Skip to main content
taking stock

It seems you just can't keep a dyed-in-the-wool market optimist down for long. Scant days ago, fear edged toward panic as investors contemplated a laundry list of economy-flattening developments.

Oil price spikes stemming from the war in Libya and even more worrisome turmoil in the Persian Gulf states were bad enough. Then we had worsening debt news from Europe. Spanish banks suffered another credit downgrade; and Portuguese Prime Minister Jose Socrates and his minority government threw in the towel over opposition to more austerity, which should hardly have been surprising in the middle of a slump. Mix in the latest radioactive news from Japan, falling consumer confidence in the U.S. and a less rosy outlook for Canadian stock market darling Research in Motion, and we had more than enough ingredients to keep the bulls penned up.

So naturally, stock markets rallied from Tokyo to Toronto and most points in between. Asian stocks scored their largest gain in four months and European equities posted their biggest advance since last September.

It's at times like these that I like to consult Satyajit Das, a global risk adviser who is capable of pouring cold water on any rally that smacks of unrealistic expectations. Plenty of perma-bears share that ability, but few have as much insight into the workings of the global financial system.

Toward the end of 2009, Mr. Das warned that the end of the financial crisis would not signal a sustained recovery. Indeed, he predicted a period of stagnation amid widening global imbalances, worsening sovereign debt woes and the risk of new asset bubbles in places such as China. Washington, he predicted, would keep throwing vast amounts of borrowed money at the struggling U.S. economy.

He has seen little since then to change his outlook. Indeed, he is convinced that an even more fragile financial system will be less able to withstand more stresses, particularly now that global liquidity has diminished and central banks have used up most of their ammunition.

A shock of any size "would risk a replay of the events that we saw in late 2008 and early 2009," Mr. Das says from his office in Sydney, Australia. "The only difference between that period and now is that we have less room to manoeuvre. We have already cut interest rates to zero. There's no flexibility on the monetary side."

Making matters worse, most governments have opted for a new age of austerity. "They won't be able to stimulate through [new]spending. So if there is a new crisis, it will be very difficult to find the airbags."

Mr. Das is best known for delving deeper into the complexities, values and dangers of derivatives than just about anyone else on the planet. He has been warning about the threats posed by the vast and still poorly illuminated market since well before the global financial meltdown, as itemized in his 2006 book Traders Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives. At the time, he was largely ignored by policy makers, bankers and market participants, who had no intention of letting this spoilsport ruin their debt-fuelled orgy.

What surprises him today is how little has changed since the near collapse of the global financial system. That occurred after Washington allowed insolvent Wall Street heavyweight Lehman to go under in 2008 and then watched panic set in around the world. If Lehman, a major derivatives player, wasn't safe, how could anyone in this opaque market be sure other trading partners were not in the same boat?

And today? "Derivatives will play their traditional part, which is … communicating the risk at the speed of light. Nobody has corrected anything. So we don't have any more circuit-breakers than we did then."

His next book, Extreme Money: The Masters of the Universe and the Cult of Risk, scheduled to be published this summer, will explore, in part, the financial alchemy that has brought us not only derivatives, but such other modern money-churning inventions as private equity, hedge funds and securitizations. All, he insists, have had a single purpose: "Increasing debt and stripping risks out, repackaging them and [selling them]to people who have no idea what they're buying."

No one, least of all the officials charged with bringing some order to the marketplace, "seems to really understand this, other than about 500 people, who are enjoying themselves hugely - intellectually and financially."

I ask if the next big global crisis could be triggered not by a headline event in the Middle East, a default in Europe or a worsening of Japan's nuclear woes but by some derivatives blowup to which no one has given a second's thought. "You can never ever discount that," says Mr. Das, as affable in conversation as he is gloomy in thought. "The more likely scenario … is that we muddle through with small crises, which progressively wear down the system."

Interact with The Globe