The line between fiction
and reality is blurring, and unfortunately the “fiction” is the
worst-case scenario I have been warning of for years.
Last night, I watched the
highly-touted film “Margin Call”, which was released
simultaneously in both theaters and home video. The movie, clearly
based on the demise of Lehman Brothers, was about a fictional Wall Street
investment bank that realized, OVERNIGHT, that it’s mortgage trading
operation was underwater, just one bad trading day from bankruptcy. And
thus, DIRE actions needed to be taken, i.e. liquidation of its entire book
the next day, risking not only the solvency of the firm, but all the CLIENTS
it sold those securities to.
In essence, the film is
about how risky, LEVERED bets and uncontrolled computer algorithms took down
a major bank, which is EXACTLY what happened to Lehman Brothers, as well as
America’s newest “black swan” this week, MF Global.
Now to the gist of this RANT, which
I had no intention of writing following this morning’s first missive,
REMEMBER, REMEMBER, THE FIFTH OF NOVEMBER. However, as is now the RULE
rather than the EXCEPTION, DIRE news has been released this weekend, which
could have MASSIVELY NEGATIVE RAMIFICATIONS on GLOBAL financial markets this
week, irrespective of what occurs in Europe, America, or even the Middle East
(the Israel/Iran war drums are starting to beat loudly).
Put your seat belts on, the END GAME
could commence THIS WEEK. It may not, but Friday night’s news
that the CME, or Chicago Mercantile Exchange, is increasing maintenance
margin requirements to 100% of initial margin requirements, ACROSS THE BOARD,
signifies systematic market stress has in fact reached “DEFCON
1”, as termed by ZeroHedge. I have little doubt this crisis stems
from the MF Global bankruptcy, as MF was one of the largest DERIVATIVES
BROKERS in the world. Like vampires, criminal enterprises like MF only
operate in the shadows, afraid to be exposed to the light of interrogation.
Most of us have gone our whole lives unaware of MF Global, as it spread its
derivatives cancer to unsuspecting investors worldwide. However, they
have now been “forced up for air” by a gaping hole in their hull,
a multi-billion dollar loss caused by excessive greed, speculation, leverage,
One should not be surprised that the
chief culprit is John Corzine, previously considered a “genius”
for running Goldman Sachs, when in fact he was yet another political stooge,
backstopped by a corrupt system and, in the end, no smarter than the
“peons” he condescended to in his government-backed arrogance
(recall yesterday’s photo of him posing with Obama). On Friday,
when Corzine resigned as CEO four days after MF’s bankruptcy filing, it
truly looked like justice might finally be served to one of America’s
most serial white-collar criminals, both in the private and public sectors.
Corzine ADMITTED to federal investigators that MF had embezzled at
least $700 million of customer money to pay off its debts, and likely had
lost it all.
However, on Friday afternoon it was
MIRACULOUSLY discovered that $658 million of MF’s funds were safely
sitting in an account at JP MORGAN! Yes, MF ADMITTED Thursday that it
lost this money, but just a day later, and right before the weekend no less,
these funds magically turned up at JP Morgan, likely a huge CLIENT of MF
Global as it is, BY FAR, the largest derivative holder in the ENTIRE
There are many aspects of government
cover-up activities that will never be discovered, and thus attempts to
unearth them are based solely on speculation. However, I have NO DOUBT
the $658 million was conjured up by Federal printing press for the benefit of
the government’s personal bank, JP Morgan, as well as to stabilize
public CONFIDENCE in the system. It is now PUBLIC KNOWLEDGE that MF
Global executed the exact same illegal financial engineering strategy to mask
its balance sheet deficiency as Lehman Brothers, and the last thing the
government wanted, going into a weekend no less, is PUBLIC SPECULATION that
such practices are the NORM, rather than the EXCEPTION.
In my view, the missing $658 million
was just the “tip of the iceberg,” as who knows what systemic
damage has been done by MF’s bankruptcy. As in “Margin Call”,
the world was OBLIVIOUS to what was going on at Lehman Brothers until the
very end, mislead by a combination of propaganda, faulty analysis, and
accounting fraud. I believe MF is the most likely reason for the
CME’s draconian announcement, which will affect not only the prices of
PAPER gold and silver, but ALL markets supplemented by futures and options,
including STOCKS, BONDS, CURRENCIES, and essentially ALL COMMODITIES.
And this is not just MY speculation,
this is what the MARKET is SCREAMING at the top of its lungs. Despite
stronger stock markets, care of the now GLOBAL PPT, corporate and sovereign
credit spreads blew out this week, in many cases to new highs.
Moreover, interbank liquidity has dissipated to ALL-TIME LOW levels,
indicating levels of mistrust between banks, even regarding OVERNIGHT
DEPOSITS, rivaling, if not exceeding, the extraordinary levels of FEAR
experienced when Lehman Brothers collapsed in September 2008.
Plainly put, banks WORLDWIDE, from
small to large, are withdrawing funds from other banks at RECORD RATES and
depositing them in the ECB and Federal Reserve, the ONLY banks guaranteed to
protect against DEFAULT risk (for now). Without a doubt, MF
Global’s demise will fuel such fears like a match to a can of gasoline,
particularly given MF’s nature as a ‘shadow world derivatives
Moreover, though small in SCOPE,
today’s “Bank Transfer Day” national movement to withdraw
funds from U.S. commercial banks in protest of their ongoing manipulative
and, in many cases, criminal practices, will only damage the liquidity
situation further and, more importantly, heighten public FEAR of a banking
Typically, when discussing
“margin increases” (as pertain to Precious Metals, for instance),
one refers to the initial margin requirement for speculative purchases.
The maintenance margin, the subject of the CME announcement, is a separate
issue altogether. It is set below the initial margin requirement,
at an arbitrary level determined by the CME. In practice, if the
underlying asset price declines to the maintenance margin level, a margin
call is triggered, requiring the investor to deposit funds equal to the loss,
lest the exchange forcibly sells the position at the market price. On
average, commodity maintenance margins are now 26% below the initial
maintenance margin, a discount the CME is ELIMINATING as of MONDAY NIGHT.
In other words, ALL CME futures and
options out of the money at the close of trading Monday will be subject to a
margin call. As it’s nearly impossible for most people, and many
funds, to procure and wire maintenance margin funds within 24-hours, the
likely result will be chaotic, across-the-board selling in ALL PAPER markets,
and I mean ALL. Yes, the PPT will do its best to support the stock
market, and the Fed to support the bond market via QE, but everything else is
fair game, including gold and silver futures and ETFs. It won’t
help either that, unlike the PPT, the gold Cartel will participate in
demolishing the PM markets with naked short selling (sorry, they are not
subject to CME rules, or ANY for that matter). So if this plays out as
it looks on paper, don’t be surprised to see another SUNDAY NIGHT PAPER
MASSACRE, only this time not just in Precious Metals.
I don’t want to sound alarmist,
as sometimes it is difficult to interpret reality, and frankly a lot will go
on behind closed doors between now and Sunday night, when Asian markets open
for trading. Yes, yet another SUNDAY NIGHT SPECIAL, and I’d bet
anything that many G-20 ministers are still in Cannes discussing this very
topic. It is simply not possible to institute a BLANKET MARGIN CALL
across all asset classes, amidst perhaps the greatest liquidity crisis of our
lifetime, without setting off across-the-board panic selling, so be assured,
the world’s “leaders” will be on the case all
weekend. They may lead us off a CLIFF, but you can bet they’ll
Regarding gold and silver specifically,
I have some unique insights in my new role as Miles Franklin’s Director
of Marketing, and frankly they are downright scary. Specifically, we
have learned that bullion wholesalers will be profoundly impacted by the CME
rule change, which has the potential of destroying the COMEX
altogether. There is NO WAY of sugarcoating the systemic damage this
announcement is SCREAMING to the world, that liquidity has dried up and thus,
businesses will need to go to cash only, C-O-D. Jim Sinclair, whom I
regard as the pre-eminent GLOBAL expert in the fields of gold AND
derivatives, has forecast this for some time, and it looks like his
prophecies are coming true, NOW. The biggest question, in my mind, is
not whether the system can work on a cash-only basis (I would view that as a
POSITIVE development), but whether it can survive the margin call mania
likely to erupt in the coming weeks.
In the bullion industry, your ability
to “lock in” prices with dealers (such as Miles Franklin) is based
on the mechanism in which dealers, in turn, “lock in” prices with
wholesalers. The wholesalers utilize futures exchanges such as the
COMEX to LEGITIMATELY HEDGE purchases, a process that works its way down the
chain to other wholesalers, retail dealers, and, finally YOU, the
customer. If the COMEX no longer extends credit to wholesalers, they
can no longer hedge clients’ purchases, and thus no longer “lock
you in” on a price instantaneously, as has been common business practice
for as long as the current generation of buyers can remember.
In the near-term, wholesalers will
require ALL outstanding client orders to be IMMEDIATELY paid in full, which
for the reasons cited above will not be feasible for many clients.
Moreover, if the CME rule is maintained, wholesalers will require CASH UP
FRONT FOR ALL NEW ORDERS, meaning, in essence, that customers will have no
guarantee of the price they pay for their gold or silver bullion.
Instead, they will be subject to the vagaries of market prices, as well as, potentially,
supply disruptions (and I can assure you they will occur, just as they did
during the PAPER smash of late 2008).
I have written for five years on the
virtues of Precious Metals as a hedge against inflation, insolvency, and a
host of political, economic, and social risks that elevate in intensity with
each passing day. However, it was not until GLOBAL MELTDOWN I in late
2008 that I vehemently preached the necessity of owning PHYSICAL metal,
either on hand or depositories in politically stable jurisdictions. At
that point, my fear of GLOBAL SYSTEMIC COLLAPSE increased DRAMATICALLY, and
since then those issues have heightened EXPONENTIALLY.
The near-term ramifications of the CME
margin announcement could set off a global meltdown, although I must repeat
this is speculation at this point. TPTB will do everything in their
power (read: OVERT and COVERT money-printing) to prevent this from happening
NOW, but even if they do it will INEVITABLY occur. Unless a major
announcement is made by Sunday night, be prepared for anything to happen in
the financial markets this week, and I mean ANYTHING. The GLOBAL
ramifications of the CME announcement cannot be underestimated, particularly
with the European Union on the brink of its own IMMINENT collapse.
If the END GAME is in fact the result,
only those with PHYSICAL gold and silver in their possession will benefit in
the ensuing environment, with essentially all PAPER investments at risk of
yielding huge losses via depreciation, inflation, foreclosure (bank holidays),
or default. Bullion dealers will likely be taxed by the aforementioned
limitations on pricing and procurement, and only the best will survive.
That is why I am proud to be a part of Miles Franklin, which deals ONLY in
PHYSICAL (non-leveraged) products, with 21 years of history in providing
superior service to clients.
PROTECT YOURSELF, and do it NOW!