Derivatives are still the Neutron bomb waiting to explode. Despite all the stupid things that Bernanke and Paulson are doing in order to 'supposedly bailout' the US economy, I still admire their ability to have averted the meltdown so far, along with the supression of key asset classes in order to incur profit only to the US government.
CDS, one of the many soldiers of PONZI finance, is supposedly a financial instrument which is an indicator of the 'probability of default' of an entity. CDS when the times were good made a lot of money for a lot of people, a lot of time. But, now the tables are turning. Why is this the case? Let us look at the history....
The graph below is that of Iceland, when market sensed that there was a growing probability of Iceland defaulting on soverign debt, CDS exploded skywards.
And the implosing was so suddent & voilent that participants did not have the time to get out and were caught with tails between their legs.
Similar fate happened to AIG. Again we see a lone standing skyscraper before the mighty went tumbling down.
Bear Sterns met the same girl down the road.
Now let us see the graph below. The CDS on the 10 Yr treasury notes has jumped 4 times in value from January 2008.
That means the market - pack of Wolves sense that US government is 4 times more likely to default on its soverign debt today, compared to start of the year.
And with the latest pleadge of backstoping the industry with $7.76 trillion 'unprinted money' uptil now, I am sure we are going to see rise in premiums. The thought of US defaulting on its debt may be unthinkable to all of us, but so were the siutations that have developed over the past 1 year.
Keep tight because, pack of wolves would run wild the day US defaults on its debt, and considering the imploding CDS spreads, that day does not seem to be far.
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