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For many years we have warned of the dangers of
derivatives. We were laughed at leading up to the 2008 financial
debacle when Lehman broke and nearly took the entire system down. That
turned out to be no laughing matter and here we are again at exactly the same
situation where derivatives threaten to melt the financial system
again. The difference now of course is the "saving
ammunition" has already been spent where sovereign treasuries and
central banks have destroyed their own balance sheets.
Two weeks ago, the Fed announced a "48 hour stay in place" provision for collateral of any derivative contracts where the big banks
are involved. The idea here is to prevent collateral being pulled by
the survivor for 48 hours should the bank counterparty become
insolvent. This will give the Fed a window of time to get the fire hose
of liquidity out and reliquefy a large bank's balance sheet before they can
break the derivatives chain. But what does this really do? Does
it make derivatives any more sound or does it really just add more risk to
central bank balance sheets and thus the currencies themselves?
It is very important to understand just how
important derivatives have become. Derivatives have been used to push,
pull, manhandle and outright price many global markets. They have been
used to paint a picture as "proof" the Alice in Wonderland markets
are in fact real. Not even one single market can get out of control
because "truth" anywhere will lead to TRUTH everywhere! Even
one single market left alone to Mother Nature will lead to questions that cannot
be logically answered.
First, these provisions being proposed by the Fed
are not set to begin until August 2017. I cannot imagine markets
holding together this long, in fact, I would give less than 50/50 odds the
U.S. actually has an election this November, rigged or not. Next and
more importantly, the Fed is actually saying "we will be the
backstop" to ALL of the derivatives given the 48 hour window to
"fix" the problem at a specific bank.
It does need to be pointed out, if any derivative
of any size does fail then someone, somewhere, is "exposed".
In reality, since few if any of the derivatives can actually
perform ...the entire world is swimming naked and already completely
exposed! How can I say this? Forget about CDS on something as
unpayable as a U.S. default, can the big banks really pony up $300+ billion
if Greece were to fail? The real number is probably 10 times this
amount as "neighbors" are allowed to purchase insurance on their
neighbor's home. What better incentive to strike a match? Or what
about another 10 times that amount if Italy defaulted? My point is
this, EVERYTHING, EVERYWHERE is "insured" via derivatives.
Many markets and assets have more (or even many times over)
"insurance" than the actual market has value, the "coverage"
is simply unpayable.
The only response to a breakdown of derivatives
will be exactly what it always has been, print more and more via QE or other
method. This is obviously destructive to currencies as they will be
diluted to zero. Whether you look at this picture from the micro
standpoint of individual currency dilution, or from the macro standpoint of
"solvency" ...all roads will lead to gold. Real physical gold
cannot be diluted nor can it default. Gold will be viewed for exactly
what it is.
We have said gold will be the "last man
standing" in a failure chain of fiat currencies, it will also be viewed
as the ONLY protective hedge in a world completely unhedged. As it
stands right now, the belief is that everything is hedged ...in reality NOTHING
is hedged. Once it becomes understood that no insurance anywhere has
the ability to pay up, the world will collectively "change insurance
companies" and move toward the only one with the ability to pay, GOLD!
Switching gears but I believe very connected
to the above, what is to be made of Deutsche Bank offering 3 month accounts
paying an annualized FIVE PERCENT interest?!!!
Liquidity Problems? Deutsche Bank Offers 5% Yields If
Depositors Lock Up Their Money For Three Months To state the
obvious, Deutsche Bank needs money (liquidity) badly and they need it
now! Think about this, why would they do such a thing in a world where
nearly a third of all debt carries a negative interest rate? Why didn't
they go to the ECB's feeding trough and snort up some zero percent
funds? Or, why didn't they just go to the market place and issue bills
for 90 days at 1/4% or less? WHY WHY WHY?
Unless DB is pulling some sort of late April fools joke, they
obviously need money and are "willing" (being forced) to pay
5%. Is it possible they have been shut out"? Please
remember, DB pleaded criminally guilty to manipulating the gold and silver
fixes. Part of their alleged settlement was turning state's evidence
and aiding regulators in tracking down other perpetrators. Is it
possible the clan of monster derivatives banks is a very small club and
Deutsche Bank "ain't a member anymore" because they turned rat?
Other than not having access to capital anywhere else, I cannot
think of any reason they would offer 5%? If this has become their only
source of funding then we just learned something very interesting. This
number of 5% is the REAL and unsubsidized interest rate! Do you see the
ramifications? The world has "valued" everything with a basic
discount rate of "0%", what does it mean if rates to raise real
capital from the markets is 5% rather than free? Might stock markets be
overvalued? ...and real estate? ...not to mention the foundation to
EVERYTHING ...BONDS???
This certainly bears watching because if Deutsche Bank has
been kicked out of the gentlemen's club, they have been allowed to carry the
red button kill switch called derivatives with them! I am not really
sure what to make of this all. Surely the powers that be would not kick
the largest (or second largest) holder of derivatives off the reservation,
would they? The only possible reason I can imagine is something has
already blown up behind the scenes that is too big to be fixed or
hidden. The "blame" for a financial meltdown may very well be
hoisted around Deutsche Bank's neck!
To finish, please do not roll your eyes at this. If you have
a logical explanation as to why DB would offer 500 basis points for three
month money if they could get it cheaper elsewhere, I would love to hear
it! Anyone who tells me Deutsche Bank is making this offer because they
feel sorry for the elderly savers earning nothing on their life's savings
will go into my spam box forever.
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Standing watch,
Bill Holter for;
Holter/Sinclair collaboration.
Prior, he wrote for Miles Franklin from 2012-15. Bill worked as a
retail stockbroker for 23 years, including 12 as a branch manager at A.G.
Edwards. He left Wall Street in late 2006 to avoid potential liabilities
related to management of paper assets. In retirement he and his family moved
to Costa Rica where he lived until 2011 when he moved back to the United States.
Bill was a well-known contributor to the Gold Anti-Trust Action Committee
(GATA) commentaries from 2007-present.
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