The strange volatility we've been experiencing in the markets is occurring because there's is a massive derivatives melt-down going on behind the scenes. The Fed is engaging in an enormous reverse repo operation in order to prevent the global financial system from collapsing. The ONLY REASON the Fed would need to inject massive amounts of Treasuries into the global banking system is because there's an extreme shortage. A massive derivatives accident requiring MASSIVE amounts of collateral to be posted has developed: Submitted by PM Fund Manager Dave Kranzler, Investment Research Dynamics: A reverse repurchase agreement, also called a "reverse repo" or "RRP," is an open market operation in which the Desk sells a security to an eligible RRP counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future. The financial news spin-doctors are attributing today's abrupt sell-off to a report of a Bloomberg terminal outage and to a report that China has expanded its list of stocks available for shorting. This explanation for the plunge in stocks globally is so absurd it almost leaves me speechless. I have been postulating since mid-December that the strange volatility we've been experiencing in the markets combined with the most intensive effort I've ever seen by the Plunge Protection Team (the Fed + the Treasury's Working Group on Financial Markets) to prop up the stock market and keep a manipulative cap on gold is occurring because there's is a massive derivatives melt-down going on behind the scenes. The volatility reflects the turmoil and the market intervention in stocks and precious metals reflects the effort to keep the problem covered up. But a good friend and colleague showed me graph this morning that shows my thinking about a derivatives collapse may be correct click to enlarge: That graph shows the Fed's Reverse Repurchase Agreement operations with foreign Central Banks and big foreign banks. A reverse repo is an operation which generally is thought of as being used as a tool to removeshort term liquidity from the banking system. However, as you can see from the timing of the first massive spike up, which occurred in early September 2008, it is an absurd notion to think the Fed would have removed liquidity from the system. (Note: the second spike up in 2011 coincided with the Fed's "Operation Twist" which was essentially a huge QE extension disguised with a "twist" but nonetheless was done to keep the system from collapsing). No, instead the massive operation was conducted to INJECT Treasury collateral into the global banking system. Treasuries are used as collateral against derivatives positions. It's in a sense margin collateral for the big boys. When an entity (typically a bank or hedge fund) takes on a derivatives bet, it needs to post collateral to protect the counterparty from a decline in the value of the bet. Treasuries are the de rigeur collateral, although the ECB now allows everything for collateral except loans to lemonade stands. When the value of the derivatives bet declines because the value of the underlying asset declines (think: Greek debt, oil debt), more collateral has to posted. Eventually, the market runs out of collateral and there's a collateral short squeeze. The use of hypothecation exacerbates the situation by several multiples. Please note that Zerohedge intermittently reports big spikes up in Treasury settlement fails. This reflects the extreme shortage of collateral. When collateral has been posted but not hypothecated, it can be called and used for settlement. When that Treasury has been hypothecated by the custodian of the collateral, it becomes harder to call, especially when it's been hypothecated several times. Big spikes up in settlement fails occur. Circling back to my postulation that a massive, ongoing derivatives melt-down has started, as the derivatives lose value, more Treasury collateral has to be posted. When the situation becomes extreme, collateral isn't posted and counterparties begin to fail, especially if the counterparty can't come up with the cash needed to remedy a derivatives bet gone bad. My bet is that the Greece situation ignited the problem and the collapse in the price of oil threw millions of gallons of napalm on the situation. The reason I believe this explanation is correct, is from the graph above. We know that in 2008 we were told that a big derivatives accident started in Europe and spread to the U.S. Lehman filed for Chap 11 on Sept 11, 2008. We also know that AIG and Goldman experienced a massive counterparty default collapse in September 2008 that was remedied thanks to rather explicit lies circulated by Ben Bernanke and Henry Paulson about systemic collapse if TARP wasn't approved. A reverse repo can be looked at as tool to remove liquidity from the system OR as a tool to inject Treasury collateral into the system. We know the Fed has been "testing" a new Reverse Repo system since mid-2013 that take Treasuries from its "SOMA" holdings (SOMA = the Treasuries the Fed purchased with QE) and use them for reverse repos, including reverse repos with MONEY MARKET FUNDS and foreign central banks/ Too Big To Fail banks. Nothing happens by accident and that spike above shows us why the Fed was "testing" a new reverse repo system. The only reason the Fed would need to inject massive amounts of Treasuries into the global banking system is because there's an extreme shortage. A massive derivatives accident requiring massive amounts of collateral to be posted has developed. If Treasuries are not available to post as collateral, while at the same time a massive amount of hypothecated (Treasuries out on loan, several times over) collateral fails are occurring, it will cause the banking system to seize up. The giant spike up shown in the graph above is occurring because the Fed is engaging in an enormous reverse repo operation in order to prevent the global financial system from collapsing. Remember I suggested some time ago that the elitists like give us a warning before something bad is about to happen. As my colleague John Titus states: "the true elite aristocracy are polite criminals they consider it gauche to flush the toilet while we're in the shower without giving us a heads up." This is why the IMF issued this warning yesterday for the financial media to publish: The so-called 'flash crash' on US bond markets last October and the collapse of the Swiss currency floor in January showed how quickly liquidity can vanish, acting as "a powerful amplifier of financial stability risks." THIS is why stock markets globally are selling off hard today. The S&P 500 is now down over 1%. Typically the Plunge Protection Team has been able to prop it up by noon EST when it falls at the open. So far today the sell-off has accelerated. I guarantee that the reason for this is unequivocally NOT because the Chinese Government is letting the public short a few more stock issues OR because Bloomberg experienced a widespread terminal outage.
I was concerned when i saw zerohedge mentioned. But then this line confirmed my concern about the legitimacy of the article. The "Swiss currency floor" DID NOT COLLAPSE, it was removed by the Swiss National Bank. This is yet another attempt to hype up and mislead those that are not prepared to do their own research. I appreciate that you took the time to post this for us and encourage you to continue with these posts . I would also encourage everyone that reads these sorts of doomsday predictions to DYODD and research the author and all sources.
I found the source site of the article: http://investmentresearchdynamics.com/is-the-global-financial-system-on-the-brink-of-collapse/
The UK broadhsheet is uses as a link in that article is a good read http://www.telegraph.co.uk/finance/...tors-to-brace-for-global-liquidity-shock.html Argh.....run....eat your neighbour......come out only at night......dooooooooooooooooooooooooom!!!!!!!!!!! [youtube]http://www.youtube.com/watch?v=-IfnjBHtjHc[/youtube]
I see the original article has attracted just the sort of comments one would expect. "the evil bankers are coming to an end" "this time there will be blood in the streets" "unbelieveable that they still manage to hold gold price down" "this will be the event that breaks the CARTELS hold on gold" "derivatives meltdown will finally break the western banks hold on gold" Clearly the only people that take time to make comments on these articles are the people that NEED positive reinforcement of their ill conceived views. Similar points to these have been expressed by many generations past. Sure there is a meltdown or recession from time to time , but things get back up and running and the cycles continue. Now i will happily admit that i do NOT fully understand derivatives ( i suspect many of those involved do not). But what i do understand are cycles , and weather it be life cycle or financial cycles they will continue on till we either become extinct or money and wealth is extinct. Now money wealth and power are here as long as people are, so extinction is the only ting that will stop these financial roller coaster rides. Of course a roller coaster is a closed circuit ( a good roller coaster) and continues it round and round cycle
I guess we will see how the markets unfold this week. Perhaps one day we will get to trade our precious metals in for a house in St Heliers eh Sterling.
LOL. I much prefer the South Island for living. The North has its positives , the weather is far warmer and it's nice to walk out and pick a fresh orange from a tree. I think i would miss the icy mornings and cutting and burning my firewood.
Call me old fashioned, but I don't see a 1% drop from a record top as a 'crash'. But thanks for the article reference.
Over the past six months, the Chinese stock market has exploded upward even as the overall Chinese economy has started to slow down. Investors have been using something called "umbrella trusts" to finance a lot of these stock purchases, and these umbrella trusts have given them the ability to have much more leverage than normal brokerage financing would allow. This works great as long as stocks go up. Once they start going down, the losses can be absolutely staggering.
Late last week...........that could sting. China's benchmark index suffered its worst day of trading in recent memory on Monday after regulators penalized three brokerages for breaking rules that limit risky margin trading. The Shanghai Composite dropped nearly 8% as investors reacted to the ruling, which will prevent the brokers from opening new margin trading accounts for three months.
Even Warren Buffett has said that he hasn't go a clue what derivatives are about. I have to admit I find it hard to get my head around derivatives and I have been trying for over 3 years. What I have found out that there are huge amounts gambled by a very super banks. I am glad to see this discussion on derivatives for if they go down, it will make the great depression of 1929/30 look like a tea party. Regards Errol 43
They are a way of turbo charging fractional banking by creating an infinity of bets and counter bets that in theory nullify each other then placing a denominated value on the betting slip and claiming it as an asset. Sad but true. There are between a half a trillion and a trillion dollar bets on Greek bonds alone. Bankers are one rare pile of assholes sometimes. All of this would be their business alone if it were not for lobbyists and grubby politicians dragging taxpayers into it as underwriters for the entire joke.
