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, and stupidity.
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 WORLD.
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 dealer.
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 system COLLAPSE.
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 lead SOMETHING.
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!