Germany just had their second failed 10 yr. auction of the year where less than 4 billion Euros were bid for 5 billion Euros offered. This comes one day before the meetings to decide whether to “bail or not to bail” the less thrifty sovereigns in their processes of failing. Interesting that the market has backed away from even the MOST pristine European credit leaving the German Treasury retaining over 1 Billion Euros of their own paper. What does this say to you?
If it is decided that the bailouts will go forward, can Germany even sustain it’s own borrowing needs? If they don’t bailout their sun tanned southern brethren, how soon do they actually fail and how fast does the collapse spread? Talk about a catch 22 inflection point! Either ruin yourself financially or let your neighbors go broke and blight the entire neighborhood (banking system). I think you can pretty much bet that the printing presses will be put to work, either at the ECB or out in the back parking lot at the Federal Reserve. One way or the other, the deadbeats will be propped up but that is not where the fire is really raging.
We have smoke in the derivatives markets and counter parties are finally taking notice. It’s been reported that JP Morgan is “reviewing” existing relationships in their clearing businesses, this has potentially devastating ramifications. If JP Morgan were to cut ties with a hypothetical XYZ broker or futures operation and you were doing business with this hypothetical company, what would you do? Maybe cut your ties to isolate your own risk? In reality, any firms that JP Morgan cuts back or cuts off will be passed a death sentence!
The point I am trying to make is that the financial center of the universe (JPM) is noticing that “risk” is elevating, they cannot act to isolate themselves without pulling the entire systemic trigger. They have their own catch 22 just as Germany does. Do they cut various financial ties or not? In all probability, JPM, by cutting some ties will start a chain reaction that will directly impact them anyways!
Let me put my cynical cap on and ask the following questions with the knowledge that they are short more Silver than even possibly exists to deliver. If you were short a “product” that you didn’t have nor could possibly procure, would you possibly try to undermine your counter parties to either delay or cancel delivery? Would you “stop clearing” for a counter party who was long your short in the hopes that they fail? Would you maybe “insinuate” this action if it was thought that they might request delivery? If you knew that you were about to be exposed and knew that no more accounting tricks could work their magic anymore, would you pull the plug so that EVERYONE was exposed?
This is all hypothetical but not beyond the scope of possibility. My feeling is that the entire derivatives chain is so upside down, so inter tangled and completely hollow that somewhere “the plug” MUST be pulled just to cover “the dirties”. It seems to me that JP Morgan cannot cut relationships without killing any firm that they do so with. It also seems to me that if Morgan were to do this with even a handful of firms, they would trigger the game ending event to which they have so much played a role in creating.
While on the subject of brokers, Morgan Stanley has been rumored for the last couple of months to be a potential casualty. Their stock has had at best a dead cat bounce and is in fact still down over 80% from their pre crash highs and down 40% from where they were just 8 months ago. They were downgraded a few months back which surely ate up a bunch ($6 billion?) of their liquidity and as you know are very big players in the derivative jungle. Please remember that if you have $ trillions in derivative exposure, if you are offsides only 2-3% you are talking HUGE amounts of capital and liquidity hits.
The above are simply 3 potential triggers, there are too many to list and all come from various different angles. A system that is on solid footing need not worry about “triggers”. It has been years upon years since the global financial system had a “solid footing”. I have no doubt whatsoever that “something will be blamed” for upsetting the entire system. What it will be has too many options to even venture a guess at this point. Just know that “muddling through” is no longer an option and only a fool “hopes” that the mathematically assured won’t happen.