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What Happens When The Margin Clerks ......

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Dennis Gartman (of the Gatman Letter), likes to describe the current situation as one in which margin clerks take control of the market. What does this actually mean and what are the implications?

1. As long as there is leverage in the financial system, a point is reached where margin clerks can seize collateral and sell assets.

2. Leveraged owners of assets ultimately cede control of their destiny to margin clerks when markets sell off.

3. To avoid ceding control of leveraged assets, their owners tend to sell other, better performaing assets to reduce leverage. This is why counterintuitive price action can take place in some asset classes (perhaps gold's performance in the last couple of days could fit into this category).

4 In times of stress, leveraged investors sell what they can rather than what they want to. Hardening short selling rules probably reduces liquidity for distressed sellers which hastens their demise as dictated to them by margin clerks.

Our entire system is at risk of a margin call. So far, QE, ZIRP, stimulus created the illusion that liquidity meant solvency. The system wide "margin clerks" are getting agitated and are beginning to see through the ruse.

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But we've all deleveraged, haven't we? Where's the problem? :lol: Hey, what's that trumpeting? Interest rates can't go back up? :ph34r:

Some hedge funds are still leveraged at something like 15x. It only takes a 6.67% drop in prices for margin clerks to take control of their destiny.

To-day is an options expiration day which could add a bit more fun to the mix. Options seem to like to go after big round numbers on the strikes so we could see a lot of volatility around 10,000 on the Dow.

The margin clerks / liquidation are on one side and strike concentration is on the other side. It will be interesting to see which one wins out to-day.

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