Jim,
I’ve bought the compendium so I hope you can steer me in the right direction if you cannot answer the question.
I understand that derivatives (cds and other derivatives) is a huge market with many old contracts outstanding. I understand they are not transparent. I understand counter-party risk. I understand that they were “put on” by professionals with the view that they were mostly riskless for themselves.
So given that, where are the weak points? What can we look to for signs that this market IS imploding?
I read lots of articles with wailing and gnashing of teeth saying derivatives are terrible and will bring about the end of the world. However, I have yet to see someone articulate HOW it may happen. I have yet to see someone talk about the weaknesses of the system.
It would seem to me that the size of the derivative market would mean that something HUGE would have to happen to bring down a part of the system. What would some of those somethings be? Do we need to predict a black swan event or observe a black swan event to feel the negative effects?
Thanks for your help in pointing me in the right direction.
CIGA Don G.
Dear Don,
The Fed and Treasury have undertaken policies to insulate the financial system from the failure of special performance contracts which are also known as OTC derivatives.
In answer to your question, let’s review what the immediate effect of the meltdown of the securitized investment vehicles backed by mortgages as a result of the end of the housing boom was.
As the backing of these difficult to value assets came into question, all the institutions holding them and the many holding all forms of wagers made thereupon had to face the losses because of mark to market accounting rules. Many institutions were financially on the ropes as their asset values found no market price available to what they called their assets.
How do you value packages of different types of mortgages made on different types of properties to different credit capable parties? It is simply a guess at best. There were no bids for them, and still in the main there are no bids of merit.
When you ask what a systemic failure of OTC derivatives would look like, consider a financial world full of promises of performance such as paying you if you lose money on a bond position due to bankruptcy that simply says to you get lost when you ask for payment. Now think of hundreds and thousands of different obligations to you that simply say buzz off when settlement in your favor is requested. Think of bankruptcy everywhere in every type of corporation from a GMAC type to your local town and village because in search of better returns and bigger profits they entered into items they did not understand, accepting the distributor’s academic presentation of a fool proof investment. That picture would approach what a failure of the OTC derivative market would look like. It would be the end of the world financially, leaving what remains after a star goes super nova – a black hole.
Since the Fed and Treasury have moved to insulate the financial industry from the above, knowing the present recovery to be at best shallow but more likely an illusion, understand that the West is on a path to HYPERINFLATION that cannot be altered no matter what. Any talk, such as today of draining liquidity or what the G20 will say soon, a united world bank effort to fight inflation is total hot air designed to keep the social order.
The die is cast. This time they have done it and we are all screwed.
Unfortunately (and I mean it most sincerely) there is no practical method of reversal, nor is there any real will to reverse QE procedures, but rather there is a pressing need now to do more and more of what has already taken place.
We have passed the threshold of "This is it." All statements to the contrary are well intentioned lies.
Now that I am on the subject I might be able someday in the future to tell you the real inside on why China novated the OTC derivatives sold to their parastatal corporations. They are in the right even though it is hard to understand without knowing the facts of the matter. The situation either has been, or will shortly be negotiated to closure.
Respectfully yours,
Jim
Jim Sinclair’s Commentary
Look what I found in my email box this evening. I knew Weiss’s father when we both were at 2 Wall Street. Wasn’t the kid a super deflationist?
Dear JAMES,
The U.S. dollar resumed its swan dive overnight, hitting brand-new, one-year lows.
Meanwhile, gold — the world’s ultimate dollar hedge — surged nicely to within an eyelash of its all-time high.
But it should come as no surprise that global investors are beating the dollar like a red-headed stepchild.
After all — they know that U.S. Treasury Chief Timothy Geithner is going panhandling this week — begging and borrowing every penny he can to fund Washington’s precedent-shattering $1.6 trillion budget deficit.
Today, Geithner will rewrite the history books by dumping an all-time record $43 billion in new U.S. Treasuries on the market in a single day.
PLUS, tomorrow and on Friday, Geithner will return to the trough, borrowing an additional $69 billion to keep the lights on in Washington.
That’s a total of $112 billion in U.S. Treasury borrowing in just three, short days!
This is truly alarming: If you’re like me, you can remember a time not too long ago when U.S. Treasury borrowing was less than $112 billion for an entire year. Now, we’re borrowing that much in less than one week!
I wish that was the worst of it. It isn’t: So far this year, Geithner has borrowed a mind-boggling $1.41 TRILLION to fund Washington’s debt addiction — nearly THREE TIMES MORE than the Treasury had borrowed at this time last year.
And still, this is only the beginning: The Congressional Budget Office (CBO) has warned that Obama’s budget will add nearly $10 trillion in new government debt over the next ten years.
If the CBO is correct, our national debt will soar to well over $21 trillion by 2019. That’s more than double the value of all the goods and services our economy now produces in a whole year!
Meanwhile, over at the Federal Reserve, “Helicopter Ben” Bernanke is printing unbacked paper dollars like there’s no tomorrow.
Yesterday alone, in his ongoing attempt to keep Geithner’s precedent-shattering borrowing spree from sending interest rates into the stratosphere, Bernanke had to print more than $4 billion just to BUY treasuries.
THIS is why the U.S. money supply is skyrocketing! THIS is why sophisticated investors worldwide are recoiling in horror.
Protect yourself now or you’ll be kicking yourself later!
The plain truth is, the value of your money — your buying power and your standard of living are being sacrificed on the altar of Washington’s debt addiction.
But if you make the right moves beginning immediately, you still have time to shore up your financial defenses. You can shield yourself, your family and your savings and investments from disaster as this great dollar decline crushes the value of your money.
More than that: There are many ways to harness this historic convulsion to keep your wealth growing.
That’s why I will be presenting a complimentary online seminar entitled “Washington’s Secret War on the Dollar: Protect Yourself and Profit” — in two weeks; on Tuesday, October 6, 2009.
My mission is clear: To help make sure you have the knowledge and the specific recommendations you need to insulate your wealth and to keep it growing as this great dollar disaster unfolds.
This online briefing is absolutely free for you — part of our ongoing commitment to help you sidestep emerging hazards to your wealth and profit no matter what the economy throws at you next.
I’ll give you the clear, concise, unhedged answers to your most pressing questions about this crisis now.
Right off the bat, I’ll give you my shocking update on this great global war on the value of the dollar …
Weiss Research, Inc.
15430 Endeavour Drive
Jupiter, FL 33478
