Fed Panics! - Era of Global Financial Market Instability

“We are at an end of an era…Now begins global financial instability. It is impossible to speculate how long today's turmoil will last-but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s-and this ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.

Posted On: Sunday, September 30, 2007, 11:07:00 PM EST

Prayers Are All That Keep The OTC Firestorm From Exploding Into The Limelight

Author: Jim Sinclair




Dear CIGAs,

There still is a firestorm out there and as long as it can be kept behind the curtain of public view the longer the timeline the central bankers have to pray it will go away. The problem is the gigantic mountain of credit and default derivatives. What is incredible is the total size of the derivative mountain wherein notional value becomes real value when these derivatives are called upon to perform and performance is nowhere to be found. No wonder the major improvement in the commercial paper and CDO markets is widening of spreads which basically means not much at all. A stock drops from $100 to $5. The market is a $5 bid offered at $6. The market now becomes a $4 bid offered at $8. That improvement is basically nothing.

With housing dragging at the US economy, central banks must do everything possible to keep equities from unraveling. The level of the equity indices are all that is left of the “Wealth Effect.” That means finding an accelerant for equities lies in the pouring of more gas on the fire of international liquidity. This is a global phenomenon and not a situation limited to the unwinding of the many Greenspan bubbles of the past few years.

At the center of the Earth there is a molten ball of magma that always seeks fissures through which to escape. When it escapes it blows the hell out of everything. It is then witnessed as an erupting volcano. This is what we are dealing with here. The molten ball is an unimaginable heap of unfinanced, non transparent, unregulated paper called over the counter derivatives. The fissures you have been seeing are the CDOs, mortgages (forget the spin title subprime), brokerage house tittering even among the halls of Wall Street Ivy, the collapse of so many so called but clearly not hedged hedge funds, the demise of major real estate lending banks and rollovers called takeovers of Internet financial entities. As long as you do not recognize these are united in the magma of over the counter derivatives and it all can be blamed on the peskiest bad mortgages made to under financed people, the longer the central bankers can pray for a miracle. Prayers is a great tool, but not for those who know what they were doing. The shock of Greenspan’s book, which I believe discredits him, is that he always knew the destruction that his acts would visit upon the world. Of all the disgusting things, the worst as I see it is his persisting support of no regulation for over the counter derivative and his pronouncements that these weapons of massive financial destruction act to spread the risk from the few to the many. What happened is over the counter derivative spread the risk from the few to the fewer who proliferated the world with offsetting paper and sucked the money out.

Simply stated we all have been killed in some degree, but 99.9% of the people have no idea it has happened.

Just as Heinz will argue articulately that there is no derivative risk to the junior and the major gold entities from short of gold derivatives, the question is will the major deliver the 30% (or whatever the percentage the junior holds) junior’s gold at $1650 while delivering their own 70% at $325? All my efforts in major mining trade publications from 1999 to 2003 pleading with the industry not to continue hedging with crap paper called over the counter derivatives were laughed at. The world at large has no idea what a meltdown in derivatives means.

I can keep giving you the numbers where gold will go to and where it will find support, calling them major and minor Angels such as at $751 followed by another minor Angel at $782, but all that serves to do is encourage you to trade and to give the opposition a target to shot at. You want it so I will continue.

The real matter is ARE WE IN THE MELTDOWN AND IS THIS IT? My answer is yes and yes. Did I not send everyone who signed up for our free email list a note saying that a couple of weeks ago?

What has changed? Absolutely nothing except the central bankers are doing everything in their power to hold the curtain shut so you cannot see what is really causing havoc with financial institutions.

Assuming I am correct, then why seek to sell the top of a small move when for all we know in terms of gold, this is it! You may recall I told you that when gold closed 3% above $529.40 it had moved into a runaway and trading should cease. Who listened out there? A few yes, but not many.

The only selling I would do in base or precious metals is if there was a distinct need for cash for a good and necessary purpose.

The last time gold passed a clutch point, a point where the clutch of price is depressed and a higher gear is selected, gold ran $400 in a little over a month. Could you handle that if you sold and before you could inhale gold was in the four figures? Well, that is the very risk you face. Those legal and illegal shorts think they have it knocked but it is upside their heads that is going to be knocked.

This volcano is smoking and the short is like the man who would not move from Spirit Lake when Mt. Saint Helen was rumbling and smoking. Now there is no more Spirit Lake and no more man standing beside it.

Smoke is spewing from the fissures. The molten magma of OTC derivatives is seeking an escape hatch which to blow out and you do not yet really believe it. Just like Heinz and the greats of the Gold producing industry shorting gold hedgers from 1991 to present, you are still trying to trade your insurance away and away it will certainly go.

Stop selling even the 1/3 unless you have a distinct need for the funds for a good purpose for their use.

What has been feared since 1968 has now occurred at orders of magnitude more than even this day is imaginable. Monty has said this could end in tears, and it will for the gold greedy hot shots that want every move gold will make.

Stay away from all credit. Hold gold and whatever currency you feel will decline the least against gold which means rise the most against the dollar. There really is little else you can do as the smell of sulfur is in the air.

It is quite interesting to see today’s article from the British Press on the new preference of those who have experienced a bank run, which is not for paper again in the hands of a financial institution, but rather for gold. I will wager that the gold is being taken delivery of. There will be bank runs here. That you can count on. First the little banks, the Internet financial organizations, the brokers and finally a massive addition of liquidity to protect their own, the international investment houses and major international banks. Yes it is that bad, only hidden from the sight of the many.

These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper -- the short-term borrowings of banks and corporations -- which was purchased by supposedly low-risk money market funds.

According to Das' figures, up to 53% of the $2.2 trillion of commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages.

When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion.

Without a central governmental authority keeping tabs on these cross-border flows and ensuring a standard of record-keeping and quality, investors increasingly didn't know what they were buying or what any given security was really worth.

A Painful Unwinding
Here is where the U.S. mortgage holder shows up again. As subprime loan default rates doubled, in contravention of what the models forecast, the CDOs those mortgages backed began to collapse. Because these instruments were so hard to value, banks and funds started looking at all CDOs and other paper backed by mortgages with suspicion, and refused to accept them as collateral for the sort of short-term borrowing that underpins today's money markets.

Excuse my ignorance but can someone point me toward a brief explanation of what the hell this all means, I have a vague understanding of derivatives thanks to wikipedia and I certainly understand 130Tr+ dollars is a hell of a lot of money, but I'm missing the bit in the middle that explains fully why this is clearly so important.

I'm quite happy to RTFM if someone would point me to it

It will only need someone like Ford or GM to go down to crash the deravatives market and god only knows how that will un-wind.

Right, so are we saying that there are derivatives insuring loss on lots of financial instruments that have all just gone down the pan (the credit event) and a lot of people will be wanting the pay out, but the amount of money that would be needed to pay off everyone who has lost is more money than is in the entire world several times over?

Can't decide if I'm going daft or I'm still just not getting it.

Thanks again for keeping us informed. "This cocktail has proved explosive." The lighting of the fuse occurred when it became common knowledge among the banking fraternity that the AAA rating placed on these derivatives was meaningless. There is now no way back. What has been made known cannot be retracted. Dangerous times ahead.

And we wonder why people want to invest in 1 Acaccia Avenue, rather than packaged investments

This thread tells all there is to know about why B2L has become so popular.

I've come to the conclusion the ordinary joe like me is unlikely to do well from stocks, shares or any other packaged investment unless by chance alone.

Strikes me we're ignoring the 3 ton elephant in the corner and concentrating on the mouse.

And we wonder why people want to invest in 1 Acaccia Avenue, rather than packaged investments

This thread tells all there is to know about why B2L has become so popular.

The global derivatives market is worth a whopping $600tr and that come in at $93,000 for every man, woman and child on the earth.

one of the big players is GM and they have a lot of people on strike due to health care cover and apparantly it costs GM $1500 in medical care expences for every car it produces.

It will only need someone like Ford or GM to go down to crash the deravatives market and god only knows how that will un-wind.

i might never happen but just in case Justice is stacking up on food before the world has a NR style shock

I think that realistically if there's some kind of global financial meltdown, we've got
at least 2 or 3 weeks to build a stock pile of food, plenty of time to get my van down to
to Tesco's a few times.

Northern rock came as no surprise to hpc members did it? At least two weeks before people
started queueing there were posts on here mentioning that NR were in trouble.
In the event of a meltdown, we will be ahead of the flock, is that not the case?
For me that's a big reason to be 'here.'
At the moment I'm only thinking in terms of what would be good to buy, also I'm stocking
the garden...fruit trees etc. Am I mad? Probably.

Not one to blow my own trumpet, quite obviously.

But I reckon I called it first
http://www.housepricecrash.co.uk/forum/ind...l=northern+rock

Thank you and congratulations.

You must have crystal balls.

It will only need someone like Ford or GM to go down to crash the deravatives market and god only knows how that will un-wind.

Right, so are we saying that there are derivatives insuring loss on lots of financial instruments that have all just gone down the pan (the credit event) and a lot of people will be wanting the pay out, but the amount of money that would be needed to pay off everyone who has lost is more money than is in the entire world several times over?

Can't decide if I'm going daft or I'm still just not getting it.

Christ on a bike, your not alone. I've just read various wikipedia articles related to derivatives, futures, etc, so I could understand this thread, the basic principles seem simple enough and then my mind implodes.

But regulators on the Basel Committee are less optimistic as they gather in the Swiss city. "In banking and in supervisory circles, this crisis is far from over," said the source. "This crisis may unfold itself in waves."
...
The source said Committee members were unlikely even to debate suggestions by some private-sector bankers that central banks become market makers of last resort for illiquid assets to keep the wheels of international finance turning.

"This is out of the question. This is something the market wants but at the current time there is no debate on this," the source said.

"If any central bank opened this possibility, they would be flooded, literally flooded, with hundreds of billions in asset backed commercial paper," the source said. "This would be a classical case of bailing out the speculators."

Many moons ago I worked with an old Fitter who of a Friday morning after a Binge the night before often partook of a "Liquidity Enhancer" with remarkable rejuvenating qualities.
Killed him in the end though.

cgnao, this Liquidity Enhancer by Citi, JPMorgan etc. should be something for you to comment on. It's just getting worse and worse, and they act more and more desperately.

cgnao, this Liquidity Enhancer by Citi, JPMorgan etc. should be something for you to comment on. It's just getting worse and worse, and they act more and more desperately.

More on the same.

http://www.reuters.com/article/economicNew...643980020071016

NEW YORK, Oct 16 (Reuters) - Foreign investors were net sellers of long-term U.S. securities in August to the tune of $69.3 billion, the biggest outflow since 1990, the Treasury Department said on Tuesday, showing the current global credit crisis has dented demand for U.S. assets.

Demand for long-maturity securities such as bonds, notes and equities plummeted in August, the month that losses on risky mortgage debt sparked a massive credit squeeze. That compared with an upwardly revised inflow of $20.6 billion in July.

Including short-term securities such as Treasury bills, foreigners sold a net $163 billion in August, a record outflow, and not enough to cover that month's $57.6 billion trade deficit.

Question: if a foreigner sells a treasury bill, what does he get in exchange?

US dollars. These are then exchanged for other currencies, putting further downside pressure on US dollar exchange rates.

Soon it will morph into a full blown currency crisis.

Thanks, but I dont understand

The johnny foreigner has got US treasury Bills and he exchsnges them for $- how did he get them in the first place

THanks

Oil, gold, you name it - lots of things bought and sold in dollars, it's the world currency don't you know? In the case of China they've got so many of them that they've run out of room so all they can do is post them back and ask for 4.5%.

Well, that's what they used to ask for anyway. Now they go and buy places like Africa with them...and maybe the odd US company that someone has convinced them will make them a fortune only for it to go down the pan 3 days later. And that's another story of nails in coffins for the US!

I think IC, they sold goods and the yanks paid for them in tresaury bills.

Theyve kept them (as cash) and claimed 4.5% INT on the money markets, ie they may have made up some of the funds we use for sub prime.

Now they offload them back onto the money markets. I think thats it then.

so in this case the yanks have issued enough to cover their trade deficit, and then the chinese (EG) have sold even more- Yes that has got to be bad and may lead to the fed raisin rates.

Thanks for your help

Im going to crawl under the table now

Think the credit crunch is over? Think again
Despite what Wall Street boosters would have us believe, the credit crunch is far from over. Fortune's Peter Eavis outlines the five steps that need to happen before we can say the end has come.

I think IC, they sold goods and the yanks paid for them in tresaury bills.

Theyve kept them (as cash) and claimed 4.5% INT on the money markets, ie they may have made up some of the funds we use for sub prime.

Now they offload them back onto the money markets. I think thats it then.

so in this case the yanks have issued enough to cover their trade deficit, and then the chinese (EG) have sold even more- Yes that has got to be bad and may lead to the fed raisin rates.

Thanks for your help

Im going to crawl under the table now

may lead to the fed raisin rates.

Nothing to do with currant accounts is it?

Rhinebridge Commercial Paper SIV May Not Repay Debt (Update1)

By Neil Unmack

Oct. 18 (Bloomberg) -- Rhinebridge Plc, the IKB Deutsche Industriebank AG structured investment vehicle that has lost about half its value, is unlikely to repay all its debt.

Rhinebridge suffered a ``mandatory acceleration event'' after IKB's asset management arm determined the SIV may be unable to pay back debt coming due, the Dublin-based fund said in a Regulatory News Service release. Rhinebridge had $1.2 billion in commercial paper outstanding as of Oct. 5, according to Fitch Ratings.

Rhinebridge, Cheyne Finance Plc and other SIVs, which borrow from the short-term commercial paper market to fund purchases of asset-backed securities, have struggled as investors retreated from all but the safest debt. SIVs have dumped about $75 billion of assets as a result, prompting U.S. Treasury Secretary Henry Paulson to organize an $80 billion bank-run fund to buy some of the securities.

In August, Rhinebridge had to sell $176 million of its assets to cover obligations, and as much $320 billion of holdings by SIVs worldwide may be dumped if the market doesn't improve.

Rhinebridge said Oct. 12 that it breached a ``major capital loss test'' because its net assets fell to less than half the amount it owes holders of its subordinated capital notes after repaying senior debt. The company had five business days to remedy the breach before the enforcement event took place.

SIVs have different rules to protect investors and allow the fund time to recover from a market slump. An enforcement action is typically the last step for a fund, and is irreversible.

http://bloomberg.com/apps/news?pid=2060108...&refer=home
A little more melting going on.

SIV Problems

Treasuries rallied the most in five weeks yesterday after Standard & Poor's cut ratings on $23.4 billion of mortgage securities and Deloitte & Touche LLP said a structured investment vehicle of London-based Cheyne Capital Management Ltd. will stop paying debts.

Moody's Investors Service said last month it will assume its rankings for many subprime mortgage-backed bonds issued since July 2005 are too high when it assesses new collateralized debt obligation

Mainsail II Ltd., a SIV set up by London-based hedge-fund manager Solent Capital Partners LLP, said yesterday it had assets with a face value of $1.48 billion and debts of $1.65 billion.