Peter Bernstein is saying the same thing.

I note that the world’s richest man and most highly respected investor is harshly critical of “derivatives trading.”  Pardon my ignorance of economic matters, but what in the world is “derivatives trading?”  Stocks and bonds I know.  Commodities trading I know.  But derivatives?

David Handy+

Derivatives are “derived” from other assets.  In the case of a stock, options on that stock are a derivative, derived from the value of the stock.  The option can be used two ways; it can serve as insurance against a change in the stock’s value, or it can serve as a vehicle to place speculative bets on future movements of the stock.

Buffet is being somewhat disingenuous in his criticism of derivatives.  His own company, Berkshire-Hathaway, uses derivatives all the time to both insure its portfolio and also to create additional income from the stocks it owns.  If there were no speculators betting on the future movements of stocks, Warren would have nobody willing to buy/sell the options he wants to sell/buy.  I am beginning to distrust Buffet much like I greatly distrust George Soros.  They both make very public pronouncements that seem to serve the value of their own portfolios as much as the interests of the public.

Thanks, Daniel.  I’ll leave it to my financial advisor to understand and advise me on such things.

David Handy+

“Buffet is being somewhat disingenuous in his criticism of derivatives.  His own company, Berkshire-Hathaway, uses derivatives all the time to both insure its portfolio and also to create additional income from the stocks it owns”—-Daniel [#3]

How do you know Buffet is being “disingenuous” without knowing what he said? Surely he said more than the scant words reported here.

You can criticize derivatives trading without meaning that all derivatives are bad. Lots of derivative instruments serve legitimate purposes, such as hedging against changes in interest rates, foreign exchange rates, or securities or commodities prices.

But plenty of firms get in trouble buying derivatives they don’t understand. I know of one case during the mid-1990s in which a rural U.S. bank invested in a derivative instrument that amounted to a bet on the relative appreciation of the German mark and the Spanish peseta.

As it happens, a study came out this week showing that most professional money managers lack the skill required to make money shorting stocks in the newly fashionable “130/30” funds (you short stocks you think will fall and use the proceeds to buy more of stocks you think will climb, so you end up with 130% of your total assets long).  Derivatives, if used unwisely, can get you in a lot of trouble awfully quick.  Though used correctly they are a useful tool.

A contrary thought:

What do you call a recession where the economy keeps going up and up, even if a bit sluggishly? Well, my friends, you call that an expansion. And that is what we seem to have right now, despite all the economic doomsaying about a recession or even a Great Depression 2.0. Today, the Commerce Department revised its first-quarter estimate of gross domestic product upward to 0.9 percent from 0.6 percent. That follows 0.6 percent GDP growth in the final quarter of 2007. The revision also makes it more likely that the second quarter will be positive, maybe 1.5 percent, maybe even higher.

Now I went back and checked the numbers for the past 50 years and didn’t find a single case of a recession—as calculated by the National Bureau of Economic Research—that started with or contained two straight quarters of positive GDP growth, much less three quarters. In a recent interview with the Financial Times, former Federal Reserve Chief Alan Greenspan admitted he was puzzled that the economy hasn’t fallen off a cliff, given the housing crisis, credit crunch, and oil price surge. He told the FT: “A recession is characterized by significant discontinuities in the data…. It started off that way—there was a period of sharp discontinuity from December to March. But then it stopped…. No one knows how this tug of war will end—specifically, whether the financial crisis will end before it drags down the real economy.”

by James Pethokoukis, the money and politics blogger for U.S. News & World Report.

The rest of his entry continues here:  http://tinyurl.com/46updm