Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Sheffield Hallam Election Battle 2015, School Places Crisis, Can Nick Clegg Win? - 26th Apr 15
Stocks Bull Market Looks to Resume - 25th Apr 15
Gold And Silver - The U.S. Is A Corporation. Precious Metals Stand In The Way - 25th Apr 15
When the Nuclear Money Option Fails - 25th Apr 15
The War on Cash Special Report - 25th Apr 15
China Economic Slowdown Story - Why “Didi Dache” Is a Phrase You Need to Know - 25th Apr 15
The Trans-Pacific Partnership and the Death of the Republic - 25th Apr 15
Stock Splitting Caused the Stock Market Crash - 25th Apr 15
China Stock Market Parabolic Mania’s Global Risk - 24th Apr 15
What Will Happen to You When the U.S. Dollar Collapses? - 24th Apr 15
Why 2 of U.S. Dollar's Recent Bottoms Have 1 Thing In Common - 24th Apr 15
UK Economy Debt Timebomb Will Explode After Election - 24th Apr 15
Are Gold Stocks the Cheapest Ever? - 24th Apr 15
God, the Stock Market and Pascal's Wager - 24th Apr 15
Greedy Insurers Are in for a Nasty Surprise – Positioning You for Big Profits - 24th Apr 15
Four Things Missing From Obama’s First-Ever Energy Review - 24th Apr 15
How to Grow a Regenerative Medicine Industry - 23rd Apr 15
Stocks and Bonds Seven Year of Negative Returns; Fraudulent Promises - 23rd Apr 15
The Existential Danger To The Euro Is Elections - 23rd Apr 15
Stock Market No Clear Direction As Investors React To Quarterly Earnings Releases - 23rd Apr 15
Is China The Next United States? - 23rd Apr 15
U.S. Oil Glut: How High Can It Go? - 23rd Apr 15
Distorted Financial System Expect Deflation, Inflation And Hyperinflation - 23rd Apr 15
What McDonald’s Corporate Earnings Report Is Really Telling You - 23rd Apr 15
Gold Price Forecast to Become Priceless - 23rd Apr 15
FDIC Plots a Bank Heist Involving YOUR Accounts - 23rd Apr 15
$GOLD Price Year 2007 Again - 23rd Apr 15
Stocks Bubble - The Spread between Stock Prices and GDP is Blowing Out - 23rd Apr 15
Ukraine War - When Did We All Become Murderers? - 23rd Apr 15
Libya Crisis - EU Leaders Are Indicted for Nazi-Style Crimes against Humanity - 22nd Apr 15
Why Alternative Energy Isn’t Taking It on the Chin Despite Low Oil Prices - 22nd Apr 15
Bill Gross - German 10-Year Bunds Short of a Life Time - 22nd Apr 15
How to Profit from the Drop in the Oil Price - 22nd Apr 15
The U.S. Dollar's Move Is More Dangerous than You Think - 22nd Apr 15
Apple Watch Means Apple Will Become Worlds First $1 Trillion Stock - 22nd Apr 15
Half a Stocks Bubble Off Dead Center - 22nd Apr 15
They Said Go to College - Learning to become Debt Slaves - 22nd Apr 15
Best Cash ISA 2015/16, Instant and Fixed Savings Interest Rates, New Flexible Withdrawal / Deposit Rule - 22nd Apr 15
Unsound Banking: Why Most of the World's Banks Are Headed for Collapse - 21st Apr 15
Bitcoin Recent Low Price Volatility Might Be Deceptive - 21st Apr 15
Currency Wars Back As Russia Buys Gold - One Million Ounces in March Alone - 21st Apr 15
The Greece 'Grexit' Issue and the Problem of Free Trade - 21st Apr 15
Why Europe Lets People Drown - 21st Apr 15
Wealth Destruction for the 99.9 Percent - 21st Apr 15
SNP Publish England's Suicide Note as Pollsters Still Forecast Labour-SNP Election Disaster - 21st Apr 15
Characteristics of Extremely Over-Indebted Economies - 21st Apr 15
Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 21st Apr 15
Gold & Silver Alert: Silver Stocks’ Signal - 20th Apr 15
Now is the Time to Buy Resource Stocks, Especially Gold Equities - 20th Apr 15
DJ Transportation & Utility Averages Suggest Stocks Bull Market Is Over - 20th Apr 15
Crude Oil Price Bull Market Hope - 20th Apr 15
Stock Market Bears Get Slaughtered Despite Greece Counting Down to Grexit Financial Armageddon - 20th Apr 15
The Rise of the Paper Machines - 20th Apr 15
Gold and Silver Inflection Point - 20th Apr 15
SP500: A Butcher's Stock Market (Chop Chop Chop) - 20th Apr 15
Are Stock Market Bears Slowly Gaining Control? - 20th Apr 15
Sugar Commodity Price Bear Rally - 19th Apr 15
Avoid the Spread of the Stock Market "China Syndrome" - 19th Apr 15
Stock Market Going Nowhere Fast - 19th Apr 15
An Easy Way to Profit From the Two Biggest Trends in the Stock Market - 19th Apr 15
No Scripture Is Divine, Authentic and Beyond the Creation of the Human Brain - 19th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Historic Bubble

Learning from MF Global Bankruptcy

Stock-Markets / Financial Markets 2011 Dec 21, 2011 - 06:27 AM GMT

By: William_Bancroft

Stock-Markets

Best Financial Markets Analysis ArticleIn this article we look at how the failure of MF Global might affect the financial markets and trade in general. We learn from one of the gold market’s most famous investors, Jim Sinclair, and hear how this incident might affect the gold price. Mr Sinclair’s comments are worth reading for all investors but especially those inclined toward gold and silver.

During our spare moments reading apparently ‘anoraky’ financial books, we come across the odd gem that we excitedly recommend to our friends for a week or two in a flush of enthusiasm.


One of our favourites is ‘Reminscences of a Stock Operator’ by Edwin Lefèvre, that is meant to document a series of conversations between the great trader, Jesse Livermore, and an unusually market savvy journalist.

An investment classic

Reading Reminiscences of a Stock Operator one is left with a real appreciation of the irresistible nature of speculation, perhaps gambling, for humans and our fascination with the market. We also felt an appreciation of how the casino is generally the winner, and in this case that Wall St has been piking the people for generations.

The dynamic seemed to be built upon retail cash made in the wider economy being poured into Wall St, with not as much as had been hoped returning. The system did not eat itself though.

Our thoughts returned to this issue and whether the system was becoming more in danger of risk from itself and within with the failure of MF Global.

Did anyone else watch the testimony of John Corzine and think, how did we get here?

How was a CEO of such a business unable to account for so many significant events and issues?

Where is all the client money?

What is so shameful is that such a regulated financial business was legally permitted to leverage and speculate with client funds as Harry Markopolos points out.

Learning from trading royalty

During these musings our thoughts were sharpened by an interview by King World News with one of the best known traders in the gold market, Jim Sinclair. Jim is a figure of reverence in the markets and is always worth listening to. He forecast a gold price of $1650/ounce and greater in 2000 when this was almost unthinkable and gold investors were derided as hayseeds with a wish to be parted with their capital.

Rather poetically Jim Sinclair also has a link to the aforementioned Jesse Livermore. His father Bert Seligmann was in fact business partners with Livermore.

During the interview Jim sets out how the MF collapse is totally different to the failure of a retail facing institution, and as such its implications are markedly different and potentially greater. This failure within the core of the system has burnt some of its most central participants but has crucially broken something potentially more important than this.

When quizzed about MF, Jim starts by urging that “When you see the inner workings of Wall St and finance through the eyes of MF; totally shocking”.

What MF Global will mean for the financial markets

After dealing with some technicalities with the difference between MF Global’s failure and that of REFCO and others Jim cites the Bush administration’s regulatory changes with regard to and bankruptcy law with regard to derivatives accounting and advises that:

“This puts into question whether any clearing entity, because they’re all working with these things, can or will protect your funds under the law, if segregation means anything whatsoever.

Without that what you’ve done is gone and broken the mechanism. The mechanism of the market place is clear.

In all markets without clearing there is no settlement of trade. So the question is has the mechanism of the marketplace broken down?”

We are informed that if the mechanism breaks the market cannot be brought back, because there is nothing left to bring back and that “right now there is still confidence due to rank ignorance of what’s going on”.

Investors all use a clearing house whether they are retail and playing on the side lines owning a few Mom and Pop shares or running significant sums of money. As Jim reminds us:

“If you’re investing and the items you’re holding are not in your name, be it physical metals or securities, you’re in a clearing house.

This event is so complex that I’m not sure that even the professionals reporting on it or even a good deal of the management of companies operating in it totally understand it. When MF Global went down that broke the mechanism…

…we’ve already seen that a clearing house may have been an entity set up to collect funds from all types of clients to use to speculate for its own account.

It is almost impossible to tell whether one’s clearing mechanism are not hypothecating and using client funds to create leverage for their own speculation.

In the Lehman case the banksters took out Main Street. The sharks will eat the sharks now because in the case of the clearing house what you’re taking out is the traders and investors who had confidence… that their money was safe from misuse of the management of the clearing house. You lose confidence in that, how do you settle trades?”

Has the market mechanism broken?

Has clearing and settlement been critically undermined?

Time will tell, and investors may reappraise their portfolios accordingly.

Sinclair offers that “there’s two things you’ve got to do right now, that’s be your own central bank, and be your own clearing house”.

Whatever you think of Jim’s wider world view, his analysis of the MF Global collapse is thought provoking.

Taking another look at our portfolios may be no bad thing. When we look at ours we find that:

  • The gold and silver bullion sit there free from counterparty risk and outside of the financial system achieving what we asked them to do. We don’t own ETFs we find them sub-optimal products for owning precious metals. We looked at this previously.
  • It gets more complicated with our stocks and shares covering sectors from precious metals miners to uranium miners and rare earth miners. A couple of emails and signed letters of authority later and the procedure of taking possession of our stock holdings has just begun. The process seems to work none too fast apparently. We now wait and send a reminder email every few days as we are informed by our broker that “…will come back to you shortly regarding whether or not we are able to rematerialise each of your holdings into certificated form and the costs involved”.
  • Further investments in agriculture and agricultural commodities are difficult to isolate from the system. There’s not much we can do here as futures and options are being used.

What does it mean for the gold price?

As gold and silver investors, and hopefully not suffering from what Didier Sornette calls an investor’s inescapable ‘bounded rationality’, we find the potential reaction to MF Global’s failure helpful for investment assets free from counterparty risk that are not simultaneously someone else’s liability.

The need for liquidity and to cover losses seem to be contributing to a soft gold price at the moment, where the markets main element of price discovery centres around the COMEX paper markets, but in the longer term we find this positive for gold. Any form of trend was temporarily lost during 2008 for the gold market as well.

Jim Sinclair finishes his discussion of MF with the following:

“More problems occur like this, less people trade, less life to markets, three to four hundred dollar range to gold (daily movements in the gold price), why not? The only money I can count on is the money I own. Everything else depends on the system”.

Regards and good investing,

Will Bancroft

For The Real Asset Company.

http://therealasset.co.uk

Aside from being Co-Founder and COO, Will regularly contributes to The Real Asset Company’s Research Desk. His passion for politics, philosophy and economics led him to develop a keen interest in Austrian economics, gold and silver. Will holds a BSc Econ Politics from Cardiff University.

© 2011 Copyright Will Bancroft - 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 losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

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

Free Report - Financial Markets 2014