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> the vast majority of international capital flows into advanced economies that are already flooded with excess savings and cheap capital. I'm going to go out

> the vast majority of international capital flows into advanced economies that are already flooded with excess savings and cheap capital. I'm going to go out on a limb here, and say that this is because of the ridiculous state of derivatives in modern stock markets. If the derivatives market didn't provide an infinite soak for excess capital, then that money would be forced to go find something "real" to invest in, and the economic theory TFA talks about might work (money should flow from advanced, low growth, economies, to less developed, higher growth opportunity, markets).

riskneutral 6y ago
Yeah I don’t think so. You’re just scapegoating something you don’t understand, and people will agree with you because it’s a popular scapegoat.
- justwalt 6y ago
  Can you explain why you feel that way?
- naringas 6y ago
  I do not understand sophisticaded derivatives either. I blame this fact on my lack of exposure to such financial instruments.
- ItalianPizza64 6y ago
  Would you mind expanding on this? Do you not agree that derivatives allow for infinite inflow of capital?
  - dpc_pw 6y ago
    I don't even understand what this is supposed to mean. Every asset allows infinite inflow of capital. If humans wanted, they could trade everything for TSLA, moving it's price to gazzilion dollars per share. Derivatives are transaction between to parties like any other. One side pays money the other takes money for making certain bet. The problems I'm aware of with derivaties is that it makes easier for companies to hide their speculative bets off the balance sheet, and it exaggerates overleveraged long-term bets. But it's hardly a root of all evil.
    - SpaceRaccoon 6y ago
      One issue I see is that derivate instruments tend to be used for short-term speculation, meaning that capital is tied up in short-term speculation, instead of financing businesses and projects for long term growth.
    - marcus_holmes 6y ago
      OK, but in a "real" asset there is a limited supply of the thing being bought. You cannot buy an infinite amount of (e.g) houses, or corn, or pork bellies, because there isn't an infinite amount to sell. But I agree that you can invest an infinite amount of money in these things because as you buy up more, the price increases. Derivatives remove the supply limits. Because, as you say, essentially derivatives are all about making bets rather than actually buying anything. If you want to bet a bajillion dollars in a derivative, the only thing limiting you is how many people want to bet against you. I get that this is similar to conventional supply/demand, but it's not the same. The reason it's not the same is because there's no link to the actual production (aka what TFA is talking about) of the thing. You can make a bet that pork belly prices will go up or down regardless of how many actual pork bellies are being made. So capital flows get detached from actual production, which is where we came in. And yes, I get that buying a stock is "making a bet" that the stock or share is going to increase in price. But that's only if you're speculating on the price. There are people (or at least there used to be) who buy a stock because they want the dividend. Or, perish the though, because they actually want the pork belly to make bacon with.
      - dpc_pw 6y ago
        There are people who buy derivatives for practical rational reasons as well - e.g. producers who want to lock the price of pork belies, or business hedging currency risk in an international transactions. In a normal market If people are crazy-buying TSLA stock, TSLA can issue more stock. If people are piling crazily into corporate treasuries and the yields are going down, corporations will issue more debt (and e.g. buy back more of their own stocks). When people were pilling up into a housing bubble in 2005, the builders were creating mc mansions like crazy as well. All the financial assets are prone to systemic over leveraging, and fiat money central bank induced bubble is affecting absolutely every asset: housing, debt (private & public), equity, derivatives. Different things explode at the time, and central banks need to run to the rescue by blowing the bubble even bigger. If it weren't for fiat money bubble, derivatives would be mostly rational markets as well.
CountSessine 6y ago
If the derivatives market didn't provide an infinite soak for excess capital, then that money would be forced to go find something "real" to invest in, and the economic theory TFA talks about might work (money should flow from advanced, low growth, economies, to less developed, higher growth opportunity, markets). As someone who doesn't really understand finance and economics, this is really interesting to me. Doesn't this suggest though that those derivatives markets are really inefficient? ie for them to really appeal to capital that isn't merely hedging, doesn't this mean that they would have to be materially different than their underlying contracts?
- rmah 6y ago
  I'm speculating, but I suspect marcus_holmes's world view has been shaped by reading the many articles about of the "GIGANTIC SIZE" of various derivatives markets. Those articles almost always use "notional value" of the underlying assets to "size" the derivatives markets. Which is, IMO, pretty misleading. In the simplest terms, a derivative is a security that is derived from some other underlying asset. Typically, they are contracts -- contracts that can be bought and sold on financial markets. For example, a call options contract says "the holder may, at his option, purchase 100 shares of ABC at $250/share on or before 15-Dec-2020". And on the other side, the writer of that contract is obligated to fulfill it if the holder exercises it (but most options contracts expire unexercised). What many articles for the public would say is "that derivative is $25,000 in size!" Except that the contract may be trading at around $0.50/share (or $50). And then they'll multiply it out across all derivatives... thus leading to surprising "conclusions" like "the derivatives market for X is 10 times larger than X itself!" Which is sorta true if you squint hard enough, but mostly not true in terms of all other financial metrics. To circle back, while it is true that there is a huge amount of what many would term "excess capital" sloshing around, I don't think the derivatives market "provide[s] an infinite soak" for it. In reality, a large chunk of it goes into low-risk fixed income instruments such as US Treasuries, other sovereign debt, and AAA-rated corporate bonds.
  - marcus_holmes 6y ago
    This is useful. And yes, I probably have an inadequate understanding of the derivatives market (hence going out on a limb). Where I think the problem is, is the disconnect between actual supply/demand of the thing and the gambling about whether the price is going to go up or down. For example, as you say, most option contracts expire unexercised. In the context of TFA, where we're talking about where investment money can go, buying an options contract with no intention of ever actually exercising the option is effectively a complete waste of investment opportunity (compared with, say, building infrastructure in Africa). My point of view is that the derivatives markets in developed economies allows such pointless investments (aka gambling). If there wasn't a derivatives market, this money would be forced to go find something else to invest in. That might be government bonds as you say. Or it might be African infrastructure.
stainforth 6y ago
To their point - https://www.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization-2020/ https://www.visualcapitalist.com/all-of-the-worlds-money-and... no?

riskneutral 6y ago

Yeah I don’t think so. You’re just scapegoating something you don’t understand, and people will agree with you because it’s a popular scapegoat.

justwalt 6y ago
Can you explain why you feel that way?
naringas 6y ago
I do not understand sophisticaded derivatives either. I blame this fact on my lack of exposure to such financial instruments.
ItalianPizza64 6y ago
Would you mind expanding on this? Do you not agree that derivatives allow for infinite inflow of capital?
- dpc_pw 6y ago
  I don't even understand what this is supposed to mean. Every asset allows infinite inflow of capital. If humans wanted, they could trade everything for TSLA, moving it's price to gazzilion dollars per share. Derivatives are transaction between to parties like any other. One side pays money the other takes money for making certain bet. The problems I'm aware of with derivaties is that it makes easier for companies to hide their speculative bets off the balance sheet, and it exaggerates overleveraged long-term bets. But it's hardly a root of all evil.
  - SpaceRaccoon 6y ago
    One issue I see is that derivate instruments tend to be used for short-term speculation, meaning that capital is tied up in short-term speculation, instead of financing businesses and projects for long term growth.
  - marcus_holmes 6y ago
    OK, but in a "real" asset there is a limited supply of the thing being bought. You cannot buy an infinite amount of (e.g) houses, or corn, or pork bellies, because there isn't an infinite amount to sell. But I agree that you can invest an infinite amount of money in these things because as you buy up more, the price increases. Derivatives remove the supply limits. Because, as you say, essentially derivatives are all about making bets rather than actually buying anything. If you want to bet a bajillion dollars in a derivative, the only thing limiting you is how many people want to bet against you. I get that this is similar to conventional supply/demand, but it's not the same. The reason it's not the same is because there's no link to the actual production (aka what TFA is talking about) of the thing. You can make a bet that pork belly prices will go up or down regardless of how many actual pork bellies are being made. So capital flows get detached from actual production, which is where we came in. And yes, I get that buying a stock is "making a bet" that the stock or share is going to increase in price. But that's only if you're speculating on the price. There are people (or at least there used to be) who buy a stock because they want the dividend. Or, perish the though, because they actually want the pork belly to make bacon with.
    - dpc_pw 6y ago
      There are people who buy derivatives for practical rational reasons as well - e.g. producers who want to lock the price of pork belies, or business hedging currency risk in an international transactions. In a normal market If people are crazy-buying TSLA stock, TSLA can issue more stock. If people are piling crazily into corporate treasuries and the yields are going down, corporations will issue more debt (and e.g. buy back more of their own stocks). When people were pilling up into a housing bubble in 2005, the builders were creating mc mansions like crazy as well. All the financial assets are prone to systemic over leveraging, and fiat money central bank induced bubble is affecting absolutely every asset: housing, debt (private & public), equity, derivatives. Different things explode at the time, and central banks need to run to the rescue by blowing the bubble even bigger. If it weren't for fiat money bubble, derivatives would be mostly rational markets as well.

CountSessine 6y ago

If the derivatives market didn't provide an infinite soak for excess capital, then that money would be forced to go find something "real" to invest in, and the economic theory TFA talks about might work (money should flow from advanced, low growth, economies, to less developed, higher growth opportunity, markets). As someone who doesn't really understand finance and economics, this is really interesting to me. Doesn't this suggest though that those derivatives markets are really inefficient? ie for them to really appeal to capital that isn't merely hedging, doesn't this mean that they would have to be materially different than their underlying contracts?

rmah 6y ago
I'm speculating, but I suspect marcus_holmes's world view has been shaped by reading the many articles about of the "GIGANTIC SIZE" of various derivatives markets. Those articles almost always use "notional value" of the underlying assets to "size" the derivatives markets. Which is, IMO, pretty misleading. In the simplest terms, a derivative is a security that is derived from some other underlying asset. Typically, they are contracts -- contracts that can be bought and sold on financial markets. For example, a call options contract says "the holder may, at his option, purchase 100 shares of ABC at $250/share on or before 15-Dec-2020". And on the other side, the writer of that contract is obligated to fulfill it if the holder exercises it (but most options contracts expire unexercised). What many articles for the public would say is "that derivative is $25,000 in size!" Except that the contract may be trading at around $0.50/share (or $50). And then they'll multiply it out across all derivatives... thus leading to surprising "conclusions" like "the derivatives market for X is 10 times larger than X itself!" Which is sorta true if you squint hard enough, but mostly not true in terms of all other financial metrics. To circle back, while it is true that there is a huge amount of what many would term "excess capital" sloshing around, I don't think the derivatives market "provide[s] an infinite soak" for it. In reality, a large chunk of it goes into low-risk fixed income instruments such as US Treasuries, other sovereign debt, and AAA-rated corporate bonds.
- marcus_holmes 6y ago
  This is useful. And yes, I probably have an inadequate understanding of the derivatives market (hence going out on a limb). Where I think the problem is, is the disconnect between actual supply/demand of the thing and the gambling about whether the price is going to go up or down. For example, as you say, most option contracts expire unexercised. In the context of TFA, where we're talking about where investment money can go, buying an options contract with no intention of ever actually exercising the option is effectively a complete waste of investment opportunity (compared with, say, building infrastructure in Africa). My point of view is that the derivatives markets in developed economies allows such pointless investments (aka gambling). If there wasn't a derivatives market, this money would be forced to go find something else to invest in. That might be government bonds as you say. Or it might be African infrastructure.

stainforth 6y ago

To their point - https://www.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization-2020/ https://www.visualcapitalist.com/all-of-the-worlds-money-and... no?