Olduvaiblog: Musings on the coming collapse

Home » Posts tagged 'Derivatives'

Tag Archives: Derivatives

Can the Markets Crash? | Zero Hedge

Can the Markets Crash? | Zero Hedge.

This is the trillion-dollar question. From a common sense perspective, the simple answer is “absolutely!”


Since 1998, the markets have been in serial bubbles and busts, each one bigger than the last. A long-term chart of the S&P 500 shows us just how obvious this is (and yet the Fed argues it cannot see bubbles in advance?).



Moreover, we’ve been moving up the food chain in terms of the assets involved in each respective bubble and bust.


The Tech bubble was a stock bubble.


The 2007 bust was a housing bubble.


This next bust will be the sovereign bond bubble.


Why does this matter?


Because of the dreaded “C word” COLLATERAL.


In 2008, the world got a taste of what happens when a major collateral shortage hits the derivatives market. In very simple terms, the mispricing of several trillion (if not more) dollars’ worth of illiquid securities suddenly became obvious to the financial system.


This induced a collateral shortfall in the Credit Default Swap market ($50-$60 trillion) as everyone went scrambling to raise capital or demanded new, higher quality collateral on trillions of trades that turned out to be garbage.


This is why US Treasuries posted such an enormous rally in the 2008 bust (US Treasuries are the highest grade collateral out there).


Please note that Treasuries actually spiked in OCTOBER-NOVEMBER 2008… well before stocks bottomed in March 2009.



The reason?


The scrambling for collateral, NOT the alleged “flight to safety trade” that CNBC proclaims.




The senior most assets backstopping the $600 trillion derivatives market are SOVEREIGN BONDS: US Treasuries, Japanese Government Bonds, German Bunds.


By keeping interest rates near zero, and pumping over $10 trillion into the financial system since 2007, the world’s Central Banks have forced investors to misprice the most prized collateral backstopping the entire derivatives system: SOVEREIGN BONDS.


SO what happens when the current bond bubble bursts and we begin to see bonds falling and yields rising?


Another collateral scramble begins… this time with a significant portion of the interest rate derivative market (over 80% of the $600 TRILLION derivative market) blowing up.


At that point, rising yields is the last thing we need to worry about. The assets backstopping a $600 trillion market themselves will be falling in value… which means that the real crisis… the crisis to which 2008 was the warm up, will be upon us.


This is why Central Banks are so committed to keeping rates low. This is also why all Central Bank policy has largely benefitted the large financial institutions (the Too Big To Fails) at the expense of Main Street…




They will fail eventually. When they do, the markets will experience yet another terrible collapse even worse than that of 2008.


For a FREE Special Report on how to prepare your portfolio for this, visit us at:




Best Regards


Phoenix Capital Research

Shake me, wake me! | KUNSTLER

Shake me, wake me! | KUNSTLER.


The rot moves from the margins to the center, but the disease moves from the center to the margins. That is what has happened in the realm of money in recent weeks due to the sustained mispricing of the cost of credit by central banks, led by the US Federal Reserve. Along the way, that outfit has managed to misprice just about everything else  — stocks, houses, exotic securities, food commodities, precious metals, fine art. Oil is mispriced as well, on the low side, since oil production only gets more expensive and complex these days while it depends more on mispriced borrowed money. That situation will be corrected by scarcity, as oil companies discover that real capital is unavailable. And then the oil will become scarce. The “capital” circulating around the globe now is a squishy, gelatinous substance called “liquidity.” All it does is gum up markets. But eventually things do get unstuck.

Meanwhile, the rot of epic mispricing expresses itself in collapsing currencies and the economies they are supposed to represent: India, Turkey, Argentina, Hungary so far. Italy, Spain, and Greece would be in that club if they had currencies of their own. For now, they just do without driving their cars and burn furniture to stay warm this winter. Automobile use in Italy is back to 1970s levels of annual miles-driven. That’s quite a drop.

Before too long, the people will be out in the streets engaging with the riot police, as in Ukraine. This is long overdue, of course, and probably cannot be explained rationally since extreme changes in public sentiment are subject to murmurations, the same unseen forces that direct flocks of birds and schools of fish that all at once suddenly turn in a new direction without any detectable communication.

Who can otherwise explain the amazing placidity of the sore beset American public, beyond the standard trope about bread, circuses, and superbowls? Last night they were insulted with TV commercials hawking Maserati cars. Behold, you miserable nation of overfed SNAP card swipers, the fruits of wealth and celebrity! Savor your unworthiness while you await the imminent spectacles of the Sochi Olympics and Oscar Night! Things at the margins may yet interrupt the trance at the center. My guess is that true wickedness brews unseen in the hidden, unregulated markets of currency and interest rate swaps.

The big banks are so deep in this derivative ca-ca that eyeballs are turning brown in the upper level executive suites. Notable bankers are even jumping out of windows, hanging themselves in back rooms, and blowing their brains out in roadside ditches. Is it not strange that there are no reports on the contents of their suicide notes, if they troubled to leave one? (And is it not unlikely that they would all exit the scene without a word of explanation?) One of these, William Broeksmit, a risk manager for Deutsche Bank, was reportedly engaged in “unwinding positions” for that that outfit, which holds over $70 trillion in swap paper. For scale, compare that number with Germany’s gross domestic product of about $3.4 trillion and you could get a glimmer of the mischief in motion out there. Did poor Mr. Broeksmit despair of his task?

Physicist Stephen Hawking declared last week that black holes are not exactly what people thought they were. Stuff does leak back out of them. This will soon be proven in the unwinding derivatives trades when most of the putative wealth associated with swaps and such disappears across the event horizon of bad faith, and little dribbles of their prior existence leak back out in bankruptcy proceedings and political upheaval.

The event horizon of bad faith is the exact point where the credulous folk of this modern age, from high to low, discover that their central banks only pretend to be regulating agencies, that they ride a juggernaut of which nobody is really in control. The illusion of control has been the governing myth since the Lehman moment in 2008. We needed desperately to believe that the authorities had our backs. They don’t even have their own fronts.

Is the money world at that threshold right now? One thing seems clear: nobody is able to turn back the plummeting currencies. They go where they will and their failures must be infectious as the greater engine of world trade seizes up. Who will write the letters of credit that make international commerce possible? Who will trust whom? When do people seriously start to starve and reach for the pitchforks? When does the action move from Kiev to London, New York, Frankfurt, and Paris?

What Blows Up First? Part 3: Subprime Countries

What Blows Up First? Part 3: Subprime Countries.

by John Rubino on January 27, 2014 

One of the reasons the rich countries’ excessive money creation hasn’t ignited a generalized inflation is that today’s global economy is, well, global. When the Fed dumps trillions of dollars into the US banking system, that liquidity is free to flow wherever it wants. And in the past few years it has chosen to visit Brazil, China, Thailand, and the rest of the developing world.

This tidal wave of hot money bid up asset prices and led emerging market governments and businesses to borrow a lot more than they would have otherwise. Like the recipients of subprime mortgages in 2006, they were seduced by easy money and fooled into placing bets that could only work out if the credit kept flowing forever.

Then the Fed, spooked by nascent bubbles in equities and real estate, began to talk about scaling back its money printing*. The hot money started flowing back into the US and out of the developing world. And again just like subprime mortgages, the most leveraged and/or badly managed emerging markets have begun to implode, threatening to pull down everyone else. A sampling of recent headlines:

Contagion Spreads in Emerging Markets as Crises Grow

Investors Flee Developing World

Erosion of Argentine Peso Sends a Shudder Through Latin America

The Entire World is Unraveling Before Our Eyes

Chinese Debt Debacle Supports Soros’ ‘Eerie’ Portrayal

Venezuela Enacts “Law of Fair Prices”

Argentina Returns to Villa Miseria

Indian Rupee Falls to 2-Month Low; Joins Emerging Market Sell-Off

Turkey’s ‘Embarrassing’ Intervention Fails to Curb Lira Sell-Off

Prudent Bear’s Doug Noland as usual gets it exactly right in his most recent Credit Bubble Bulletin. Here are a few excerpts from a much longer article that should be read by everyone who wants to understand the causes and implications of the emerging-market implosion:

Virtually the entire emerging market “complex” has been enveloped in protracted destabilizing financial and economic Bubbles. In particular, for five years now unprecedented “developed” world central bank-induced liquidity has spurred unsound economic and financial booms. The massive investment and “hot money” flows are illustrated by the multi-trillion growth of EM central bank international reserve holdings. There have of course been disparate resulting impacts on EM financial and economic systems. But I believe in all cases this tsunami of liquidity and speculation has had deleterious consequences, certainly including fomenting systemic dependencies to foreign-sourced flows. In seemingly all cases, protracted Bubbles have inflated societal expectations.

For a while, central bank willingness to use reserves to support individual currencies bolsters market confidence in a country’s currency, bonds and financial system more generally. But at some point a central bank begins losing the battle to accelerating outflows. A tough decision is made to back away from market intervention to safeguard increasingly precious reserve holdings. Immediately, the marketplace must then contend with a faltering currency, surging yields, unstable financial markets and rapidly waning liquidity generally. Things unravel quickly.

The issue of EM sovereign and corporate borrowings in dollar (and euro and yen) denominated debt has speedily become a critical “macro” issue. More than five years of unprecedented global dollar liquidity excess spurred a historic boom in dollar-denominated borrowings. The marketplace assumed ongoing dollar devaluation/EM currency appreciation. There became essentially insatiable market demand for higher-yielding EM debt, replete with all the distortions in risk perceptions, market mispricing and associated maladjustment one should expect from years of unlimited cheap finance. As was the case with U.S. subprime, it’s always the riskiest borrowers that most intensively feast at the trough of easy “money.”

So, too many high-risk borrowers – from vulnerable economies and Credit systems – accumulated debt denominated in U.S. and other foreign currencies – for too long. Now, currencies are faltering, “hot money” is exiting, Credit conditions are tightening and economic conditions are rapidly deteriorating. It’s a problematic confluence that will find scores of borrowers challenged to service untenable debt loads, especially for borrowings denominated in appreciating non-domestic currencies. This tightening of finance then becomes a pressing economic issue, further pressuring EM currencies and financial systems – the brutal downside of a protracted globalized Credit and speculative cycle.

In many cases, this was all part of a colossal “global reflation trade.” Today, many EM economies confront the exact opposite: mounting disinflationary forces for things sold into global markets. Falling prices, especially throughout the commodities complex, have pressured domestic currencies. This became a major systemic risk after huge speculative flows arrived in anticipation of buoyant currencies, attractive securities markets, and enticing business opportunities. The commodities boom was to fuel general and sustained economic booms. EM was to finally play catchup to “developed.”

Now, Bubbles are faltering right and left – and fearful “money” is heading for the (closing?) exits. And, as the global pool of speculative finance reverses course, the scale of economic maladjustment and financial system impairment begins to come into clearer focus. It’s time for the marketplace to remove the beer goggles.

No less important is the historic – and ongoing – boom in manufacturing capacity in China and throughout Asia. This has created excess capacity and increasing pricing pressure for too many manufactured things, a situation only worsened by Japan’s aggressive currency devaluation. This dilemma, with parallels to the commodity economies, becomes especially problematic because of the enormous debt buildup over recent years. While this is a serious issue for the entire region, it has become a major pressing problem in China.

At the same time, data this week provided added confirmation (see “China Bubble Watch”) that China’s spectacular apartment Bubble continues to run out of control. When Chinese officials quickly backed away from Credit tightening measures this past summer, already overheated housing markets turned even hotter. Now officials confront a dangerous situation: Acute fragility in segments of its “shadow” financing of corporate and local government debt festers concurrently with ongoing “terminal phase” excess throughout housing finance. China’s financial and economic systems have grown dependent upon massive ongoing Credit expansion, while the quality of new Credit is suspect at best. It’s that fateful “terminal phase” exponential growth in systemic risk playing out in historic proportions. Global markets have begun to take notice.

There are critical market issues with no clear answers. For one, how much speculative “hot money” has and continues to flood into China to play their elevated yields in a currency that is (at the least) expected to remain pegged to the U.S. dollar? If there is a significant “hot money” issue, any reversal of speculative flows would surely speed up this unfolding Credit crisis. And, of course, any significant tightening of Chinese Credit would reverberate around the globe, especially for already vulnerable EM economies and financial systems.

No less important is the historic – and ongoing – boom in manufacturing capacity in China and throughout Asia. This has created excess capacity and increasing pricing pressure for too many manufactured things, a situation only worsened by Japan’s aggressive currency devaluation. This dilemma, with parallels to the commodity economies, becomes especially problematic because of the enormous debt buildup over recent years. While this is a serious issue for the entire region, it has become a major pressing problem in China.

The crucial point here is that this crisis is not a case of one or two little countries screwing up. It’s everywhere, from Latin America to Asia to Eastern Europe. Each country’s problems are unique, but virtually all can be traced back to the destabilizing effects of hot money created by rich countries attempting to export their debt problems to the rest of the world. ZIRP, QE and all the rest succeeded for a while in creating the illusion of recovery in the US, Europe and Japan, but now it’s blow-back time. The mess we’ve made in the subprime countries will, like rising defaults on liar loans and interest-only mortgages in 2007, start moving from periphery to core. As Noland notes:

Yet another crisis market issue became more pressing this week. The Japanese yen gained 2.0% versus the dollar. Yen gains were even more noteworthy against other currencies. The yen rose 4.2% against the Brazilian real, 3.9% versus the Chilean peso, 3.5% against the Mexican peso, 3.9% versus the South African rand, 3.8% against the South Korean won, 3.0% versus the Canadian dollar and 3.0% versus the Australian dollar.

I have surmised that the so-called “yen carry trade” (borrow/short in yen and use proceeds to lever in higher-yielding instruments) could be the largest speculative trade in history. Market trading dynamics this week certainly did not dissuade. When the yen rises, negative market dynamics rather quickly gather momentum. From my perspective, all the major speculative trades come under pressure when the yen strengthens; from EM, to the European “periphery,” to U.S. equities and corporate debt.

It’s worth noting that the beloved European “periphery” trade reversed course this week. The spread between German and both Spain and Italy 10-year sovereign yields widened 19 bps this week. Even the France to Germany spread widened 6 bps this week to an almost 9-month high (72bps). Stocks were slammed for 5.7% and 3.1% in Spain and Italy, wiping out most what had been strong January gains.

Even U.S. equities succumbed to global pressures. Notably, the cyclicals and financials were hit hard. Both have been Wall Street darlings on the bullish premise of a strengthening U.S. (and global) recovery and waning Credit and financial risk. Yet both groups this week seemed to recognize the reality that what is unfolding in China and EM actually matter – and they’re not pro-global growth. With recent extreme bullish sentiment, U.S. equities would appear particularly vulnerable to a global “risk off” market dynamic.

To summarize: 
Developed world banks have lent hundreds of billions of dollars to emerging market businesses and governments. If these debts go bad, those already-impaired banks will be looking at massive, perhaps fatal losses. Meanwhile, trillions of dollars of derivatives have been written by banks and hedge funds on emerging market debt and currencies, with money center banks serving as counterparties on both sides of these contracts. They net out their long and short exposures to hide the true risk, but let just one major counterparty fail and the scam will be exposed, as it was in 2008 when AIG’s implosion nearly bankrupted Goldman Sachs and JP Morgan Chase.

Last but not least, individuals and pension funds in the developed world have invested hundreds of billions of dollars in emerging market stock and bond funds, which are now looking like huge year-ahead losers. The global balance sheet, in short, is about to get a lot more fragile.

So, just as pretty much everyone in the sound money community predicted, tapering will end sooner rather than later when a panicked Fed announces some kind of bigger and better shock-and-awe debt monetization plan. The European Central Bank, which actually shrank its balance sheet in 2013, will reverse course and start monetizing debt on a vast scale. As for Japan, who knows what they can get away with, since their government debt is, as a percentage of GDP, already twice that of the US.

The real question is not whether more debt monetization is coming, but whether it will come soon enough to preserve the asset price bubbles that are right this minute being punctured by the emerging market implosion. If not, it really is 2008 all over again.

The previous articles in this series:

What Blows Up First, Part 1: Europe

What Blows Up First, Part 2: Japan

“Money printing” in this case refers to currency creation in all its forms, electronic and physical.


Market Cornered: JPMorgan Owns Over 60% Notional Of All Gold Derivatives | Zero Hedge

Market Cornered: JPMorgan Owns Over 60% Notional Of All Gold Derivatives | Zero Hedge.

Perhaps the only question we have after seeing the attached table, which shows that as of Q3, 2013 JPMorgan owned $65.4 billion, or just over 60% of the total notional ($108.2 billion) of all gold derivatives in the US, is whether the CFTC will pull the “our budget was too small” excuse to justify why it allowed Jamie Dimon to ignore any and all position limits and corner the gold market?


And purely as a reference point, the chart below compares the total value of gold held in JPM’s vault (registered and eligible) as of Friday’s closing price with its reported gold derivative notional holdings.


Finally, for the purists out there, we realize that gross is not net… until there is a breach in the derivative counterparty collateral chain, and gross becomes net.

Source: OCCComex

On Death and Derivatives » Golem XIV – Thoughts

On Death and Derivatives » Golem XIV – Thoughts.

On Sunday a former Senior Deutsche Bank manager, William Broeksmit,  was found hanged at his house. He was the retired Head of Risk Optimization for the bank and a close personal friend of Deutsche’s Co-Chief Executive, Anshu Jain. Mr Broeksmit became head of Risk Optimization in 2008. He retired in February 2013.

Early this morning, Gabriel Magee, a Vice President of CIB (Corporate and Investment Banking) Technology at JP Morgan jumped to his death from the top of the bank’s 33 story European Headquarters in Canary Wharf.  As a VP of CIB Technology Mr Magee’s job would have been to work closely with the Bank’s senior Risk Managers providing the technology which monitored every aspect of the bank’s exposure to financial risk.

These deaths could well be completely unrelated and just terribly sad for their respective families. On the other hand neither of these men had any obvious problems and both were immensely wealthy. So why would two senior bankers commit suicide within a couple of days of each other?

One place to start is to note that JP Morgan Chase had, at the end of 2012,  a mind boggling, but only silver medal, $69.5 Trillion with a ‘T’ gross notional Deriviatives exposure . While the gold medal for exposure to Derivative risk goes to …Deutsche Bank, with $72.8 or €55.6 Trillion Gross Notional Exposure. Gross Notional means this is the face value of all the derivative deals it has signed. Which the bank would be very quick to tell you would Net Out to far, far less. Netting Out, for those of you who do not know just means that a bet/contract in one direction is considered to balance or cancel out a similar sized bet/contract betting the other way. But as I wrote in Propaganda War – Risk Weighted Lies and further in Propaganda Wars – Balance Sheet Instabilities ,

…this sort of cancelling out is fine on paper but in reality is more akin to  people trying to swap sides in a rowing boat.

Both of the men who killed themselves were intimately concerned with judging and safeguarding their bank from risk.

To give you an idea what sort of risk that size of a derivatives book is consider that the entire GDP of Germany is €2.7 Trillion. Remember that Derivatives are what Warren Buffet dubbed “weapons of financial mass destruction.”

Next question might be, when do these weapons become dangerous? The answer obvioulsy varies in accordance with the type of derivative you are considering. One huge group of derivatives that both JP Morgan and Deutsche both deal very heavily in are currency and interest rate swaps. They become dangerous when there are large moves in currency values and interest rates.

At the moment The Tukish Lira has been in free fall for days. The Turkish central bank tried to defend it and could not stem an unstoppable tide. It then stunned everyone by raising its over-night lending rate (the interst rate it charges to lend to banks over-night) from 4.25% to 12 %!

This did not work either and today the Lira continues to be in crisis, as is the whole Turkish stock market.

The Hungarian Florint is also crashing. As is the entire Argentinian economy. The Peso fell 10% in a single day recently. At the same time there is massive uncertainty surrounding Ukraine as there is also surrounding the interest rates and stability of South Africa.

So imagine you are a large bank with huge derivatives business much of which covers bets in your equally large Foreign Exchange business. Essentially that boat in which you are hoping you can ‘net out’ about 70  Trillion dollar’s worth of derivatives positions is now being bounced about by several large storms.

Many of those derivatives contracts would have been entered into during Mr Broeksmit’s tenure at Deutsche, while Mr Magee would have been overseeing and advising on his bank’s risk exposure as it swayed about over at JP Morgan.

All in all I don’t think it is far fetched to think both these men may have been under huge strain and possibly more afraid than the rest of us, because they were in prime position to know much more than the rest of us.

All of which brings to mind yet another banker who recently fell to his death.

Just under a year ago, in March of 2013, David Rossi, head of communications at one of Itay’s largest and most catastrophically insolvent banks, Monte dei Paschi, fell from the balcony of his third story office at the bank’s head-quarters. How a man who isn’t drunk and who, as far as I am aware, left no suicide note just ‘falls’ from a balcony is a mystery. But the Italian authorities, I have no doubt, did a bang up job.

It turns out that,

Monte dei Pasche…had engaged with shady derivatives deals with Deutsche Bank to cover up hundreds of millions of euros in loses, and then employed some creative accounting to hide the trades from share holders and the public.(My emphasis).

Now what I find strange about this man’s death is that as Head of Communications he would not have done any banking himself. Therefore, he would not have been guilty of any wrongdoing. So why would he kill himself? It seems to me the worst that could have happened to him is that he became aware of rather serious wrongdoing that other people and other banks even,  might have not wanted brought to light….

And then I remembered one more death. Pierre Wauthier, the former Chief Financial Officer (CFO) of Zurich Insurance Group hung himself last year, at his home. Now this death you might think has no possible connection with the others. In fact it has two. Both are, as with the rest of what I freely admit is a speculative piece, circumstantial.

The CEO of Zurich Insurance group at the time of Mr Wauthier’s suicide was Josef Ackermann, former CEO of Deutsche Bank. Mr Ackermann resigned shortly after it was revealed that Mr Wautheir, in his suicide note, had named Mr Ackermann. According to Mr Wauthier’s widow it was Ackermann who had placed her husband under intolerable strain. Of course we don’t know what the issue was that caused the ‘intolerable strain’.  But let’s look a little closer at what tied these two men together.

Mr Ackermann stepped down as CEO of Deutsche Bank in 2012 after ten years at the helm. During that time he had transformed Germany’s largest bank from a large but slightly dull national player into one of the very largest and most agressive of the global banks. One of the ways Ackermann had grown Deutsche so spectacularly was to make it the world’s largest player  in the derivatives market. Nearly all of that 72 Trillion dollars’ worth of derivative exposure was accumulated under his leadership.

Mr Ackermann had built a derivatives position 18 times larger than the GDP of Germany itself.

A year and a half after Mr Ackermann took over at Zurich Insurance Group, Zurich announced it was going to start offering banks a way of holding less capital against their risky assets/loans by offering to insure or ‘buy’ the risk from them. This is know as Regulatory Capital Trade. As one of the archtiects of the trade was quoted at the time,

“We are looking at products where banks would buy insurance for their operational risks issues. These are normally risks that are not covered by traditional insurance.”

This new insurance venture was, on the one hand, in response to the European regulators insisting that banks had to hold more capital against their risky assets and on the other, a result of the dire need of Insurers to find products that could yield them a profit. The trade is a classic result of a period of extended low interest rates where traditionally safe investments like Soveriegn bonds and vanilla loans and securities just don’t pay enough to cover insurers’ needs let alone let them make a tidy profit. In other words those insurers who understood what banks were exposed to and were willing to take the risk on themselves – because they thought they were cleverer – could find yield where others feared to tread. And of course one of the largest pots of risky assets on bank books is derivatives. All those lovely foreign exchange bets and interest rate bets, and derivative trades which underpin the rapidly growing European ETF market (in which guess who is a massive palyer?  Yes, that’s right, Deutsche) – they would all have levels of risk the banks would love to off-load.

Holding more capital against risk might be prudent but it is hell on bank growth and bonuses. Regulatory Capital Arbitrage, is how you game (quite legally, of course) that particuar regulation. The bank gets to keep the underlying asset, while the risk is ‘sold’ to or insured by (depends on how you account for it at both ends) someone else. In this case Ackermann’s Zurich Insurance Group.

In some ways it was a creative move – in the way finance is creative , like making a better land mine I suppose – since Zurich already ran the world largest derivative trading exchange, Eurex. With the new trade Zurich would not just be running the exchange but would now become a major player in the risk trade. Of course this is fine so long as the risk never materializes. Which brings us back to the present spreading turbulence in markets from Ukraine, to Argentina and Turkey.  It is also worth noting Zurich also offers insurance against about 50 or so emerging market banks going under.  Might not seem quite so safe a market to be in just at the moment.

As Chief Financial Officer Mr Wauthier would have had to be on side with Mr Ackermann about the wisdom of this bank-risk insurance trade.

Now I realize, as I said above, that this is all circumstantial and speculative. But derivatives are, as Warren Buffett said, very dangerous. Deutsche is sitting on the world’s biggest pile of them and J P Morgan the second biggest pile. And right now global events are making those risks sweat. When HSBC tries to limit cash withdrawals and so does one of Russia’s largest banks then something somewhere is not healthy. We are , I think, circling around another Morgan Stanley moment.

To This Day, No One Knows What Financial Firms Are Sitting on | Zero Hedge

To This Day, No One Knows What Financial Firms Are Sitting on | Zero Hedge.

As powerful as it may be, the Fed is not the market. And since the Fed failed to restore trust in the system by forcing all bad debts to light, the financial world has grown increasingly volatile and broken as investors grow increasingly distrustful of the system and begin to pull their money from it: see market volumes continuing to plunge.


Nowhere is the lack of trust more apparent than in the financial sector. Indeed, it was a lack of trust between banks (inter-bank lending) that caused the credit markets to jam up in 2008, which resulted in the Crash.


That lack of trust continues to this day. In the post-Lehman collapse, instead of forcing real derivative and credit risk out into the open, the Federal Reserve and regulators instead suspended accounting standards and allowed financial firms (and other corporate entities) to continue to lie about the true state of their balance sheets.


As a result of this, the financial sector remains rife with fraud and impossible to accurately value (how can you value a business that is lying about its balance sheet?).


Those times in which a company was forced to value its assets at market prices have always seen said values losing 80%+ value in short order: consider Washington Mutual, which sported a book value north of $70 billion right up until it was sold for… $2 billion.


This type of fraud is endemic in the system. Indeed, we got a taste of just how problematic a lack of transparency can be with MF Global’s bankruptcy, in which a firm with $42 billion in assets lost over 80% of its value since August only to reveal in bankruptcy that it had stolen over $700 million worth of clients’ money.


That MF Global engaged in fraud and stole clients’ money is noteworthy. However, the far more important issue is:  HOW did this company receive primary dealer status from the NY Fed nine months before imploding?


The Primary Dealers are the banks that actively engage in day to day activities with the New York Fed regarding the Fed’s monetary policies. Primary Dealers also participate in US Treasury auctions.


Put another way, Primary Dealers are the most elite, well-connected financial firms in the world.  They have unequal access to both the Fed and the US Treasury Dept. In order for MF Global to have attained this status it must have passed through a review by:


1)   The New York Fed

2)   The SEC


This is not a quick nor superficial process. According to the NY Fed’s own site:


Upon submission of a formal application, a prospective primary dealer can expect at least six months of formal consideration by the New York Fed. That consideration may include,among other things, on-site reviews of front, middle, and back office operations, review of compliance programs and discussions with compliance and credit risk management staff, discussions with senior management about business plans, financial condition, and the ability to meet FRBNY’s business needs, review of financial information, and consultation with primary supervisors and regulators.


MF Global passed through all of these reviews to became a primary dealer in February 2011. A mere nine months later, the firm is in Chapter 11 and has admitted to stealing clients’ funds to maintain liquidity.


These developments reveal, beyond any doubt, that financial oversight in the US is virtually non-existent. This returns to my primary point: that trust has been lost in the system. And until it is restored, the system will remain broken.


A final note on this: the NY Fed is the single most powerful entity in charge of the Fed’s daily operations. How can any investor believe that the Fed can manage the system and restore trust when the NY Fed granted MF Global primary dealer status a mere nine months before the latter went bankrupt?


If the NY Fed cannot accurately audit a financial firm’s risks during a six month review, then there is NO WAY an ordinary investor can do so.


This is one of the biggest risks in the system: that no one has a clue what financial entities are sitting on in terms of garbage derivatives and debts. As MF Global proved, this risk can result in a TOTAL loss of funds.


This type of fraud will continue until the system breaks. At that point hopefully the bad debts will finally clear from the system and we can actually lay a foundation for growth.


For a FREE Special Report outlining how to protect your portfolio from this, swing by: http://phoenixcapitalmarketing.com/special-reports.html


Best Regards

Phoenix Capital Research

What do I believe about the world complex? Or, why I think a collapse is inevitable.

Last evening (January 12, 2014) I sat down to create a compilation of beliefs I hold about the world complex. The first twenty that popped into my head were pretty easy with the last few (I only went as far as once through the alphabet) requiring a little thinking. In no particular order I offer this quickly composed list with some links to articles/websites to support them:


a)     Economic markets are rigged.

  1. http://www.zerohedge.com/news/2013-12-11/are-markets-rigged
  2. http://www.zerohedge.com/news/2013-06-12/summarizing-known-rigged-markets
  3. http://www.zerohedge.com/news/2013-06-11/wmreuters-busted-latest-market-rigging-and-collusion-scandal-foreign-exchange

b)    Gold has been moving from the West to the East.

  1. http://www.zerohedge.com/news/guest-post-world’s-gold-moving-west-east
  2. http://www.zerohedge.com/news/2013-12-19/chinese-dont-want-dollars-anymore-they-want-gold-londons-gold-vaults-are-empty-why
  3. http://www.zerohedge.com/news/2013-05-08/chinese-gold-imports-soar-monthly-record-insatiable-demand

c)     The world’s primary reserve currency never lasts forever.

  1. http://www.zerohedge.com/news/2014-01-10/todays-reserve-currency-tomorrows-wallpaper
  2. http://www.zerohedge.com/news/2013-07-06/bundesbank-warns-chinas-currency-its-way-becoming-global-reserve-currency
  3. http://www.zerohedge.com/news/2013-10-13/guest-post-how-much-longer-will-dollar-be-reserve-currency

d)    Central banks have been coordinating their monetary policies from interest rates to ‘money printing’ to ‘forward guidance’ that is resulting in currency devaluations

  1. http://www.zerohedge.com/news/here-comes-mother-all-rumors-g-20-sources-say-central-banks-preparing-coordinated-action
  2. http://www.zerohedge.com/news/goldman-todays-coordinated-central-bank-bailout-it-isn’t-enough-save-anyone-or-solve-averything
  3. http://www.zerohedge.com/news/2013-10-03/guest-post-rise-and-fall-monetary-policy-coordination

e)     Central banks have been monetizing sovereign debt through increased holdings of government bonds.

  1. http://www.zerohedge.com/news/2013-01-07/japan-may-or-may-not-mint-quadrillion-yen-coins-it-will-monetize-european-debt
  2. http://www.zerohedge.com/news/ecb-monetizes-another-€10-billion-piigs-debt-trichet-says-prudent-ecb-not-fed
  3. http://www.zerohedge.com/news/2012-10-20/presenting-all-us-debt-thats-fit-monetize

f)     Sovereign nations are in extreme debt.

  1. http://en.wikipedia.org/wiki/Government_debt
  2. http://www.economist.com/content/global_debt_clock
  3. http://www.tradingeconomics.com/country-list/government-debt-to-gdp

g)    Private households are in extreme debt.

  1. http://www.oecd.org/std/fin-stats/
  2. http://www.zerohedge.com/news/2013-06-04/debt-nations
  3. http://www.economist.com/blogs/graphicdetail/2013/06/focus-1

h)    All fiat currency experiments eventually end.

  1. http://dailyreckoning.com/fiat-currency/
  2. http://www.youtube.com/watch?v=Oql8CTy6AcA
  3. http://georgewashington2.blogspot.ca/2011/08/average-life-expectancy-for-fiat.html

i)      Robotic technology is replacing increasing number of jobs.

  1. http://www.news.com.au/technology/science/robots-to-replace-almost-50-per-cent-of-the-work-force/story-fn5fsgyc-1226729696075
  2. http://robotswillstealyourjob.tumblr.com/post/48210312400/robots-are-taking-our-jobs-and-we-will-take-their
  3. http://www.amazon.com/Jobocalypse-Human-Jobs-Robots-Replace/dp/1482701960

j)      There exist trillions of dollars of IOUs supporting the financial system.

  1. http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html
  2. http://theeconomiccollapseblog.com/archives/the-coming-derivatives-panic-that-will-destroy-global-financial-markets
  3.  http://moneymorning.com/2011/10/12/derivatives-the-600-trillion-time-bomb-thats-set-to-explode/

k)    Unemployment has skyrocketed across western nations, especially for the young (under 25).

  1. http://www.theguardian.com/commentisfree/2013/nov/14/youth-unemployment-wreck-europe-economic-recovery
  2. http://business.time.com/2012/11/05/why-the-u-s-has-a-worse-youth-employment-problem-than-europe/
  3. http://www.workopolis.com/content/advice/article/study-why-youth-unemployment-in-canada-is-here-to-stay/


l)      Production of conventional oil has begun to decline.

  1. http://www.oildecline.com/
  2. http://www.theguardian.com/environment/earth-insight/2013/dec/23/british-petroleum-geologist-peak-oil-break-economy-recession
  3. http://www.csmonitor.com/Environment/Energy-Voices/2013/0412/The-decline-of-the-world-s-major-oil-fields

m)   New technologies and dirtier sources are being increasingly required to sustain fuel production.

  1. http://www.peakoil.net/future-oil-production-in-canada
  2. http://www.ft.com/cms/s/0/d005f176-4ad8-11e3-8c4c-00144feabdc0.html
  3. http://www.theoildrum.com/node/10017

n)    Fuel production barely sustains demand.

  1. http://omrpublic.iea.org/balances.asp
  2. http://www.economist.com/blogs/dailychart/2011/06/oil-production-and-consumption
  3. http://www.eia.gov/todayinenergy/detail.cfm?id=12891

o)   The Shale Oil Revolution is not.

  1. http://shalebubble.org/drill-baby-drill/
  2. http://www.resilience.org/stories/2013-10-21/major-study-projects-no-long-term-climate-benefit-from-shale-gas-revolution
  3. http://mondediplo.com/2013/03/09gaz

p)    Models of future fuel production rely on significant ‘yet-to-be-discovered’ sources.

  1. http://www.abo.net/en_IT/publications/reportage/togo/togo_1.shtml
  2. http://seekingalpha.com/article/236162-iea-forecast-economy-depends-on-yet-to-be-found-oil
  3. http://www.jeffrubinssmallerworld.com/2010/11/24/even-the-international-energy-agency-forecasts-peak-oil/

q)    Fossil fuel extraction, transportation, and use have polluted the planet with numerous toxins.

  1. http://www.ec.gc.ca/energie-energy/default.asp?lang=En&n=1F4E5D8A-1
  2. http://www2.epa.gov/nutrientpollution/sources-and-solutions-fossil-fuels
  3. http://www.ucsusa.org/clean_energy/our-energy-choices/coal-and-other-fossil-fuels/the-hidden-cost-of-fossil.html


r)     Climate extremes are increasing in frequency, duration, and magnitude.

  1. http://www.theguardian.com/environment/2013/dec/18/2013-extreme-weather-events
  2. http://www.climatecommunication.org/new/articles/extreme-weather/overview/
  3. https://www.ipcc.ch/pdf/special-reports/srex/SREX_FD_SPM_final.pdf

s)     Polar ice caps are melting.

  1. http://www.nrdc.org/globalwarming/qthinice.asp
  2. http://www.dw.de/polar-ice-sheets-melting-faster-than-ever/a-16432199
  3. http://uk.news.yahoo.com/what-if-the-world-s-icecaps-melted-overnight–120351663.html#PK3eE9D

t)      We are experiencing peak water.

  1. http://www.wired.com/science/planetearth/magazine/16-05/ff_peakwater?currentPage=all
  2. http://www.bloomberg.com/news/2012-02-06/peak-water-the-rise-and-fall-of-cheap-clean-h2o.html
  3. http://www.princegeorgecitizen.com/article/20130606/PRINCEGEORGE0304/306069987/-1/princegeorge/peak-water-limiting-energy-production

u)    Deserts are expanding.

  1. http://www.nature.com/climate/2009/0909/full/climate.2009.84.html
  2. http://www.bbc.co.uk/learningzone/clips/desertification-expansion-of-the-sahara-desert/1498.html
  3. http://www.globalpost.com/dispatch/news/science/131211/waterless-world-inner-mongolia-desert-wasteland

v)     Sea levels are rising.

  1. http://pri.org/stories/2014-01-10/sea-levels-rising-uk-starting-let-go-some-its-coastline
  2. http://ocean.nationalgeographic.com/ocean/critical-issues-sea-level-rise/
  3. http://www.env.gov.bc.ca/cas/adaptation/sea_level.html

w)   Honeybees have been decimated by human chemical use.

  1. https://www.commondreams.org/archive/2008/05/24/9177
  2. http://www.businessinsider.com/the-world-without-honeybees-2013-6
  3. http://www.prnewswire.com/news-releases/honeybee-population-decline-and-its-devastating-effects-are-topic-of-vanishing-of-the-bees-82364717.html


x)    Governments are spying on their citizens.

  1. http://www.theguardian.com/world/2013/dec/02/revealed-australian-spy-agency-offered-to-share-data-about-ordinary-citizens
  2. http://www.theguardian.com/world/2013/dec/02/revealed-australian-spy-agency-offered-to-share-data-about-ordinary-citizens
  3. http://www.canada.com/nationalpost/news/story.html?id=dae581de-2490-45f8-90c7-919d01fbd4f4

y)    Governments are spying on each other and themselves.

  1. http://www.globalresearch.ca/nsa-spying-on-congress-to-manipulate-intimidate-blackmail-top-government-and-military-officials/5364273
  2. http://www.cbc.ca/news/politics/new-snowden-docs-show-u-s-spied-during-g20-in-toronto-1.2442448
  3. http://www.nytimes.com/2013/12/21/world/nsa-dragnet-included-allies-aid-groups-and-business-elite.html?_r=0

z)     Governments are manipulating the data they provide to the public.

  1. http://www.businessinsider.com/government-data-manipulation-pricestats-argentina-inflation-2012-10
  2. http://www.wealthdaily.com/articles/unemployment-data-manipulation/4767
  3. http://www.zerohedge.com/news/2013-11-19/government-investigate-government-over-jobs-manipulation-report

I know many people would prefer to hear a message of hope but when these ‘realities’ exist I can’t help but be fairly pessimistic about our chances of a ‘sustainable’ future or a ‘soft landing’ for our economic woes. Unless some unforeseen miracle can save us from ourselves, I can only conclude that the day of reckoning is quickly approaching; it’s a matter of when, not if. Some event, minor or major, will be that snowflake that begins a cascading collapse of our interrelated, complex world. And by collapse, I mean a sudden, devastating drop in the standard of living (similar to Dimitry Orlov’s Five Stages of Collapse) OR an elongated, slow contraction (similar to James Howard Kunstler’s The Long Emergency or John Michael Greer’s The Long Descent); to me, these are not too dissimilar and require simply a change in time perspective to interpret the change as either ‘sudden’ or ‘lengthy’.

To quote William Catton Jr., from his book Overshoot: “…the pressure of our numbers and technology upon manifestly limited resources has already put out of reach the previously acceptable solutions to many of our problems. There remains steadfast resistance to admitting this, but facts are not repealed by refusal to face them. On the other hand, even the ‘alarmists’ who have been warning of grave perils besetting mankind have not fathomed our present predicament…” (p. 5).

Update 1. January 17, 2014

1.  Far more ‘paper’ precious metals exists than actual ‘physical’ metal in existence (a type of ‘fractional reserve’ banking):

2. Large Western financial institutions (i.e. U.S. Federal Reserve; Bank of England) have sold/leased their gold holdings and misled their clients about this:

3. The United States government and/or people within it have carried out domestic assassinations of numerous leaders:

4. The Fukushima Daichii Nuclear Plant disaster is far worse than the corporate media is letting on:

5. ‘Democratic’ countries are becoming more secretive and totalitarian through ‘legislation’:

Interesting thoughts: Murray Rothbard, Anatomy of the State (ISBN 978-80-87888-43-8):
“…the government is not ‘us.’ The government does not in any accurate sense ‘represent’ the majority of the people…Briefly, the State is the only organization in society which attempts to maintain a monopoly of use of force and violence in a given territorial area; in particular, it is the only organization in society that obtains its revenue …by use of complusion; that is, by the use and the threat of the jailhouse and the bayonnet. Having used force and violence to obtain its revenue, the State generally goes on to regulate and dictate the other actions of its individual subjects…The State provides a legal, orderly, systematic channel for the predation of private property; it renders certain, secure, and relatively ‘peaceful’ the lifeline of the parasitic caste in society….The State has never been created by a ‘Social Contract’; it has always been born of conquest and exploitation…”

Feel free to offer some further ‘beliefs’, and three ‘credible’ links, in the comments. I will update the list periodically.



The Most Important Number In The Entire U.S. Economy

The Most Important Number In The Entire U.S. Economy.


At $72.8 Trillion, Presenting The Bank With The Biggest Derivative Exposure In The World (Hint: Not JPMorgan) | Zero Hedge

At $72.8 Trillion, Presenting The Bank With The Biggest Derivative Exposure In The World (Hint: Not JPMorgan) | Zero Hedge.

There’s Only One Real Option for Averting Economic and Ecological Ruin — So Why Aren’t We Talking About It?

There’s Only One Real Option for Averting Economic and Ecological Ruin — So Why Aren’t We Talking About It?.


%d bloggers like this: