Land Price Bubble

[shakerator]

When this happens I'd rather own a lot of guns and a concrete bunker full of food and fuel!! Derivatives might be handy if you want to do a few Credit Swaps or Exercise your currency option while the baying hoards are regrouping.

You'll be popular ;-)

 

[Walterp]

Most senior financial asset you can own. The derivatives market will be preserved at all costs, as bankruptcy law currently suggests

This doesn't make any sense to me, I'm afraid - my understanding (limited as it is) is that derivatives are substitutes for trades in real assets and not real assets in themselves; ETF's in gold spring to mind as a rough parallel and, to my mind, why would anyone except a trader want to own the right to delivery of gold (which may, or may not, appear on the due date) rather than feel the comforting substance of the actual asset under your mattress?

Would you like to explain your view? And bring into account LTCM, perhaps?

 

[shakerator]

This doesn't make any sense to me, I'm afraid - my understanding (limited as it is) is that derivatives are substitutes for trades in real assets and not real assets in themselves; ETF's in gold spring to mind and, to my mind, why would anyone except a trader want to own the right to delivery of gold (which may, or may not, appear on the due date) rather than feel the comforting substance of the actual asset under your mattress?

You are taking a position on the price of said asset unless hedging. Then the derivative has an intrinsic value when the price moves. Can be big losses!

But derivatives positions are first in the que to be settled...ahead of bondholders, equity holders and unsecured creditors like depositors. The show must go on! The aggregate size of the derivatives market simply dwarfs the real economy.

Yes physical gold guns and whiskey is nice in a doomsday scenario..... But I can see our world only becoming more financialized not less......

The investment world is being turned upside down. Cash is no longer the safest haven. How else do you think markets are manipulated?

 

[Goweresque]

Most senior financial asset you can own. The derivatives market will be preserved at all costs, as bankruptcy law currently suggests

So in a scenario where the currency of the day has become worthless, you'd want to be holding a piece of paper that says you can have billions (or even trillions) of said worthless currency?

Each to their own. I'd prefer land myself.

 

[Walterp]

But I can see our world only becoming more financialized not less......

The investment world is being turned upside down. Cash is no longer the safest haven. How else do you think markets are manipulated?

Nice and clear explanation - 'upside down' about sums up where we are now.

It'll be interesting to see how it all pans out.

 

[shakerator]

So in a scenario where the currency of the day has become worthless, you'd want to be holding a piece of paper that says you can have billions (or even trillions) of said worthless currency?

Each to their own. I'd prefer land myself.

If it gets to that stage property rights won't mean jack.

The point I'm trying to make is that derivatives are safer from haircuts, and you can haircut as well as print.

 

[Walterp]

The point I'm trying to make is that derivatives are safer from haircuts, and you can haircut as well as print.

Unexplored territory - if a trading body is unable to honour its commitments, no one knows how far a State will go to guarantee performance (LTCM x Lehman Bros).

 

[shakerator]

Unexplored territory - if a trading body is unable to honour its commitments, no one knows how far a State will go to guarantee performance (LTCM x Lehman Bros).

Or vice versa in many countries!

 

[Goweresque]

If it gets to that stage property rights won't mean jack.

The point I'm trying to make is that derivatives are safer from haircuts, and you can haircut as well as print.

I understand the point your making (that bank haircuts are likely at some point in the future, and derivatives potentially being safer than having cash in the bank) BUT a derivative is a trade - its only worth money if your on the right side of the trade. You're assuming your derivative will be worth something - that will only be true if you chose the right trade, and manage to keep it alive long enough to profit. I think it was JM Keynes who said 'The market can stay irrational longer than you can stay solvent'. Holding long term derivative positions is not cost free - there are margin calls if the market moves against you in the short run - it can become very expensive.

 

[Walterp]

Everyone knows that UK land, houses and Govt bonds are selling for many times what a rational person would give for 'em - they are over-valued by at least 100%, maybe 200%.

No one disagree? Good, so we'll go on...

The cause is negative real interest rates, right?

And, 'cos no one knows for how long negative real interest rates can persist, no one knows how long these asset bubbles can persist. Or how they'll end.

So - just like TB, Farm Assurance, farm inspections, and all the other crap paraphenalia that British agriculture has to work around - we just have to learn to live with it, yes?

(But do I really have to put up with all those arrogant and know-nothing estate agents?)

 

[shakerator]

I understand the point your making (that bank haircuts are likely at some point in the future, and derivatives potentially being safer than having cash in the bank) BUT a derivative is a trade - its only worth money if your on the right side of the trade. You're assuming your derivative will be worth something - that will only be true if you chose the right trade, and manage to keep it alive long enough to profit. I think it was JM Keynes who said 'The market can stay irrational longer than you can stay solvent'. Holding long term derivative positions is not cost free - there are margin calls if the market moves against you in the short run - it can become very expensive.

Yes, of course 2 types of investors.

Industry based hedging.

Bank based speculation. Big moral hazard. Got to keep the banks alive!!

But what about a farm......buy some options, sell wheat forward, short your banks stock over and above balances of 85k.

Surely you can imagine which derivatives to be in an environment like that!

There are arbitrage opportunities out there, be your own counterparty, the devil is in the detail. The chances are that haircuts will be orderly ushered in through stealth legislation.

As for margin calls, probably better value than a deposit losing 10% a year in real terms

 

[7610 super q]

Everyone knows that UK land, houses and Govt bonds are selling for many times what a rational person would give for 'em - they are over-valued by at least 100%, maybe 200%.

No one disagree? Good, so we'll go on...

The cause is negative real interest rates, right?

And, 'cos no one knows for how long negative real interest rates can persist, no one knows how long these asset bubbles can persist. Or how they'll end.

So - just like TB, Farm Assurance, farm inspections, and all the other crap paraphenalia that British agriculture has to work around - we just have to learn to live with it, yes?

(But do I really have to put up with all those arrogant and know-nothing estate agents?)

I thought all the hype surrounding estate agents was a myth.Till I had the misfortune to use one a few years ago.I let a rude,arrogant,incompetent,useless know-nothing prat deal with my most precious asset.Ho-hum.

 

[grumpy]

I thought all the hype surrounding estate agents was a myth.Till I had the misfortune to use one a few years ago.I let a rude,arrogant,incompetant,useless know-nothing prat deal with my most precious asset.Ho-hum.

estate agents,lawyers,car sales men and cops all pricks,

 

[7610 super q]

estate agents,lawyers,car sales men and cops all pricks,

I concur,however the lawyer/farmer posting above is, I'm sure ,a thoughly decent bloke.(got myself out of that nicely I think)

 

[Goweresque]

Yes, of course 2 types of investors.

Industry based hedging.

Bank based speculation. Big moral hazard. Got to keep the banks alive!!

But what about a farm......buy some options, sell wheat forward, short your banks stock over and above balances of 85k.

Surely you can imagine which derivatives to be in an environment like that!

There are arbitrage opportunities out there, be your own counterparty, the devil is in the detail. The chances are that haircuts will be orderly ushered in through stealth legislation.

As for margin calls, probably better value than a deposit losing 10% a year in real terms

Hmm. Its all a bit 'Masters of the Universe' financial engineering for my liking. There's an old saying 'If you can't see who the mug is in the room, its you'. Thats kind of how I'd feel dealing with a load of shark-like investment bankers. Whereas I know what a field looks like, and what I can make out of it, whatever its worth. I used to think I was a a bit of a financial whizz-kid, the older I get the more I realise I'm just a yokel at heart.

 

[shakerator]

Hmm. Its all a bit 'Masters of the Universe' financial engineering for my liking. There's an old saying 'If you can't see who the mug is in the room, its you'. Thats kind of how I'd feel dealing with a load of shark-like investment bankers. Whereas I know what a field looks like, and what I can make out of it, whatever its worth. I used to think I was a a bit of a financial whizz-kid, the older I get the more I realise I'm just a yokel at heart.

I wish it was all like we learn in the text books

 

[Walterp]

I wish it was all like we learn in the text books

I was under the impression that they're re-writing the textbooks as we're going along.....

 

[Devil's advocate]

I remember this well as the prin was really hacked off about it. However iirc the buyer planted most of the farm to early spuds which were good money that year, story was he paid for the farm with one crop?

We had a small acerage in various veg crops last year, where the crop was worth more than the land about 12K/acre. So it can still be done. Certainly for most of my life a good potato crop was worth more than the land it grew in.

 

[Devil's advocate]

looking round at my neighbours I've two with 70 million grandish each available to spend on land & lots with circa £20 million to spend on land, it ain't going down anytime soon. Also building land money at half to one million pound an acre will set a lot more people up.

 

[wanton dwarf]

I'd rather own derivatives

The problem with Derivatives is they are fundamentally flawed.

Derivatives basically insure trading by allowing claims to be made and spread - complicated mathematics was used to spread the risk and essentially de-risk trading. Derivatives could then be traded and essentially betting on risk.

Margins expanded as it was seen to be the case that risk no longer existed.

However there was a fundamental flaw - what if someone didn't pay ? what if those using the system were humans and they lied. Lehmans broke the derivatives chain because they couldn't honour their commitments which rippled on to the next and the next etc, So rather than the system being an asset it became a liability because most didn't have the assets to backup their liabilities.