Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
VIX is Reversing, Other Stock Market Indicators are Faltering - 28th Nov 14
Will The Swiss People Resist The Massive Anti-Gold Propaganda? - 28th Nov 14
Dramatic Increase in Gold Flows into China - 28th Nov 14
Britain's Immigration Catastrophe Continues, David Cameron's Impotent Speech on Stopping In Work Benefits - 28th Nov 14
Netherlands, Germany Have Euro Disaster Plan - Possible Return to Guilder and Mark - 28th Nov 14
Russia’s Gold Monetary Solution - 28th Nov 14
British Government Publishes UK, Scotland DevoMax Smith Report Suicide Note - 28th Nov 14
The Price Of Oil Exposes The True State Of The Economy - 27th Nov 14
Brazilian Bovespa Stock Market Technical Analysis - 27th Nov 14
Gold Price Would Soar on Possible Swiss Yes Vote - 27th Nov 14
Crude Oil Asset Bubble Trouble - 27th Nov 14
Thanksgiving and Puritan Geopolitics in the Americas - 27th Nov 14
The Dow Jones Stocks Index - Beautiful Tree in the Desert - 27th Nov 14
The Digital World, The Opiate of The People - 27th Nov 14
Harry Dent's Simple Strategy for Surviving Withdrawals from Markets on Crack - 27th Nov 14
Socialist France Just Cannot Compete Against Google Freedom - 27th Nov 14
A Short Tale About the Grand Manipulation of Crude Oil Prices - 26th Nov 14
China Secret Gold Buying ... How Could It Happen? - 26th Nov 14
Gold Price Spikes to $1,467.50/oz on Computer Glitch? - 26th Nov 14
Gold - So Bad It's Good: Surviving 2014 - 26th Nov 14
TrueShopping.co.uk Real Customer Experience Review - Online Shopping Lessons - 26th Nov 14
Is There A New Global Consensus About Cheating Investors To Reboot Employment? - 26th Nov 14
EUR/USD – Currency Bulls Don’t Give Up - 26th Nov 14
Swiss Gold Referendum A Golden Opportunity for Switzerland - 25th Nov 14
Silver: What COT Analysis Tells Us - 25th Nov 14
Stock Market Big, Bold and Ugly - 25th Nov 14
U.S. Dollar Near Top? Gold and Silver Trading, Platinum Breakout Invalidation - 25th Nov 14
Buy Fear - Easily Pick Up Profits on Stock Market Dips - 25th Nov 14
The Islamic State Reshapes the Middle East - 25th Nov 14
Gold Price Forecast 2015 - 25th Nov 14
The Swiss Referendum On Gold: What’s Missing From The Debate - 25th Nov 14
Clash of Generations - Why Millennials Still Live at Home; Not Jobs, Student Debt, or Housing - 25th Nov 14
Stock Market Reminiscent of Pompeii - 25th Nov 14
Once Upon A Time There Were Philosopher Kings - 24th Nov 14
The 2014 Crude Oil Price Crash Explained - 24th Nov 14
China Stock Investing - Follow the Money! - 24th Nov 14
122 Tonnes of Gold Secretly Repatriated to Netherlands - 24th Nov 14
What Causes the U.S. Dollar to Move? - 24th Nov 14
Stock Market Indexes New Highs - Will Uptrend Extend Even Further? - 24th Nov 14
All Hail the King U.S. Dollar - Trend Forecast - 24th Nov 14
Where Is China Economy On The Map Exactly? - 24th Nov 14
Most of The World Economies Panic - Is The US Next? - 24th Nov 14
Stock Market Exhaustion Gap? - 24th Nov 14
Gold Golden Gains Come After The Pain - 24th Nov 14
Crude Oil and Stock Market Setting The Stage For The Next Recession - 23rd Nov 14
This Publicly-Owned Bank Is Outperforming Wall Street - 23rd Nov 14
Who’s Ready For $30 Crude Oil Price? - 23rd Nov 14
Strategic, Methodological and Developmental Importance of Knowledge Consumption - 23rd Nov 14
Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - 23rd Nov 14
Gold Price 2015 - 22nd Nov 14
Stock Market Medium Term Top? - 22nd Nov 14
Is the Gold And Silver Golden Rule Broken? - 22nd Nov 14
Malaysia's Subsidy and Budget Deficit Conundrum - 22nd Nov 14
Investors Hated Gold at Precisely the Wrong Time: What About Now? - 22nd Nov 14
Gold and GLD ETF Selloff - 22nd Nov 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Gold Report 2015

Derivatives: A Capital Markets Gong Show For Whom The Bell Tolls

Stock-Markets / Derivatives Jul 01, 2011 - 05:42 AM GMT

By: Rob_Kirby

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleBack in early March, 2011 – PIMCO’s Bill Gross were calling for much higher rates and telling the world that they were selling U.S. Government Bonds. 

             PIMCO's Bill Gross Says to Sell U.S. Treasuries Now

             03/03/2011

……To wit, he predicts that when the Fed’s QE2 bond-buying binge ends at the end of June, there will be nobody to take the Fed’s place as last-resort buyer of U.S. Treasuries at artificially low rates. Treasury yields will need to ramp up sharply by 1.5 percentage points to attract private buyers. Given that the ten-year U.S. Treasury is currently yielding only 3.5%, a 1.5 percentage point jump would equal a 43% increase in interest rates (1.5/3.5). That’s a big move in interest-rate land and would have a significantly negative effect on bond prices.


As you can see, not only did the anticipated rise in interest rates NOT materialize – rates have actually fallen:

Remember folks, Bill Gross [PIMCO] is reputed to run the world’s largest bond fund.  Not only was Gross wrong – in investment terms he was SERIOUSLY WRONG – a great many percentage points wrong.  Not only did 10 yr. bond rates not go up by 150 basis points – they have indeed FALLEN by more than 50 basis points. 

This illustrates a point; namely, that being the biggest in your space [and having former Fed Chairman Alan Greenspan acting as advisor to your company] doesn’t ensure that you NEVER, EVER make a poor market call and “lose-your-shirt” – so to speak. 

Accordingly, it sure is a good thing that the world’s biggest derivatives player - J.P. Morgan - has “seemingly” NEVER, EVER made a bet even “1 % wrong” with their 80 Trillion derivatives book.  The Morgue has a Market Cap of roughly $180 billion. A wrong bet of a mere 1% on their ‘book’ would translate to a loss of $800 billion dollars eviscerating their entire capital base more than four times over.  The knock on effect from such an event would trigger multiple tsunamis reverberating through the global financial system.  Sounds absurd, but it’s pure math.

Either J.P. Morgan NEVER makes a mistake or they get a pass if / when they do make a mistake.  Back in early 2006, Business Week reported,

 

President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006,

What that means folks, is:  J.P. Morgan’s derivatives book constitutes national and international security and they along with other large derivatives player are NECESSARILY excused from wrong way bets.  The obscenely large derivatives books of J.P. Morgan and other select money center banks are being used to execute U.S. monetary policy and to achieve other arbitrary financial market outcomes.  This has been occurring since at least the mid 1990’s and severely ramped-up in the mid 2000’s.

Additionally, what can be said for J.P. Morgan can also be said for the likes of B of A, Citibank, Goldman Sachs – all with derivatives books [currently] ranging from 44+ to 79+ Trillion in size.  Take note of the TOTAL derivatives for Commercial Banks at 243 Trillion:

      

               TABLE 1 excerpted from: OCC Quarterly Derivatives Report Q1/11

Commercial Banks Vs. Bank Holding Companies

 

The Office of the Comptroller of the Currency [OCC] tells us, in the Executive Summary of the Q1/11 Report that derivative contracts remain concentrated in interest rate products, which comprise 82% of total derivative notional values. Credit derivatives, which represent 6.1% of total derivatives notionals, increased 5.3% to $14.9 trillion.  It is the settlement of these interest rate derivatives – specifically int. rate swaps of duration between 3 and 10 years – that creates artificial scarcity of physical U.S. government bonds.

The OCC’s quarterly derivatives report is published three months in arrears and typically runs about 30 – 35 pages in length.  All but one page of this reporting deals with data on the Commercial Bank level.  Commercial Bank reporting falls under the purview of the Office of the Comptroller of the Currency.  It’s in the Commercial Bank reportage ONLY where we get a glimpse of bank activity in precious metals:

                       excerpted from: OCC Quarterly Derivatives Report Q1/11

ONLY one page of the quarterly derivatives report [table 2] gives us a high level view of derivatives at the Holding Company Level.  Bank Holding Com pany reporting falls under the purview of the Federal Reserve and DOES NOT INCLUDE any breakout or reveal on precious metals derivatives holdings.  Take note how – at the Holding Company Level, Morgan Stanley’s Derivatives book swells to over 51 TRILLION – vaulting them from a rather insignificant 8th place on the Commercial Bank list into 4th place on the Holding Company list below.  :

 

                TABLE 2 excerpted from: OCC Quarterly Derivatives Report Q1/11

Historically it is VERY WELL DOCUMENTED that Central Banks the world over have illustrated a large propensity to hide / veil / obfuscate all their activities relating to precious metals and specifically gold.  Note the disparity between the transparency offered by the OCC with their Commercial Bank reportage versus the Holding Company data with falls under the purview of the Federal Reserve.  This amounts to 80 Trillion worth of derivatives that the public knows “sweet nothing” about.

Remember folks, it was none other than former Federal Reserve Vice Chairman Alan Blinder – while appearing on the Nightly Business Report back in 1994 – issued these prescient words,

                  “the last duty of a central banker is to tell the public the truth”

By comparing Total Derivatives in TABLE 1 [Commercial] versus TABLE 2 [Holding Co.] we can identify that Morgan Stanley’s derivatives book stands as a 50 TRILLION BLACK HOLE where reporting of precious metals are concerned; Goldman’s 5+ TRILLION, B of A’s 20 TRILLION, J.P. Morgue’s about 1 TRILLION.

Now everyone should appreciate the fact that Morgan Stanley’s “book” grew from 42.1 Trillion at Dec. 31/10 to 51.2 Trillion at Mar. 31/11 – THAT’S an increase of 9.1 TRILLION in three months at an institution with a market capitalization of 35 billion.  Even if you’re asleep and have your head buried in the sand, you’ve got to admit that 9.1 TRILLION ramp in business in 3 months for a company with a 35 billion market cap is quite a feat, eh?  Remember folks, interest rate derivates – BY THEIR VERY NATURE, DO HAVE 2-WAY CREDIT / COUNTERPARTY RISK. 

The feat performed by Morgan Stanley, outlined above, becomes even more unbelievable when you stop and consider that – according to the OCC – there are virtually NO DECLARED or IDENTIFIABLE END USERS [counterparties] for these products:

                                 excerpted from: OCC Quarterly Derivatives Report Q1/11

Now we must ask who Morgan Stanley did their impressive 9.1 TRILLION trade in 3 months with?  Just because they remain anonymous doesn’t mean they don’t exist – but they are certainly known to the Federal Reserve because the Fed has purview, as regulator, over Bank Holding Companies.  So, by extension – the Fed is comfortable [from a credit standpoint] with “whoever it is” that Morgan Stanley is doing this mind boggling business with.  What we can say about the nature of this business is this:  in the absence of identifiable end users [counterparties], this trade creates artificial demand for U.S. Government bonds.

So who would Morgan Stanley [and the Fed by extension] accept as a secretive counterparty on this scale - in credit sensitive transactions that serve to create artificial demand for U.S. government securities?  Embodied in the answer to this question IS THE REASON why the world’s largest bond fund – Bill Gross/ PIMCO – got it ALL [counter-intuitively] WRONG on interest rates.  It also happens to be the EXACT same reason why Amaranth got it ALL [counter-intuitively] WRONG with Natural Gas back in 2006.

How many ways can you say Exchange Stabilization Fund?  It’s the Exchange Stabilization Fund acting through the New York Fed – utilizing agents J.P. Morgan, Citibank, B of A, Goldman Sachs and Morgan Stanley as proxies to implement imperialist U.S. monetary policy.

Let us forget for a moment that natural gas trades in Europe for 2 – 3 times what it trades for in North America – with the reasoning most often given by mainstream pundits that “natural gas is a local market” and let’s move on to crude oil and specifically let’s take a closer look at the price spread between North Sea [Brent] Crude @ 108.30 and West Texas Intermediate [WTI] @ 91.72:

Crude Truth

Historically and until VERY recently, WTI has traded at a premium to North Sea Brent Crude.  This historic relationship has now “flipped” and grown to PERVERTED inverted-ness [today to the tune of 16.58 per barrel] and we have been fed a line by “officialdom” for the past couple of years that this is mainly due to storage constrains or “a glut of crude” centered on Cushing, Oklahoma.

Well guess what folks?  The BIG LIE that the perversion of global crude oil prices were due to a “glut” at Cushing, Oklahoma were laid bare by a PANICKING U.S. administration last week when they announced that 60 million barrels of crude were to be released from the Strategic Petroleum Reserve.  If there truly was a “glut” of any kind – which according to the lies told to the world by officialdom there must be with Brent trading at a 16.58 premium to WTI – there would be no release of crude from the Strategic Petroleum Reserve.

Many market pundits wrongly refer to or reference the derivatives complex as a “DEBT” that the world has been stuffed with.  This is WRONG.  What the derivatives complex really is – it’s a price control grid which enables its handlers to harvest the fruits of the world’s labor at arbitrary prices. 

The reality – the U.S. Fed and Treasury have become increasingly desperate to make their lies about low inflation believable and provide cover for their increasing monetary debasement by attacking and rigging the most visible, go-to alternatives to failing fiat currency.

In doing so, global financial stewardship provided by America has turned our global capital markets into a sleazy GONG SHOW.

                        

It’s high time these dirt-bags had their bells rung.

Subscribers are getting this plus a whole lot more.

Subscribe here.

Got physical yet?

By Rob Kirby

http://www.kirbyanalytics.com/

Rob Kirby is proprietor of Kirbyanalytics.com and sales agent for Bullion Custodial Services.  Subscribers to the Kirbyanalytics newsletter can look forward to a weekend publication analyzing many recent global geo-political events and more.  Subscribe to Kirbyanalytics news letter here.  Buy physical gold, silver or platinum bullion here.

Copyright © 2011 Rob Kirby - All rights reserved.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

n
Rob Kirby Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

B.
02 Jul 11, 09:50
Bank Reports.

The end-user/dealing distinction applies to the reporting banks themselves. It specifically does not look to report on non-bank end-users. Rob missing the obvious.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014