GLD & TLT: Exploring the Dark Side of Exchange Traded Funds (ETFs) With Lauren Lyster at Capital AccountSubmitted by EB on 09/20/2012 12:14 -0400
What might happen to your favorite ETF in a crisis? As the the half life for the next Fed-induced bubble happily converges with the six month mark on Mr. Bernanke's QE3, these things never matter...until they do
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Several weeks ago we learned that 2011's vaporizer extraordinaire Jon Corzine is contemplating starting his own hedge fund: presumably one that invests all its capital in Italian 2 year bonds, charges 2 and 20, and then disappears when all LP capital blows up in an AUM supernova. Today, we learn that the stigma freeze associated with all other former MF Global trading whizkids has officially melted, as the former head of equity derivatives of MF Global has just launched a new hedge fund. From Bloomberg: "Daniel Bystrom, former head of equity derivatives trading at MF Global Inc., and Neil Boyarsky plan to start Hawksfield Capital LLC, a New York-based equity volatility hedge fund, by the end of this month. Hawksfield Capital will start with $10 million to $20 million of Bystrom and Boyarsky’s own money, as well as capital from friends and family, Bystrom said in a telephone interview. “The fund will deliver returns that are uncorrelated and often negatively correlated to the returns of the typical hedge- fund strategy,” Bystrom said. “The opportunity set expands dramatically in times of higher volatility, when most other asset classes are not performing well.” Such as the stock of MF Global perhaps?
One of the key stories of 2011 was the revelation, courtesy of MF Global, that no asset in the financial system is "as is", and instead is merely a copy of a copy of a copy- rehypothecated up to an infinite number of times (if domiciled in the UK) for one simple reason: there are not enough money-good, credible assets in existence, even if there are more than enough 'secured' liabilities that claim said assets as collateral. And while the status quo is marching on, the Ponzi is rising, and new liabilities are created, all is well; however, the second the system experiences a violent deleveraging and the liabilities have to be matched to their respective assets as they are unwound, all hell breaks loose once the reality sets in that each asset has been diluted exponentially. Naturally, among such assets are not only paper representations of securities, mostly stock and bond certificates held by the DTC's Cede & Co., but physical assets, such as bars of gold held by paper ETFs such as GLD and SLV. In fact, the speculation that the physical precious metals in circulation have been massively diluted has been a major topic of debate among the precious metal communities, and is the reason for the success of such physical-based gold and silver investment vehicles as those of Eric Sprott. Of course, the "other side" has been quite adamant that this is in no way realistic and every ounce of precious metals is accounted for. While that remains to be disproven in the next, and final, central-planner driven market crash, we now know that it is not only precious metals that are on the vaporization chopping block: when it comes to China, such simple assets as simple steel held in inventories, apparently do not exist.
Nothing has changed, it has only gotten worse...
A week ago, after peripheral European bonds soared and yields plunged on more hype and more promises that the ECB may monetize debt on the one condition that insolvent countries hand over sovereignty to the Troika ala Greece, we were not all surprised to learn that "suddenly, nobody in Europe wants the ECB bailout." And why should they? After all, The whole point of the gambit was to lower bond rates, which happened, which would allow insolvent government to stack even more debt courtesy of lower rates on top of record debt, taking the insanity of the old saying "fixing an insolvency problem with liquidity" one step further, and revising it to "fixing an insolvency problem with more insolvency." Furthermore, if the mere threat of the ECB stepping in and crushing any shorts or supporting longs was enough, why even bother with actual intervention. Simple: even infinite monetary dilution has its limits. That limit is and always has been cash flow, because a central bank can only dilute wealth, never create it. And for Spain said limit is approaching fast.
The new policy of unlimited quantitative easing is an experiment. If those theorists of insufficient aggregate demand are right, then the problem will soon be solved, and we will return to strong long-term organic growth, low unemployment and prosperity. I would be overjoyed at such a prospect, and would gladly admit that I was wrong in my claim that depressed aggregate demand has merely been a symptom and not a cause. On the other hand, if economies remain depressed, or quickly return to elevated unemployment and weak growth, or if the new policy has severe adverse side effects, it is a signal that those who proposed this experiment were wrong.
Remember Peregrine Financial, the firm that just like MF Global, ended up vaporizing $200 million in client money after it was revealed that its suicide-challenged CEO Russell Wasendorf was stealing operating cash for two decades under the nose of the CFTC? Yes? Good. Because in four days, said CEO will be relaxing in the comfort of his own home. It seems odd to us that the man who caused hundreds of clients to lose up to all of their life's savings, will be hanging out on his leather sofa, if only until such time as a one-way first class ticket to a non-extradition country is consummated. But who knows: perhaps this is all part of the "New Fairness Normal" where fraud and crime is if not rewarded, then certainly ignored.
That the SEC is the most incompetent, corrupt, irrelevant and captured organization "serving" the US public is known by everyone. And while the details of the SEC's glaring lack of capacity to do anything to restore investor confidence in the capital markets, which has become a casino used exclusively by Wall Street to defraud any retail investor still stupid enough to play (which lately a moot point as there have been no material retail inflows into mutual funds in over three years), are scattered, courtesy of Bloomberg we now have the best summary of just how the utterly clueless SEC is a muppet plaything of Wall Street, and together with it, the "grand regulation" that was supposed to keep Wall Street in check, is nothing but what Wall Street demand it to be, and forced the SEC, way over its head on regulation, to accept every change, that the very banks that are supposed to be regulated, demands as part of Dodd-Frank reforms. In short: everything we know about Wall Street 'regulation' has been a farce, and a lie, exclusively thanks to corruption rampant at the now documentedly incompetent Securities And Exchange Commission.
Jacques Wajsfelner of Weston, Massachusetts is a criminal mastermind. Big time. Like Lex Luthor. But rest easy, ladies and gentlemen, for this nefarious villain is about to face some serious jail time thanks to the courageous work of US government agents. 83-year-old Wajsfelner was finally caught and convicted of a most heinous crime: failing to disclose his foreign bank account to the US government and is now looking at FIVE YEARS behind bars in a Day-Glo orange jumpsuit. Sentencing guidelines suggest that he will get some combination of jail time and supervised release to the tune of several years. Then there's Eric Higgins of Port Huron, Michigan, who was recently busted for major possession of child pornography and engaging in sexually explicit conversations with juveniles online. He was given 20 months. Oh... and Mr. Higgins was a US Customs & Border Patrol agent. This is what justice means in the Land of the Free today. Have you hit your breaking point yet?
It ain't safe no more???
When first the speculation and subsequently the confirmation that in addition to suffering massive losses on its IG-9 position, JPM had engaged in massive, reckless and criminal CDS mismarking with the intent to defraud and to boost the appearance of profit for selfish reasons, we promptly concluded that "Jamie Dimon's "tempest in a teapot" just became a fully-formed, perfect storm which suddenly threatens his very position, and could potentially lead to billions more in losses for his firm." So far, the regulators which are currently on page two of "CDS for Absolutely Corrupt Criminal Morons", are only slowly catching up. And while the stench will eventually lead to Jamie, as what happened in the over the counter, unregulated CDS market has most certainly happened at the tens of trillions in other OTC products traded by JPM, most of which are IR swaps, tying it all back nicely to the Libor scandal of which JPM is also a part, the first person who will certainly experience some major pain as the JPM scapegoating plays out, is none other than the London Whale himself Bruno Iksil, who was loved by all at JPM when he was making money, and is now being hung out to dry, once the bank is in the prosecution's cross hairs.
The issue at hand is the sense that we have entered a phase of exponential criminality and corruption. A slavering crook like Corzine who stole $200 million of clients’ funds can walk free. Meanwhile, a man who exposed evidence of serious war crimes is for that act so keenly wanted by US authorities that Britain has threatened to throw hundreds of years of diplomatic protocol and treaties into the trash and raid the embassy of another sovereign state to deliver him to a power that seems intent not only to criminalise him, but perhaps even to summarily execute him. The Obama administration, of course, has made a habit of summary extrajudicial executions of those that it suspects of terrorism, and the detention and prosecution of whistleblowers. And the ooze of large-scale financial corruption, rate-rigging, theft and fraud goes on unpunished.
What do the following have in common? LIBOR, Bernie Madoff, MF Global, Peregrine Financial, zero-percent interest rates, the Social Security and Medicare entitlement funds, many state and municipal pension funds, mark-to-model asset values, quote stuffing and high frequency trading (HFT), and debt-based money? The answer is that every single thing in that list is an example of market rigging, fraud, or both. How are we supposed to make decisions in today’s rigged and often fraudulent market environment? Where should you put your money if you don’t know where the risks lie? How does one control risk when control fraud runs rampant? Unfortunately, there are no perfect answers to these questions. Instead, the task is to recognize what sort of world we happen to live in today and adjust one’s actions to the realities as they happen to be. The purpose of this report is not to stir up resentment or anger -- although those are perfectly valid responses to the abuses we are forced to live with -- but to simply acknowledge the landscape as it is so that we can make informed decisions.