futures contracts.But unexpectedly, when the oil price rose to 147 US dollars, it suddenly turned around and went all the way down, and the futures purchased plummeted.As a result, by the end of 2008, Air China had lost 68 billion yuan in hedging, which was the sum of its profits in the past two years; Eastern Airlines had lost 62 billion yuan in hedging contracts, 2007 times its 10 profit. lost heavily.

The futures market needs Zhang San, who buys "insurance", just like Air China; it also needs the participation of speculator Li Si, just like international financial capital, betting on his luck.These two parties are a pair of "happy lovers", one is indispensable, and the play cannot be sung without either party.Futures, like all other derivative securities, are a Zero-Sum Game (zero-sum game). During the same period of time, the money earned by all winners is equal to the money lost by all losers.To put it bluntly, the futures market is only a redistribution of wealth and does not create new economic value.Then amidst the up and down violent fluctuations, it is obvious that some people make a lot of money, while others go bankrupt.It goes without saying who will earn the money we lost.

9. Securitization – the alchemy of financial overlords

The financial system that dominates the world today, in the final analysis, is the financial system of Wall Street, which can exclusively enjoy the world's resources, enabling financial giants to obtain monopoly power from the world's governments and the public for speculation, creating an unequal global wealth Distribution mechanism - under the guise of maximizing shareholders' rights and interests, crazily looting the world's wealth.

The securitization adopted by Wall Street is the most important method for looting wealth, and the invention of financial derivative products based on high leverage has reached the extreme of securitization and evolved into modern alchemy.Because, after the leverage is enlarged, the wealth on paper is inflated, and Wall Street pats its ass and leaves after making money, leaving a large piece of ruins for the global public, such as the subprime mortgage crisis in 2007.

In the original capital market, the cornerstone of credit is trust, and one party in the market must trust the other party to fulfill its promise.For example, investors must trust that lenders have the ability to repay loans, and investors must trust that they can see a return on investment.The currency market is extremely dependent on trust because of the huge short-term trading volume in the currency market.Once the cornerstone of trust is lost, the currency market will immediately collapse.

For example, in the subprime mortgage crisis in 2008, the total amount of subprime mortgages was only 1.3 trillion US dollars, which was not a large amount, but the problem was that after securitization, these assets first became 2 trillion US dollars of subprime debt. Then came credit default swaps, and in the end, the amount of outstanding credit default swap contracts was as high as $55 trillion, which is a huge and staggering number.

The report of the Bank for International Settlements pointed out that as of June 2008, the total value of other over-the-counter derivative products derived in similar ways and not yet settled was 6 trillion US dollars.what is this concept?This is equivalent to 648 times the total global GDP of 2008 trillion US dollars in 78.36!The value of such assets owned by the average person in the world is more than 8.27 US dollars. If converted into RMB, almost everyone will be a millionaire.So much "paper" or "virtual" wealth has been created out of thin air. Is there really so much wealth in the world?

In the United States, investment bankers used securitization, first through the mass market of credit cards, using borrowers' credit scores and targeted direct marketing techniques, enabling banks to issue credit cards to hundreds of middle-income, even low-income families.The only constraints banks face in this area come from their own balance sheets - a lack of sufficient deposits or capital, which limits what they can do to make a big difference.But securitization removes this constraint—the interest and principal are sold to investors in a transaction.

From this, a new group emerged, portfolio investors, who became loan owners, entitled to interest and principal.If you think about it carefully, once the credit card is securitized, the bank can lend without deposits. At this time, some investors buy credit card mortgage-backed securities. Capital is no longer a problem, because the investor owns the cardholder’s loan. rather than the issuing bank.

So securitization was out of control, everything from auto loans to commercial mortgages were packaged as securities and sold to a wide range of investors.That's why the most active lenders of credit card debt, home equity loans and home construction loans are not banks but financial institutions.These financial institutions do not need to take deposits because the loans are already securitized.Therefore, financial institutions are not subject to the supervision of regulators like banks.

In this way, if the financial institution fails, the taxpayer will not lose money, only the shareholders and other creditors of the financial institution will lose money.Financial institutions will do whatever they want, more and more crazy, and even lower or completely violate the traditional lending standards without any scruples.At this time, the bank's loan model under the premise of maintaining its balance sheet quickly gave way to a new model - securitizing loans and selling them to a large number of investors.This new model of the banking industry is fully approved by regulators, because banks do not own loans and do not need to take risks, which reduces the possibility of financial crises.

In fact, the risks involved in these loans have not disappeared, but have been transferred to investors. In other words, the risks have actually extended to the wider financial system.As mentioned earlier, the total amount of the subprime mortgage itself is only 1.3 trillion U.S. dollars. Even if it is "annihilated", it is not terrible. What is terrible is that the subprime mortgage has further become a subprime debt, and its amount is immediately magnified by more than 40 times, it becomes 55 trillion US dollars.When the housing price is so high that no "fool" is willing to take over the property, the transactions in the real estate market cannot continue, and people avoid it for fear that the sharp downward sword will cut off the steps on the wealth pyramid at once. The bottom immediately loosened until it collapsed.

At present, the price in China's real estate market has been so high that the transaction cannot continue, but fortunately, China has not yet implemented comprehensive securitization in the financial sector like the United States.But China has opened the door, and international financial capital has aggressively entered the Chinese market. They will, as always, turn around and leave after making profits.In fact, international financial hegemony has already looted a wave of wealth in China's real estate market, so what will happen after lobbying for further opening of China's financial market?Needless to say, everyone should understand.

10. If you are short, you will lose everything

Some people envy Paulson, the "short king" on Wall Street, who became the big winner of the financial crisis, so they itch to try "short selling" themselves.wait!Before you lose everything, hear me tell the story of two friends.

Eighteen years ago, I broke into Bankers Trust, one of the top five investment banks on Wall Street at that time. At that time, there were very few Chinese on Wall Street. Among the more than 18 people in my risk management department, I was the only one from mainland China.It was not until 300 that another David, who spoke the same voice as me, came to the department. He felt very kind, and finally he could speak a few words of Chinese at work.

As a student of finance, he is ambitious and hopes to make his first pot of gold as soon as possible, and then return to China for development.Before coming to Bankers Trust, he had made a lot of money trading in stocks.At that time, Wall Street had just recovered from the bear market a few years ago, and a new round of high-tech stocks was in full swing. As soon as almost all Internet-related companies went public, their stock prices began to soar.I also play a few games from time to time, almost only making money but not losing money. It's a small gamble for fun.It should be said that we all caught up with the good times.I think that David is a student of finance, and with his handwriting, he probably only needs to "flip" a few more times, and it is estimated that he will achieve his goal just around the corner.David also hoped that I would join hands with him to return to China to make great achievements, and I gladly accepted the invitation.

(End of this chapter)