In traditional economics, money was defined generally as a “storehouse of value.” Yet, to even the least-informed, this linkage has been mostly shit-canned.
The problem is one of runaway leverage.
Once upon a financial fairytale, the story was sold far and wide that America was using a fractional reserve currency. In other words, when a dollar was printed, if could be re-lent as many as seven or eight times. Thus, printing more money advanced the money supply.
This died in the shadows of 9/11. But the “charges” were set when Nixon closed the gold convertibility window (and opened up trade with communist China) in the early 1970’s.
The problem – quite simply – is that “money creation” is well- beyond government control. Effectively (although we despise crypto currencies because they exist mainly as a way to fund human trafficking, launder cartel money, and help tax-dodgers avoid their fair share of public costs) between cryptos and derivatives trading, the “money” in America’s monetary base is merely a small fraction of “money in play.”
Oil and Metals Tell Us Something…
The price of oil on the futures market was knocking on $85 this morning. Gold was magically drawn above $1,800 briefly, and silver is edging back towards $24.50.
Away from public eyes (because Public is a synonym for lazy) there is data that is cause for concern. The Notional Value of U.S. derivatives continues hanging over the world like some sword of Damocles.
The “good news” about notional values is that in the (cockeyed) world of financial engineering these are passed-off as totally safe. Because (in theory) derivatives have counterparties. Thus, arguably, derivatives are a zero-sum game.
Until, of course, they are not.
That actually happened – back in 1974 if you know where to read in Wikipedia:
“Herstatt Bank (Bankhaus I.D. Herstatt K.G.a.A.) was a privately owned bank in the German city of Cologne. It went bankrupt on 26 June 1974 in a famous incident illustrating settlement risk in international finance.
It led to the creation of the Basel Committee on Banking Supervision a committee composed of representatives from central banks and regulatory authorities to help find ways to avoid such risks in the future.”
The way the world was saved (that time) was through the institution of “continuous settlement.”
See, what happened with Herstatt was they were holding a ton of derivatives (until then considered good financial engineering). However, when they defaulted, their counterparties (expecting Herstatt to make good to them, so they – in turn – could make good to others) locked-up.
The answer was a process called “continuous settlement” administered by the National Securities Clearing Corporation which, in turn, is administered by the Securities and Exchange Commission. (Notes and details here.)
For almost 50-years now, I have been haunted by the “What could go wrong with this?” question. Obviously, continu0us settlement worked through the Internet Bubble collapse and the 2009 housing bubble debacle. But at some point, is there a “bigger than government” problem?
What if Taiwan were lost?
Continuous settlement works because the NSCC provides for daily netting of multiple positions. That has worked – so far.
Think of playing several card games at the same time (which is what banks and major corporations do). On a particular day, you might be ahead $50 playing poker, down $100 playing blackjack, and up $45 in gin rummy.
Without continuous settlement, the being down $100 (which you, by the way, don’t have…) would have busted the gambling party. Under continuous settlement, you’d pay only the net position from all three of your card games. $5-bucks down for the day and everyone is happy.
It’s a clever system and it has worked well ever since Herstatt.
The problem? Will it scale?
We’re not seeing headlines like Derivatives as viable alternative for boosting stock market’s liquidity — Business — The Guardian Nigeria News – Nigeria and World News. Financial engineering? You bet. Derivatives are already doing this at the global level.
I mean, come on, think about this: US Monetary Base is how much? $6.329 trillion in the latest Fed H.6 Money stocks. And the “card games” come to 29-times that amount in the U.S. alone and over a quadrillion globally. Maybe even several because there exists an analog to some “off-track betting” as well.
What Nigeria is considering is securitizing some of this (delicious!) derivatives pile.
And they are not alone. There is also something structural going on with cryptos. Where we read CBOE Agrees to Acquire ErisX, Entering Digital Asset Space with Spot, Derivatives and Clearing Platform (prnewswire.com).
Short version? Derivatives are back and growing. Fueled by unregulated “pseudo-money” cryptos, I lose sleep because of two under-appreciated possibilities..
The first? Trading of derivatives could (or will) begin to “leak into equities” markets. In other words, could securitized derivatives be a clever way for the Bankster class to offload products they didn’t (or want) to hold anymore themselves?
Think back to Howard Hill’s book Finance Monsters: How Massive Unregulated Betting by a Small Group of Financiers Propelled the Mortgage Market Collapse Into a Global Financial Crisis which laid out the migration from an “idea” (collateralized mortgage obligations – CMO’s) to a kind of systemic abuse to “grow the bottom line.”
The second? Losses have to go somewhere. As we watch the situation in China with Evergrande. This company – which had threatened to set off a global panic this weekend avoided the disaster by making an $83.5 million debt payment this weekend.
BUT, Evergrande not out of the woods. As one reports notices Unfinished Buildings Are a Sign of China’s Evergrande Debacle – WSJ. And in addition to our usual key business axiom (Everything is a Business Model) there is a second: “Someone always gets the check.”
Despite a lot of “rah-rah, sis-boom-bang” a thoughtful researcher will notice plenty of skepticism: Forbes offers extremely cogent insight reporting Evergrande’s Proposed Shift From Real Estate To Electric Vehicles Fails To Convince (forbes.com).
We’ve seen this in smaller companies over our half-century of writing: A promoter of one thing has to pivot (which may or may not) work, into a new field of business. Our sense is that’s what’s going on here: A “promoter” personality (*common among real estate moguls) [Don’t make me say “like Trump.”] will always have “another plan” in case things don’t work out.
Color us skeptical. Not only do first-rate companies like Tesla have a head-start, but so do Ford and GM. Toss in the electrics from Europe and the sound of a salesman “selling what he thinks a lot of people will buy” becomes clear.
How long before the next disaster looms? Our guess is sooner than later.
Someone always gets the check. And at some point, we worry derivative losses could spiral out of regulatory range to control.
Markets At Turning Point
There’s a time – when sailboat racing offshore (or inland waters) in light air – when a puff of wind comes along that will give the boat (*typically a ULDB) enough way-on to put the rudder over an come across the “eye of the wind.” At the decision moment, the skipper yells “Coming about!” Crew hopefully knows enough to slightly back-wind the jib so it takes up full – quickly – on the new tack…
Well, that’s where we are this morning: Do the markets tack or don’t they? Tough call for any skipper…
Well, just out we have the CFNAI – Chicago Fed National Activity Indicator.
“Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.13 in September from +0.05 in August. One of the four broad categories of indicators used to construct the index made a negative contribution in September, and one category deteriorated from August. The index’s three-month moving average, CFNAI-MA3, moved down to +0.25 in September from +0.38 in August.”
Can’t they say “loss?” Negative contribution? Come on, fellas….
Tomorrow, two biggies: The Case-Shiller/S&P Housing data – which should closely mimic the 31+ percent annual rise in the monetary by that that ever-printing Fed.
Then – if I have the schedule right, we will see shortly thereafter what the latest data reveals about expansion of the monetary base. Even a fraction of a percentage points could blow a huge williwaw through the market. “Look lively on the helm,” time…
For Shallow Thinkers
Want a liberal view of why the Buyed ’em administration wants to snoop into your personal banking info? Try A tax fight is brewing over IRS plans to get more bank information : NPR. Here’s the reality: The $10,000 trigger is so low (and stupid) it amounts to financial abuse of average Americans. Take whatever amount Sloppy Joe proposes, divide by 2,000 working hours a year – and that’s who gets netted by the jab-threatening Nanny Staters. At the moment? It’s everyone who makes $5.00 per hour and up. More reasonable? People who run $150,000 a year – or more? That would be a single income earner at $75 an hour OR two at $37.50 per hour. Anything less? Bullshit and arguably in violation of the privacy in our papers part of the Constitution. (Oddly, they didn’t ask me for common sense input…last seen in Washington during the Kennedy years. – Which is still being covered up on phony excuses and bullshit, but don’t get me started on that dirty government cover-up…)
More BBBS (*Biden Bullshit Bait and Switch). The demagogues are trying to peddle four weeks of job leave per year – typical bait and switch while they screws us with more surveillance: How 4 Weeks of U.S. Paid Leave Would Compare With the Rest of the World – The New York Times. Free lunch-selling never goes out of style, though…
Last Day(s) of Taiwan?
Now we get to the real urban survival stuff: Do you have a plan in case China takes Taiwan this week? A note from my consigliere outlines the concern:
“China “may” move on Taiwan this week…and the idealized timing is about 1 to 2 hours after Biden goes to bed in Rome Thursday evening (28th), if not sooner. (and he will be going to bed early – after his all day flight over and so he can be rested for the Pope’s meeting which will be on ROME time, 5 hours ahead of US time.
There are only two weather windows when China can move on Taiwan, October into the first week of November each year, and May into maybe the first week of June each year. Two weeks remain for this year’s weather window.
Xi is under TREMENDOUS pressure to have Taiwan settled before he tries for an unprecedented 3rd 5 year term next October, so NEXT October is too late. In addition his speeches about War became more and more bellicose through the spring and over the summer.
Unnoticed by most? Xi has over the last few months managed to completely stack both the Congress and the Central Committee with HIS people, and most of them are NOT CCP politicians from around the country but are Military People who of course are loyal only to Beijing and have NO INDEPENDENT power base out in the country (about 40% of the Congress and about 60% of the Central Committee will be new after November).
In addition there is something serious going on behind the scenes wrt Xi’s power.
In addition to the rumored assassination attempt (from last winter – at least one executed so far after that) suddenly in the last two weeks his “Enforcer” who was his right hand man on his climb up the brutal ladder of power – sent most of Xi’s opponents to jail, executed a few, you get the picture: in China high level politics is a very very brutal game, was SUDDENLY HIMSELF put under “Investigation” about a week ago (tantamount to being tried, convicted, and he is now either going to jail for the rest of his life or to the hangman’s noose). This is the guy who did ALL of Xi’s dirty work, knows ALL the dirty secrets…and now HE is on the same chopping block he sent so many others to.
IMO the sudden “Investigation” of Xi’s right hand man/enforcer has all the echoes of Stalin – including what Stalin did just before he died when he suddenly AGAIN started getting rid of those around him who had the power – or so they thought – to stop Stalin from doing something rash (Stalin was probably assassinated since he had decided to engage in a nuclear war with the US, or so the tales are – Khrushchev will never tell)
Anyway…from the outside it looks like Xi is under considerable pressure from within China to MOVE on Taiwan QUICKLY, and it also looks like he is moving to further consolidate his own One Man Power.
At the moment there is NO LEGAL AUTHORITY for the US to come to the aid of Taiwan. The War Powers Act does NOT apply since we have NO Defense Treaty with Taiwan and China has NOT attacked the US.
There is a bill pending in the Congress, suddenly being pushed by moderate Democrats in addition to Republicans, that WOULD give him the power…but that probably won’t be passed for at least a couple of weeks, maybe not until the end of the year. The Chinese KNOW THIS. I read it on one of their propaganda outlets!! (In addition to the US press, so that is another reason for Xi to move quickly!!)
Biden flies to Rome on Thursday the 28th. They will probably give him a sleeping pill when he goes to bed EARLY so he can have a good sleep before his meeting with the Pope on Friday. IF they would start to move while he is out cold from the sleeping pill, plus being out of the country, the Chinese will buy themselves quite a few hours before the US can even start to respond to any attack since Biden will basically be “out of it” mentally at first, then on a plane flying back to the states without his national security team around him.
Unlike most of the pundits I do NOT believe China will spend two weeks softening up Taiwan via rockets and bombing before putting troops on the island. I give them about two hours…. i.e. get Chinese troops on the ground in key locations BEFORE the Taiwanese can even get from their homes to their bases. Shut down movement on the island ASAP.
IF China does NOT move in the next two weeks Xi ONLY HAS NEXT MAY where the weather window will allow him to move on Taiwan. A little too close for comfort wrt to the November Party Congress where he WANTS to be elected to another 5 year term with people who may want to assassinate him, or at least replace him, circling around in the wings. Without having the Taiwan issue settled Xi has little chance of getting his THIRD term as President.
NOT a week to be long the markets imo. IF a sudden invasion would occur look for the US Stock Market to drop about 2/3 virtually overnight (well because of circuit breakers it would probably just have to stay closed for a few days) since almost all of our Retail and Manufacturing businesses DEPEND upon access to Chinese made products/parts and Taiwan made chips. What is Amazon worth without Chinese products? ditto Wal-Mart, ditto Apple, etc. etc..
OK …I “AM” the crazy uncle you would rather keep locked in the closet and not let anybody see or talk to. Please at least leave the light on … OK?”
We’ve actually done a good bit more: We have pre-made shopping lists that are ready to be triggered on any word of a Taiwan issue. Jeans, shirts, socks, shoes, cold weather gear. Even a back-up small air conditioner has already arrived. Meds. Backup microwave. I may order even more used solar panels.
This could very-easily be a “tipping point week” and if it’s “on” this week, it won’t be long before most of Asia is down.
We are paying close attention to stories like Japan Monitoring Combined Russian and Chinese Naval Fleet Sailing Off Honshu – USNI News. Because
Guam is 2,400 km south, any real U.S. response would likely have to involve naval assets in Japan. So is the joint fleet just “in the area?” And where could they be Thursday.
One more to have in your calculations: World War 3: Expert says UK should be concerned about growing tensions between China and US – EconoTimes.
Toss in reports like Solarwinds hackers are targeting the global IT supply chain, Microsoft says (msn.com) and you have the potential for a zero-warning time strike.
With all this on the table? Markets have a way of climbing walls of worry. but with a Biden trip ahead? Any last-minute cancellation would indicate to us that conflict could be bigger – and closer – than even our dire contingency plans suggest.
Then there was this: Taiwan shaken by 6.5-magnitude quake, woman hurt by rockfall (apnews.com).
So on that note, let’s see how the markets do: After the CFNAI Dow futures were up. We’ll see how that works out.
Write when you get rich,