It seems like a financial no-brainer: foot traffic and revenue in America's shopping malls are down generally; the mall operators struggle and eventually go under. So simply sell them short and make a quick buck. Right?

But not so fast.

As Bloomberg characterized it: "Hedge funds burned by short trade as America's malls refuse to die."

Many of these shopping mall plays are executed through financial derivatives -- specifically, the trading of credit default swaps. In using indexed funds that follow commercial mortgages which have a large concentration of "exposure to malls across the country," investors will essentially bet on whether/when those associated loans will become non-performing in default.

As many of these investors short sell (bet against the success of) the retail centers, many of the malls nevertheless remain on economic life-support, refusing to die.

So, in the finest tradition of zombie banks, we have zombie malls.

What this means for those in the hedge fund community on the hook is a waiting game, an expensive one.

As demonstrated by JPMorgan, a theoretical short position of $25 million must be serviced with a monthly premium in excess of $60,000. Thus, holding on to this trade while waiting for the underlying loans to officially go bust -- for, say, 18 months -- could cost you a cool million.

Here's a graphical look at the timeline situation of how malls have rallied lately.

 

 

But this condition effectively serves as an instructive microcosm of the bigger picture of financial derivatives.

The world's current total derivative exposure is much, much larger than global GDP. It is even greater than all the earthly debt and equity markets combined -- in the hundreds of trillions at an absolute minimum, and most likely, well, north of a quadrillion. No one really knows.

The world's never seen this much leverage.

An unwinding of this would probably get very nasty, very fast. We'd experience firsthand the "rage" in leverage, courtesy of financial derivatives.