"Some very ordinary transactions that we have all become accustomed to are at risk of disappearing entirely. Among them are airline tickets at a known price for travel six months from now. Reasonably-stable prices for a box of cereal are another example (corn has traded from 572 to 799 in the last year; a forty percent range over the last 12 months; soy and wheat have seen similar moves); indeed, virtually every food item in your store, from orange juice to bacon (pork bellies) is hedged off in these markets!
The move to direct transactions means that the reasonable stability we have enjoyed in these transactions, or even the ability to enter into them at all over a horizon of more than a month or two, is at risk of disappearing!"
http://market-ticker.org/akcs-www?post=199790
"U.S. commodity markets have shrunk almost 9 percent since MF Global's collapse as farmers, investors and traders close out positions, according to a Reuters analysis of data that suggests there may be lasting effects from the industry's most disruptive broker failure."
http://www.reuters.com/article/2011/12/21/uk-mfglobal-futures-idUSTRE7BK1E220111221
"The process of hedging allows parties with a legitimate business interest that wish to shed risk transfer it to those willing to take risk in expectation of a return (speculators). In other words, speculators are absorbing price risk and therefore its volatility. Because of the mechanism of the futures markets day-to-day volatility is not put through to the economy on a day-to-day basis. This allows stability of prices which is really stability of the exchange medium.
Take away this mechanism and we have to imagine an economy in which farmers, for example, would not be willing to take the risk of planting enough food to feed the population, or the price for doing so would be very dear as to make it unaffordable to all but the wealthy. Or as news and rumors of unfavorable weather, droughts and crop failures hits the wire, prices fluctuate instantly and wildly at the end user level.
This instability is a positive feedback loop that leads to shortages, hoarding, increased poverty and overall economic and social instabilityas people are thrust into a law of the jungle world where moment-to-moment survival dominates the psyche.
I reiterate, in a complex economy, futures markets are as important as is a reliable medium of exchange. Currently both are at risk of being destroyed.
MF Global punctuates the issues at hand. Opacity, willful deception (fraud), the absence or impotence of the rule of law, which is nothing less than a collapse in government. With that said, opacity and fraud are a human constant. It is the collapse of government that poses the greatest threat."
http://charleshughsmith.blogspot.com/2011/12/mf-global-when-belief-in-system-fades.html
Showing posts with label meltdown. Show all posts
Showing posts with label meltdown. Show all posts
Saturday, December 31, 2011
Tuesday, December 27, 2011
Is MF Global causing a shadow bank run?
"It is an open secret that there are more paper-assets than there are actual assets. The markets are essentially playing musical chairs—and praying that the music never stops. Because if it ever does—that is, if there is ever a panic, where everyone decides that they want their actual asset instead of just a slip of paper—the system would crash.
And unlike with fiat currency, where a central bank can print all the liquidity it wants, you can’t print up gold bullion. You can’t print up a silo of grain. You can’t print up a tankerful of oil.
Now, question: When is there ever a panic? When is there ever a run on a financial system?
Answer: When enough participants no longer trust the system. It is the classic definition of a tipping point. It’s not that all of the participants lose faith in the system or institution. It’s not even when most of the participants lose faith: Rather, it’s when a mere some of the participants decide they no longer trust the system that a run is triggered.
And though this is completely subjective on my part—backed by no statistics except scattered anecdotal evidence—but it seems to me that MF Global has shoved us a lot closer to this theoretical run on the system.
As I write this, a lot of investors whom I know personally—who are sophisticated, wealthy, and not at all the paranoid type—are quietly pulling their money out of all brokerage firms, all banks, all equity firms. They are quietly trading out of their paper assets and going into the actual, physical asset.
Note that they’re not trading into the asset—they’re simply exchanging their paper-asset for the real thing.
Why? MF Global."
“Because of MF Global, the integrity of the system has disappeared,” said a good friend of mine, Tuur Demester, who runs Macrotrends, a Dutch newsletter out of Brugge. “The banks are insolvent, the governments are insolvent, and all that’s left is for the people to realize what’s going on—and that will start a panic.”
--http://gonzalolira.blogspot.com/2011/12/run-on-global-banking-systemhow-close.html
And unlike with fiat currency, where a central bank can print all the liquidity it wants, you can’t print up gold bullion. You can’t print up a silo of grain. You can’t print up a tankerful of oil.
Now, question: When is there ever a panic? When is there ever a run on a financial system?
Answer: When enough participants no longer trust the system. It is the classic definition of a tipping point. It’s not that all of the participants lose faith in the system or institution. It’s not even when most of the participants lose faith: Rather, it’s when a mere some of the participants decide they no longer trust the system that a run is triggered.
And though this is completely subjective on my part—backed by no statistics except scattered anecdotal evidence—but it seems to me that MF Global has shoved us a lot closer to this theoretical run on the system.
As I write this, a lot of investors whom I know personally—who are sophisticated, wealthy, and not at all the paranoid type—are quietly pulling their money out of all brokerage firms, all banks, all equity firms. They are quietly trading out of their paper assets and going into the actual, physical asset.
Note that they’re not trading into the asset—they’re simply exchanging their paper-asset for the real thing.
Why? MF Global."
“Because of MF Global, the integrity of the system has disappeared,” said a good friend of mine, Tuur Demester, who runs Macrotrends, a Dutch newsletter out of Brugge. “The banks are insolvent, the governments are insolvent, and all that’s left is for the people to realize what’s going on—and that will start a panic.”
--http://gonzalolira.blogspot.com/2011/12/run-on-global-banking-systemhow-close.html
Friday, December 16, 2011
Sunday, December 11, 2011
System in freefall now
I think that the system is in freefall now. It is not because of any ratio that has been breached. I have spent a lot of time trying to speculate on some metric that would indicate whether some problem has occurred, usually as a percent of GDP or tax revenue. Most of the "objective" trends that I have been coming up with indicate a problem somewhere around 2025 to 2035, which is too far out to worry about.
No, the problem has to do with attitude. If you give a spoiled girl a credit card and she spends it and doesn't even keep track of the receipts and ignores the bills when they come in, then you know there is a problem. Why do I need to care, she says, my daddy will take care of it, and even if he doesn't, what are they going to do, arrest me?
We have that same problem. Everyone is living in a fantasy world. And here are some indicators, either causes or symptoms, of the problem.
1. The collapse of the Super-Committee talks. This happened on November 22. This was the committee that was supposed to come up with $1.2 trillion in savings over the next 10 years. And nobody cares. I think this was the last best hope of reaching an agreement. I don't think we will ever have a serious attempt at cutting the deficit again. Instead, there will be some token attempts, like arguing over how to pay for FEMA costs, or holding up FAA construction projects for a few weeks.
2. Lack of seriousness in the budget projections and process. CBO and OMB projections don't even start with the same numbers for 2010 and 2011, and don't have a common definition of what is mandatory spending or defense spending. We don't have a budget, instead we have Continuing Resolutions. The current one funds the government through 12/16/2011 (this Friday). I don't even know when the last time the US had a budget (as opposed to a series of resolutions).
3. The collapse of MF Global, and the apparent immunity of Jon Corzine. MF Global collapsed on 10/31/11, and there was a "shortfall" in customer accounts of $1.2 billion. Will Corzine go to jail? I don't think so. The accounts are insured by the SIPC, so nobody really cares. But it shows systemic problems. The collapse of MF Global is what caused Ann Barnhardt to lose it, which seems extreme. One company fails and you think the sky is falling, but if you see every company as having the same problems then I think you have a valid argument.
4. Social Security. I have written about this before. The combined Social Security and Medicare trust funds reached a permanent peak balance on 10/18/2011 and it is all downhill from here. It would be fiscally prudent to reinstate the 2% payroll cut, but nobody cares.
5. Increasing Cash Deficits. I look at the Debt Held by the Public as a key indicator. This was $10,389,958 on 11/30/2011. It was $9.756 trillion on 7/29/2011; $10.024 trillion on 8/31/2011; $10.127 on 9/30/2011 and $10.256 on 10/31/2011. It has gone up at least $100 billion every month since August. I don't think we will ever have a month again in which the debt does not increase at least $100 billion.
So now that the crisis is upon us, what do we do? First, stop using the dollar as a measurement of anything except insanity. It has no fixed value, so it is meaningless as a measurement device. The is also true of the other major currencies, the pound, euro and yen. Instead, use the stable secondary currencies, such as the Swiss franc, Canadian dollar, Australian dollar, Hong Kong dollar, Norwegian krone, Chilean peso, Brazilian real, Indian rupee, South Korean won, etc. And buy silver. Sell any bonds and invest in foreign stocks. Don't worry about any debts, they will be inflated away.
How long until we see the practical effects of this? Well, it depends on what you are looking for. I don't think we will have a stock market crash or a lot of major companies failing because they are being artificially inflated. When M2 velocity starts to pick up, I think we will quickly see inflation of 10% or more. The M1 multiplier is already starting to turn. I think we will see the effects by summer 2012.
I am going to stop making any budget projections since they are meaningless. I will continue to blog about positive developments.
=============
Update 6/19/12: This isn't a model, it's a pessimistic rant. An economy is pretty robust and won't collapse just because the government doesn't go through a formal budgeting process.
No, the problem has to do with attitude. If you give a spoiled girl a credit card and she spends it and doesn't even keep track of the receipts and ignores the bills when they come in, then you know there is a problem. Why do I need to care, she says, my daddy will take care of it, and even if he doesn't, what are they going to do, arrest me?
We have that same problem. Everyone is living in a fantasy world. And here are some indicators, either causes or symptoms, of the problem.
1. The collapse of the Super-Committee talks. This happened on November 22. This was the committee that was supposed to come up with $1.2 trillion in savings over the next 10 years. And nobody cares. I think this was the last best hope of reaching an agreement. I don't think we will ever have a serious attempt at cutting the deficit again. Instead, there will be some token attempts, like arguing over how to pay for FEMA costs, or holding up FAA construction projects for a few weeks.
2. Lack of seriousness in the budget projections and process. CBO and OMB projections don't even start with the same numbers for 2010 and 2011, and don't have a common definition of what is mandatory spending or defense spending. We don't have a budget, instead we have Continuing Resolutions. The current one funds the government through 12/16/2011 (this Friday). I don't even know when the last time the US had a budget (as opposed to a series of resolutions).
3. The collapse of MF Global, and the apparent immunity of Jon Corzine. MF Global collapsed on 10/31/11, and there was a "shortfall" in customer accounts of $1.2 billion. Will Corzine go to jail? I don't think so. The accounts are insured by the SIPC, so nobody really cares. But it shows systemic problems. The collapse of MF Global is what caused Ann Barnhardt to lose it, which seems extreme. One company fails and you think the sky is falling, but if you see every company as having the same problems then I think you have a valid argument.
4. Social Security. I have written about this before. The combined Social Security and Medicare trust funds reached a permanent peak balance on 10/18/2011 and it is all downhill from here. It would be fiscally prudent to reinstate the 2% payroll cut, but nobody cares.
5. Increasing Cash Deficits. I look at the Debt Held by the Public as a key indicator. This was $10,389,958 on 11/30/2011. It was $9.756 trillion on 7/29/2011; $10.024 trillion on 8/31/2011; $10.127 on 9/30/2011 and $10.256 on 10/31/2011. It has gone up at least $100 billion every month since August. I don't think we will ever have a month again in which the debt does not increase at least $100 billion.
So now that the crisis is upon us, what do we do? First, stop using the dollar as a measurement of anything except insanity. It has no fixed value, so it is meaningless as a measurement device. The is also true of the other major currencies, the pound, euro and yen. Instead, use the stable secondary currencies, such as the Swiss franc, Canadian dollar, Australian dollar, Hong Kong dollar, Norwegian krone, Chilean peso, Brazilian real, Indian rupee, South Korean won, etc. And buy silver. Sell any bonds and invest in foreign stocks. Don't worry about any debts, they will be inflated away.
How long until we see the practical effects of this? Well, it depends on what you are looking for. I don't think we will have a stock market crash or a lot of major companies failing because they are being artificially inflated. When M2 velocity starts to pick up, I think we will quickly see inflation of 10% or more. The M1 multiplier is already starting to turn. I think we will see the effects by summer 2012.
I am going to stop making any budget projections since they are meaningless. I will continue to blog about positive developments.
=============
Update 6/19/12: This isn't a model, it's a pessimistic rant. An economy is pretty robust and won't collapse just because the government doesn't go through a formal budgeting process.
Thursday, December 8, 2011
Who is Ann Barnhardt?
"Get the hell out. Get out of all paper and it's not just the commodities markets. This is going to cascade through everything. It is going to get into the equities. It is going to get into 401ks and IRAs, it is going to get into pension plans and so on and so forth. Total systemic collapse. Get out! I don’t know how I can be anymore plain about this. I say this over and over and over again and then I get scads of emails saying, well I can’t get out of my 401k. Yes, you can. Yes, you can. Take the penalty and get the hell out of there. What would you rather do? Would you rather pay the 10% penalty or would you rather have it all go up in smoke? Because that's what we're staring down the barrel of."
The aftermath of the MF Global collapse
It seems that the MF Global collapse is causing huge problems on par with the AIG collapse in 2008.
"The Merc itself basically did the equivalent of sticking a nine millimeter in their mouth and pulling the trigger by not stepping forward, backstopping the MF Global client accounts and at the very least, the Merc should have allowed the MF Global customers to liquidate their accounts and then transfer to other firms. What the Merc did was the worst possible thing—they froze those people out of their accounts and didn’t allow them to liquidate while the markets continued to trade."
--http://theautomaticearth.blogspot.com/
"MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.
If anyone thought that you couldn’t have your cake and eat it too in the world of finance, MF Global shows how you can have your cake, eat it, eat someone else’s cake and then let your clients pick up the bill."
--http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/
the MF Global bankruptcy, much more than merely a one-off instance of "repo-to-maturity" of sovereign bonds gone horribly wrong is a symptom of two things: i) the lax London-based unregulated and unsupervised system which has allowed such unprecedented, leveraged monsters as AIG, Lehman and now as it turns out MF Global, to flourish until they end up imploding and threatening the world's entire financial system. Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of "hypothecation, and re-hypothecation."
--http://www.zerohedge.com/news/why-uk-trail-mf-global-collapse-may-have-apocalyptic-consequences-eurozone-canadian-banks-jeffe
"The Merc itself basically did the equivalent of sticking a nine millimeter in their mouth and pulling the trigger by not stepping forward, backstopping the MF Global client accounts and at the very least, the Merc should have allowed the MF Global customers to liquidate their accounts and then transfer to other firms. What the Merc did was the worst possible thing—they froze those people out of their accounts and didn’t allow them to liquidate while the markets continued to trade."
--http://theautomaticearth.blogspot.com/
"MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.
If anyone thought that you couldn’t have your cake and eat it too in the world of finance, MF Global shows how you can have your cake, eat it, eat someone else’s cake and then let your clients pick up the bill."
--http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/
the MF Global bankruptcy, much more than merely a one-off instance of "repo-to-maturity" of sovereign bonds gone horribly wrong is a symptom of two things: i) the lax London-based unregulated and unsupervised system which has allowed such unprecedented, leveraged monsters as AIG, Lehman and now as it turns out MF Global, to flourish until they end up imploding and threatening the world's entire financial system. Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of "hypothecation, and re-hypothecation."
--http://www.zerohedge.com/news/why-uk-trail-mf-global-collapse-may-have-apocalyptic-consequences-eurozone-canadian-banks-jeffe
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