[Uber V8]

While we're digressing, can anyone explain derivatives in lamens terms?

[11Series]

Originally Posted by M3Bahn

Finally got around to watching this. He makes some real good points.

[Undertow]

Originally Posted by 11Series

That tax rule actually makes sense. When you invest in muni's, you fund the operation of gov't in exchange for getting (typically) lower returns than if you were investing in corporate bonds.

You are doing a good thing in helping fund the operation of gov't directly through investment at a lower rate, and in exchange you pay less in taxes to fund the gov't in a different way. It is a wash where the gov't benefits from your direct investment as much, if not more than if they just collected the taxes on your profits if you invested in corporate bonds.

I'm doing a good thing helping the operation and growth of companies directly though equity investment at a lower rate (than if the corporation borrowed in the debt market) and in exchange I pay less taxes to fund a corporation in a different way. It is a wash where the company is able to benefit from my direct investment and avoid higher leverage and the government will benefit from increased corporate tax receipts.

[achien]

A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.[1][2]

One of the oldest derivatives is rice futures, which have been traded on the Dojima Rice Exchange since the eighteenth century.[3] Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (e.g., forward, option, swap); the type of underlying asset (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives, or credit derivatives); the market in which they trade (e.g., exchange-traded or over-the-counter); and their pay-off profile.

Derivatives can be used for speculating purposes ("bets") or to hedge ("insurance"). For example, a speculator may sell deep in-the-money naked calls on a stock, expecting the stock price to plummet, but exposing himself to potentially unlimited losses. Very commonly, companies buy currency forwards in order to limit losses due to fluctuations in the exchange rate of two currencies.

In layman's terms, a derivative is really an insurance contract where the buyer purchase insurance in case something "bad" happens. The seller (a.k.a. insurance company/banks, even government, in Iceland's case) sells the insurance and "hope" something "bad" does not happen (and profit from selling the insurance).

Originally Posted by FwdFtl

While we're digressing, can anyone explain derivatives in lamens terms?

[Undertow]

Originally Posted by FwdFtl

While we're digressing, can anyone explain derivatives in lamens terms?

Derivatives take on many forms and can become very complicated. In their most vanilla form, they are financial instruments utilized to hedge against the risk of future market fluctuations.

[11Series]

Originally Posted by FwdFtl

While we're digressing, can anyone explain derivatives in lamens terms?

Here are the most simple terms I can come up with, without going into details:

At their best, derivatives are ways for producers and consumers to protect themselves from future volatility, and derivatives help the market function smoothly.

At their worst, they are nothing more than a trip to Vegas to play the odds and they function as a parasite on the market.

Like any tool, it all depends upon how you use the tool. Or how the use of that tool is regulated....


PS-- What's a "Lamen"?

[11Series]

Originally Posted by m3inwaiting

I'm doing a good thing helping the operation and growth of companies directly though equity investment at a lower rate (than if the corporation borrowed in the debt market) and in exchange I pay less taxes to fund a corporation in a different way. It is a wash where the company is able to benefit from my direct investment and avoid higher leverage and the government will benefit from increased corporate tax receipts.

It has already been discussed in this thread that the link between lower capital gains tax rates and investment is a fallacy. See the discussion between matthewk and I on the last page. The gov't gains nothing from wasting tax dollars on tax incentives that historically have not, and currently do not increase corporate tax receipts.

Again, if the awesome power of lower capital gains taxes were so powerful, with our record low capital gains tax rates, we would currently be buried in huge mounds of corporate tax receipts. We are not. Total corporate Tax revenues are way down.

The only logical conclusion is that since the gov't does not benefit from increased tax receipts by handing out Capital Gains tax subsidies, these handouts should end.

[Bumer]

Originally Posted by FwdFtl

While we're digressing, can anyone explain derivatives in lamens terms?

They can be different, but let me try to give you couple of examples in a nutshell.

You own a factory that makes BMW performance parts. Let's say you buy aluminum for those parts, and since you buy them in big volumes you buy them two times a year. So, you're thinking: what if price of aluminum increases for whatever reasons in 6 months? How do you protect yourself from unexpected price increases. You buy derivative contract that will allow you to buy specified volume of aluminum at specified price in 6 months. Makes sense so far?

Another example.

You're buying parts from foreign supplier, and when you place your order it takes your supplier two month to deliver parts and complete the contract. Upon completion you have to pay supplier 10,000,000 yuan. To guard yourself against fluctuations in currency exchange, you can buy a contract to purchase 10,000,000 yuan in two month at, let's say, $0.16 / yuan.

Hope that helps.

[Undertow]

Originally Posted by 11Series

It has already been discussed in this thread that the link between lower capital gains tax rates and investment is a fallacy. See the discussion between matthewk and I on the last page. The gov't gains nothing from wasting tax dollars on tax incentives that historically have not, and currently do not increase corporate tax receipts.

Again, if the awesome power of lower capital gains taxes were so powerful, with our record low capital gains tax rates, we would currently be buried in huge mounds of corporate tax receipts. We are not. Total corporate Tax revenues are way down.

Yes, I saw it earlier in the thread. The only problem is that your statement was not correct. Changes in capital gains historically have boosted investment tremendously. Effective tax rates are down, however - that is a separate issue (See transfer pricing, international tax treaties, globalization, etc)

[scorcherjf]

Capital gains tax is not the same as corporate tax. The United States has some of the highest corporate tax rates in the world which lead to U.S. based companies holding their profits off-shore and not repatriating them because of the huge corporate tax hit that they would incur.

Originally Posted by 11Series

Again, if the awesome power of lower capital gains taxes were so powerful, with our record low capital gains tax rates, we would currently be buried in huge mounds of corporate tax receipts. We are not. Total corporate Tax revenues are way down.

The only logical conclusion is that since the gov't does not benefit from increased tax receipts by handing out Capital Gains tax subsidies, these handouts should end.

[Uber V8]

Originally Posted by achien

In layman's terms, a derivative is really an insurance contract where the buyer purchase insurance in case something "bad" happens. The seller (a.k.a. insurance company/banks, even government, in Iceland's case) sells the insurance and "hope" something "bad" does not happen (and profit from selling the insurance).

Sounds like very informed gambling.

Originally Posted by m3inwaiting

Derivatives take on many forms and can become very complicated. In their most vanilla form, they are financial instruments utilized to hedge against the risk of future market fluctuations.

Thanks!

Originally Posted by 11Series

Here are the most simple terms I can come up with, without going into details:

At their best, derivatives are ways for producers and consumers to protect themselves from future volatility, and derivatives help the market function smoothly.

At their worst, they are nothing more than a trip to Vegas to play the odds and they function as a parasite on the market.Like any tool, it all depends upon how you use the tool. Or how the use of that tool is regulated....


PS-- What's a "Lamen"?

You got me (can't blame autocorrect), thanks for the vegas analogy, I can make that connection

Originally Posted by Bumer

They can be different, but let me try to give you couple of examples in a nutshell.

You own a factory that makes BMW performance parts. Let's say you buy aluminum for those parts, and since you buy them in big volumes you buy them two times a year. So, you're thinking: what if price of aluminum increases for whatever reasons in 6 months? How do you protect yourself from unexpected price increases. You buy derivative contract that will allow you to buy specified volume of aluminum at specified price in 6 months. Makes sense so far?...

Hope that helps.

Pretty good real life example. I'm kind of getting it's an "insured bet".

[11Series]

Originally Posted by Bumer

You own a factory that makes BMW performance parts. Let's say you buy aluminum for those parts, and since you buy them in big volumes you buy them two times a year. So, you're thinking: what if price of aluminum increases for whatever reasons in 6 months? How do you protect yourself from unexpected price increases. You buy derivative contract that will allow you to buy specified volume of aluminum at specified price in 6 months. Makes sense so far?

Good example. And here is an example of how that good example can turn bad:

Market speculators use a massive influx of cash into what is normally a stable aluminum market to drive up the cost of aluminum, and to buy up aluminum derivatives. This influx of cash is many orders of magnitude larger than what is needed for liquidity. This rise in the market is chased by a bunch of dumb money.

BMW is forced to pay more for Aluminum, so you have to pay more for your BMW, even though the price spike is due to speculation, not actual supply/demand constraints. BMW sells less cars and is hurt by the speculation.

Once enough dumb money is in, the market speculators (who could never take delivery of the Aluminum) take profits and the market tanks. Now some of the Aluminum manufacturers go out of business because the price for Aluminum has tanked, and there is an actual shortage of Aluminum. The speculators who never could take delivery of the Aluminum take their profits and move off to speculate in another market, like food, or oil. Meanwhile, the Aluminum market is put into a cycle of highs and lows until it can stabilize again.

BMW buyers lost.
dumb money lost.
BWM lost.
Aluminum suppliers lost.

Speculators sucked lots of money out of the market and won. Then they paid just 15% capital gains taxes on their profits because of their AWESOME and SELFLESS contribution they made to the economy.....

[11Series]

Originally Posted by scorcherjf

Capital gains tax is not the same as corporate tax. The United States has some of the highest corporate tax rates in the world which lead to U.S. based companies holding their profits off-shore and not repatriating them because of the huge corporate tax hit that they would incur.

You've missed the conversation. What we were talking about is the relationship between lower capital gains taxes, and corporate tax revenues.

Specifically, how lower capital gains taxes have failed to trigger increased corporate tax revenues, despite long-held claims that lower taxes would automatically increase tax revenues.

You will have to go back a few pages to catch up.

[Bumer]

Originally Posted by FwdFtl

Pretty good real life example. I'm kind of getting it's an "insured bet".

Pretty much.

Originally Posted by 11Series

Good example. And here is an example of how that good example can turn bad:

Market speculators use a massive influx of cash into what is normally a stable aluminum market to drive up the cost of aluminum, and to buy up aluminum derivatives. This influx of cash is many orders of magnitude larger than what is needed for liquidity. This rise in the market is chased by a bunch of dumb money.

BMW is forced to pay more for Aluminum, so you have to pay more for your BMW, even though the price spike is due to speculation, not actual supply/demand constraints. BMW sells less cars and is hurt by the speculation.

Once enough dumb money is in, the market speculators (who could never take delivery of the Aluminum) take profits and the market tanks. Now some of the Aluminum manufacturers go out of business because the price for Aluminum has tanked, and there is an actual shortage of Aluminum. The speculators who never could take delivery of the Aluminum take their profits and move off to speculate in another market, like food, or oil. Meanwhile, the Aluminum market is put into a cycle of highs and lows until it can stabilize again.

BMW buyers lost.
dumb money lost.
BWM lost.
Aluminum suppliers lost.

Speculators sucked lots of money out of the market and won. Then they paid just 15% capital gains taxes on their profits because of their AWESOME and SELFLESS contribution they made to the economy.....

Whoa-whoa-whoa! Hold your horses. Poor guy just asked for some info.

But on the side note... speculators. Does anyone like those guys?

[11Series]

Originally Posted by m3inwaiting

Yes, I saw it earlier in the thread. The only problem is that your statement was not correct. Changes in capital gains historically have boosted investment tremendously. Effective tax rates are down, however - that is a separate issue (See transfer pricing, international tax treaties, globalization, etc)

My statement was self-evident, and everyone can see it.

We are currently are in a state of greatly suppressed investment, and have been for a couple of years, even with 15% Capital gains taxes. I'm sorry you cannot see this fact.

There have been many, many decades where the Capital Gains taxes have been way higher than 15%, and investment was far greater. I'm sorry you deny this fact.

On top of that, Capital Gains include both investment and speculative gains. Tax incentives that are supposed to go to stimulate investment are now completely watered down by the same tax incentives being wasted going to speculators. And the damage that speculators do to the same companies that investors are supposed to be stimulating washes out any benefit left. The current laws just don't work.

[Undertow]

One of the best examples of the "bad" of derivatives is AIG's role in the 2008 meltdown. Investment banks decided to hedge against those giant securtized balls of shitty mortages with AAA ratings that they knew..were, well shitty. So they bought credit default swaps, primarily from AIG. Those swaps would make them whole if the mortgage securities went bad. AIG sold a shit ton of them paying zero attention to their overall exposure. The market crashes and all the banks want to get paid. Enter TARP. Enter Paulson/Geitner/Bush/Obama. Here's your check Goldman Sachs. Enjoy!

[Undertow]

Originally Posted by 11Series

My statement was self-evident, and everyone can see it.

We are currently are in a state of greatly suppressed investment, and have been for a couple of years, even with 15% Capital gains taxes. I'm sorry you cannot see this fact.

There have been many, many decades where the Capital Gains taxes have been way higher than 15%, and investment was far greater. I'm sorry you deny this fact.

End yet you deny that fact of massive increase in investment directly attributed to the Tax Reform Act of 1986. The 15% current rate, if anything, buffered against further suppression from the primary causes of suppressed investment: 1)Dot com boom/bust, 2) 9/11, 3) Housing boom/bust.

[Undertow]

Originally Posted by 11Series

My statement was self-evident, and everyone can see it.

Enjoyed the back and forth.


On my home. 65 degrees -top down weather. I'll make sure to wave to Occupy Boston crowd for you on the way

[11Series]

Originally Posted by Bumer

Pretty much.



Whoa-whoa-whoa! Hold your horses. Poor guy just asked for some info.

But on the side note... speculators. Does anyone like those guys?

Yea, I went overboard there a little bit.

But don't talk too bad about speculators around here. They might start talking back.

[matthewk]

Originally Posted by 11Series

Good example. And here is an example of how that good example can turn bad:

Market speculators use a massive influx of cash into what is normally a stable aluminum market to drive up the cost of aluminum, and to buy up aluminum derivatives. This influx of cash is many orders of magnitude larger than what is needed for liquidity. This rise in the market is chased by a bunch of dumb money.

BMW is forced to pay more for Aluminum, so you have to pay more for your BMW, even though the price spike is due to speculation, not actual supply/demand constraints. BMW sells less cars and is hurt by the speculation.

Once enough dumb money is in, the market speculators (who could never take delivery of the Aluminum) take profits and the market tanks. Now some of the Aluminum manufacturers go out of business because the price for Aluminum has tanked, and there is an actual shortage of Aluminum. The speculators who never could take delivery of the Aluminum take their profits and move off to speculate in another market, like food, or oil. Meanwhile, the Aluminum market is put into a cycle of highs and lows until it can stabilize again.

BMW buyers lost.
dumb money lost.
BWM lost.
Aluminum suppliers lost.

Speculators sucked lots of money out of the market and won. Then they paid just 15% capital gains taxes on their profits because of their AWESOME and SELFLESS contribution they made to the economy.....

This is a really great description of one aspect of capital investing. My hats off.

[mact3333]

Derivatives are a joke...insurance in description only...in reality it is a scam as 2008 showed...entire worth of worlds real estate 75T...entire liquid net worth of the planet 100T...derivatives mkt is 500T!.

So if things do turn bad and wallstreet hustlers who leveraged up 50-100:1 want payment so can they get paid on their gambling insurance policy can they actually collect?..of course not, as AIG showed...not even close...hence the govt(you and I) have to step in and pay off the counterparties for AIG...any wonder why Goldman got their 10B right away...thanks Hank(former CEO of Goldman) we really appreciate you as our Treasury Sec!...so US govt prints up treasuries and sells them to the Federal Reserve who print up money to buy these treasuries and dollar tanks so we pay 4.00 at the pump...thats how it works my friends.

So why isnt there any regulation of the derivatives mkt?...cause the participants own congress, pretty obvious....why did they get rid of mark to market, cause all the banks would be bankrupt thats why...banks still havent written down their bad mortgages cause they dont have to.

Perhaps the speculation would go down if participants were forced to take delivery of the futures whether its oil, gold, silver, cotton....thats what this mkt was intended for anyway.

Just follow the money, most economic advisors and key economic positions for both repub and demo presidents always hire people from Goldman Sachs or one of the branches of the Federal Reserve...haves vs have nots...the transfer of wealth is the name of the game.

[Uber V8]

Originally Posted by mact3333

Derivatives are a joke...insurance in description only...in reality it is a scam as 2008 showed...entire worth of worlds real estate 75T...entire liquid net worth of the planet 100T...derivatives mkt is 500T!.

So if things do turn bad and wallstreet hustlers who leveraged up 50-100:1 want payment so can they get paid on their gambling insurance policy can they actually collect?..of course not, as AIG showed...not even close...hence the govt(you and I) have to step in and pay off the counterparties for AIG...any wonder why Goldman got their 10B right away...thanks Hank(former CEO of Goldman) we really appreciate you as our Treasury Sec!...so US govt prints up treasuries and sells them to the Federal Reserve who print up money to buy these treasuries and dollar tanks so we pay 4.00 at the pump...thats how it works my friends.

So why isnt there any regulation of the derivatives mkt?...cause the participants own congress, pretty obvious....why did they get rid of mark to market, cause all the banks would be bankrupt thats why...banks still havent written down their bad mortgages cause they dont have to.

Perhaps the speculation would go down if participants were forced to take delivery of the futures whether its oil, gold, silver, cotton....thats what this mkt was intended for anyway.

Just follow the money, most economic advisors and key economic positions for both repub and demo presidents always hire people from Goldman Sachs or one of the branches of the Federal Reserve...haves vs have nots...the transfer of wealth is the name of the game.

Which is why I think Rothschild and Wall Street run the world.