The Eight Bubbles: What are the Numbers suggesting?

London, UK - 8th November 2008, 09:01 GMT

Dear ATCA Open & Philanthropia Friends

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

There is a rising myth of the single bubble which suggests that The Great Unwind -- manifest as the global credit crunch -- is essentially about subprime mortgage default, a USD 1.5 trillion challenge. The truth is that there are as many as eight bubbles at play which are in the process of bursting, taking the form of deleverage on an unprecedented scale. Even 1929 pales in comparison. At a recent ATCA roundtable we posed the following questions for Socratic dialogue:

I. If the Dow Jones Industrial Average has fallen from above 14,000 to below 9,000 as a result of the subprime mortgage bubble collapse, ie a 5,000+ points drop or 33% decline, where will the equities market reach by 2010 as other larger bubbles burst?

II. If the world government bond market is around USD 30 trillion, how can governments rescue the eight bubbles bursting step by step with an ever larger quantum and momentum? What ought to be the focus at Bretton Woods II starting November 15th?

There are at least eight bubbles in play worldwide and their approximate scale is as follows:

1. Subprime Mortgage linked Loans and other Assets (USD 1.5 trillion);
2. China, India, Eastern Europe and other Emerging Market Loans (USD 5 trillion);
3. Commodities (Commodity Derivatives at about USD 9 trillion);
4. Corporate bonds (USD 15 trillion);
5. Commercial (USD 25 trillion) and Residential property (USD 50 trillion);
6. Credit Cards Outstanding Debt (USD 2.5 trillion);
7. Currencies (Foreign Exchange Derivatives at about USD 56 trillion); and
8. Credit Default Swaps (USD 58 trillion) as a subset of all Derivatives (USD 1,144 Trillion).

In the ATCA briefing, "The Invisible One Quadrillion Dollar Equation" we discussed the main categories of the USD 1.144 Quadrillion derivatives market as quoted by the Bank for International Settlements in Basel, Switzerland:

1. Listed credit derivatives stood at USD 548 trillion;
2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:
a. Interest Rate Derivatives at about USD 393+ trillion;
b. Credit Default Swaps at about USD 58+ trillion;
c. Foreign Exchange Derivatives at about USD 56+ trillion;
d. Commodity Derivatives at about USD 9 trillion;
e. Equity Linked Derivatives at about USD 8.5 trillion; and
f. Unallocated Derivatives at about USD 71+ trillion.

The relative scale of the world's financial engine is as follows:

1. The entire GDP of the US is about USD 14 trillion.
2. The entire US money supply is also about USD 15 trillion.
3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.
4. The real estate of the entire world is valued at about USD 75 trillion.
5. The world stock and bond markets are valued at about USD 100 trillion.
6. The big banks alone own about USD 140 trillion in derivatives.
7. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.

Assuming a 10% conservative default or decline in asset value, this could be a USD 100 trillion challenge on the base of a Quadrillion. What are the likely outcomes? We are keen to receive your answers and solutions. Please note that the numbers quoted are a rough guide.