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Chris Martenson: "We Are About To Have Another 2008-Style Crisis"

Tyler Durden's picture




 

Submitted by Chris Martenson

Get Ready: We’re About To Have Another 2008-Style Crisis

Well, my hat is off to the global central planners for averting the next stage of the unfolding financial crisis for as long as they have. I guess there’s some solace in having had a nice break between the events of 2008/09 and today, which afforded us all the opportunity to attend to our various preparations and enjoy our lives.

Alas, all good things come to an end, and a crisis rooted in ‘too much debt’ with a nice undercurrent of ‘persistently high and rising energy costs’ was never going to be solved by providing cheap liquidity to the largest and most reckless financial institutions. And it has not.

Forestalled is Not Foregone

The same sorts of signals that we had in 2008 are once again traipsing across my market monitors. Not precisely the same, of course, but with enough similarities that they rhyme loudly. Whereas in 2008 we saw breakdowns in the credit spreads of major financial institutions, this time we are seeing the same dynamic in the sovereign debt of the weaker European nation states.

Greece, as expected and predicted here, is a right proper mess and will have to leave the euro monetary system if it is to have any chance at recovery going forward. Yes, all those endless meetings and rumors and final agreements painfully hammered out by eurocrats over the past year are almost certainly going to be tossed, and additional losses are going to be foisted upon the hapless holders of Greek debt. My prediction is that within a year Greece will be back on the drachma, perhaps by the end of this year (2012).

Greek default spectre turns material

The weekend Greek revolt against the austerity measures imposed on its economy in return for eurozone funding has elevated the prospect of a Greek default on its debts or a chaotic exit from the eurozone.

 

The collapse in support for the mainstream parties that had reluctantly accepted the austerity program and the vehement opposition to the measures by the radical left party that finished the runner up in the weekend’s elections has made it almost impossible for a coalition to be formed that would persevere with the program.

 

It is likely new elections will have to be held next month but given the degree to which Greeks have protested against the harsh eurozone prescriptions – and the 20 per cent shrinkage in GDP and 20 per cent-plus unemployment that has accompanied them – it is improbable that Greece will continue with the reforms it agreed in return for the next $300 billion tranche of eurozone funding.

 

If it does walk away from that commitment there will be chaos in Greece and, to a lesser extent, elsewhere. Greece would inevitably default on its debts and could be forced to quit the eurozone.

(Source)

There really is no choice for Greece but to leave the euro, and the sooner, the better. Even then, there is a lot of hardship coming their way. But in my estimation, that’s better than the imposed austerity that is a guaranteed torture chamber. The institutions that avoided taking losses on their Greek debt on the first pass through, due to their preferred status in the process (the ECB among them), are almost certainly going to eat big losses this time, perhaps a full 100% of them.

Leaving the euro is going to be quite a process, and the ripple effects are going to be large and somewhat unpredictable. I found this description of what will happen within Greece and its banking system to be well on the mark:

The instant before Greece exits it (somehow) introduces a new currency (the New Drachma or ND, say). Assume for simplicity that at the moment of its introduction the exchange rate between the ND and the euro is 1 for 1. This currency then immediately depreciates sharply vis-à-vis the euro (by 40 percent seems a reasonable point estimate). All pre-existing financial instruments and contracts under Greek law are redenominated into ND at the 1 for 1 exchange rate.

 

What this means is that, as soon as the possibility of a Greek exit becomes known, there will be a bank run in Greece and denial of further funding to any and all entities, private or public, through instruments and contracts under Greek law. Holders of existing euro-denominated contracts under Greek law want to avoid their conversion into ND and the subsequent sharp depreciation of the ND. The Greek banking system would be destroyed even before Greece had left the euro area.

There would remain many contracts and financial instruments involving Greek private and public entities denominated in euro (or other currencies, like the US dollar) that are not under Greek law. […] Widespread defaults seem certain.

 

Euro area membership is a two-sided commitment. If Greece fails to keep that commitment and exits, the remaining members also and equally fail to keep their commitment. This is not just a morality tale. It has highly practical implications. When Greece can exit, any country can exit.

 

As soon as Greece has exited, we expect the markets will focus on the country or countries most likely to exit next from the euro area. Any non-captive/financially sophisticated owner of a deposit account in that country (or in those countries) will withdraw his deposits from banks in countries deemed at risk - even a small risk - of exit.

 

Any non-captive depositor who fears a non-zero risk of the future introduction of a New Escudo, a New Punt, a New Peseta or a New Lira (to name but the most obvious candidates) would withdraw his deposits from the countries involved at the drop of a hat and deposit them in the handful of countries likely to remain in the euro area no matter what - Germany, Luxembourg, the Netherlands, Austria and Finland.

 

The ‘broad periphery’ and ‘soft core’ countries deemed at any risk of exit could of course start issuing deposits under English or New York law in an attempt to stop a deposit run, but even that might not be sufficient. Who wants to have their deposit tied up in litigation for months or years?

(Source)

The Greek banking system will be destroyed immediately upon Greece’s exit from the euro, but the banking system there is already all but dead anyway. Best just to sweep the floor clean and start over.  The idea is easy enough to understand; if your bank is about to go under, it is best to get your money out before that happens.

The only mystery to me is why so many people have left their money in the Greek banks this long. I suppose they were waiting for a clearer signal? Well, it would seem that the signal has now been sent and received:

Greek Depositors Withdrew $898 Million From Banks Monday

Greek depositors withdrew €700 million ($898 million) from the country's banks on Monday, fueling fears of a bank run amid the growing political disarray.

 

With deposits falling, Greek banks become even more dependent on the European Central Bank to meet their funding needs, exposing the central bank to potentially huge losses if Greece leaves the euro area.

 

Monday's deposit withdrawal far outpaced Greek banks' steady decline in deposits since the start of the country's debt crisis in 2009, as depositors withdraw cash and transfer funds overseas. In the past two years, deposit outflows have generally averaged between €2 billion and €3 billion a month, though in January they topped €5 billion.

 

The latest data from the Greece's central bank show that total deposits held by domestic residents and companies stood at €165.36 billion in March.

(Source)

Again, the real mystery to me is who still has 165 billion euros in Greek banks at this stage of the game?  Also a mystery is why Greece has not yet imposed a withdrawal moratorium and capital controls?  It is only a matter of time, perhaps days, before they do.  

Of course, it is the contagion effect that most worries the market, because the same dynamic of utter insolvency leading to the intractable nature of Greece’s dilemma applies to Spain, Portugal, and Italy.

Indeed, the market is already adjusting to this possibility, as evidenced by the spikes in the yields of those country’s bonds:

Contagion Fears Hit Markets

LONDON - Investors battered European stocks, dumped the bonds of Spain and Italy, and bid the euro down against the dollar Monday after the collapse of weekend coalition talks in Greece edged that country closer to an exit from the euro zone.

The sweeping market action dealt a blow to hopes that the damage of a Greek exit, should it occur, could be comfortably contained.

 

In the market carnage, Greek stocks fell to two-decade lows, and Spanish bond yields leapt to levels not seen since the panic of last November. Shares of a big Spanish lender dropped 8.9% on the Madrid bourse, pulling the benchmark index down 2.7%. The Italian market also fell 2.7%, and the euro slid to $1.2845 late Monday in London, its lowest level in four months.

(Source)

The worry and the carnage are both running deep. And they should. Everything is now interlinked to such a degree that there is no possible way for a run on Greek banks or continued declines in the value of sovereign debt to be anything other than exceptionally destructive.

Everybody owes everybody, and there’s not enough productive economy to mask the insolvency of the system any longer.

We saw this as Spain’s sovereign yields vaulted, Spanish bank shares plunged, a not-so-happy linkage courtesy of the LTRO funding which enabled (and encouraged) Spanish banks to load up on Spanish debt. A virtuous circle morphed into a vicious spiral, each element weakening the other all the way down.

That the US stock market is only down less than 5% from recent highs is a testament to the power of the liquidity that the Fed and US banking system have directed at keeping things elevated. However, this cannot last, at least not without another big quantitative-easing (QE) injection from the Fed. Without such an infusion, I am calling for another 2008-2009-style market rout of at least -30% but possibly as much as -50%.

QE, stat!

The reason we need another QE injection is that the same dynamic of debt destruction is again stalking the markets. As expected, the Fed has been waiting for a clear signal that it is time for more thin-air money, and again they are going to wait too long to prevent more damage from occurring.

This time I am expecting a coordinated central bank action that will involve most or all of the major central banks of the OECD: Japan, UK, US, and Europe.

One day, we will wake up to find some global message about the need for a coordinated response to a major crisis, and each of the central banks will be issuing some massive new amount of thin-air money. Of course the programs will be called something fancy that will require shortening to an acronym and will involve buying some form of debt (sovereign debt, but maybe also bank debt), and we’ll track this via central-bank balance-sheet expansion.

Perhaps we’ll see this line go up a little steeper, or perhaps the same trajectory will be maintained a little longer:

Regardless, more printing is on the way, because the alternative is the utter collapse of the entire Western banking system. And quite probably a few governments, too.

To me, that is an unthinkable outcome, and one that I have every faith will be avoided at any every cost. It is the main reason that I am quite content to hold onto all of my gold at this juncture. Anybody selling physical gold here is either broke (and needs the money) or is just not paying attention.

To drive the point home, consider this picture posted on Zerohedge taken from a German television production purported taken of the Ministry of Finance in Athens. A picture is worth a thousand words:

(Source)

By the time the Ministry of Finance is storing records in garbage bags and shopping carts, perhaps, just maybe, one might become a little concerned about loaning money to the Greek government. One hopes.

If You Think Greece is Bad

Greece, of course, is tiny compared to Spain or Italy. The situation in Spain -- which is big enough to matter -- is truly dire, very large, and getting worse.

Spain has been playing fast and loose with the numbers, and that fact has now been revealed to the world. It’s not a pretty picture.

Spain Underplaying Bank Losses Faces Ireland Fate

May 10, 2012

Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system.

 

The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt.

 

Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.

 

“How can you only talk about one type of real estate lending when more and more loans are going bad everywhere in the economy?” said Patrick Lee, a London-based analyst covering Spanish banks for Royal Bank of Canada. “Ireland managed to turn its situation around after recognizing losses much more aggressively and thus needed a bailout. I don’t see how Spain can do it without outside support.

(Source)

And this is just the losses that Spanish banks face on their real-estate portfolios. They are also now facing losses on all the Spanish sovereign debt that they bought with their LTRO funding as well. Very simply, Spain now needs a massive rescue, and soon.

Meanwhile German citizens are all done with helping their southern neighbors. Merkel has used up all of her political capital on the rescues performed to date, and it is far from clear that any more help is politically doable here. The only way that I can see such help coming is under some terms other than drawing upon the savings of Germany’s citizens. Printing, perhaps, but even that is a dicey political proposition here.

If Spain drops here, then you can just set an egg timer for when Italy will go. And then France. The dominoes will rapidly fall from there.

Why I Am Nervous These Days

In describing JPMorgan’s recent $2 billion (or is it $20 billion…or more?) trading losses and Jamie Dimon’s (the CEO of JPM) awkward explanation of how certain hedging operations went wrong, the author of this next piece asks the obvious question:

Does Jamie Dimon Even Know What Hedging Risk Is?

But wait a minute? If you’re hedging risk then the bets you make will be cancelled against your existing balance sheet. In other words, if your hedges turn out to be worthless then your initial portfolio should have gained, and if your initial portfolio falls, then your hedges will activate, limiting your losses. That is how hedging risk works. If the loss on your hedges is not being cancelled-out by gains in your initial portfolio then by definition you are not hedging risk. You are speculating.

(Source)

We still don’t know the exact dimensions of JPM’s losses here (my expectation is that more bad news will follow soon enough), but we can be sure that the big banks have not learned from the mistakes of the past and are still engaged in risky practices involving derivatives.

Whatever JPM was up to (and I am still not entirely clear on what that was), it was not classic hedging, which serves to minimize losses, but something far more speculative.

The reason this gives me such cause for concern is that it once again exposes a small portion of the derivative monster that will certainly be awakened when the European situation goes into full meltdown over the Greek, then Spanish, the Portuguese, then Italian situations.

While derivatives are, in theory, a zero-sum game, and therefore could, in theory, be forgiven and forgotten in a pinch, the reality is that they’ve been used to pretend that risk did not exist and therefore losses don’t exist.

The ugly truth here is that we are at the tail end of a most unfortunate credit bubble -- four decades of global excess by the OECD countries -- and there are massive losses to account for. Just as the offsetting counterparties involved in the subprime CDO and CDS mortgage crisis did not zero out because the losses they were allegedly papering over were all too real, the same will prove true of the derivative paper allegedly covering sovereign and corporate debts.

Remember, the biggest holder of derivatives is the company that just demonstrated that it doesn’t really understand the concept of hedging.

(Source)

Overall derivatives, especially interest-rate-linked derivatives, have increased by over $100 trillion since the crisis began. As JPM just evidenced, and as hinted at by the interminable hand-wringing over allowing Greece’s paltry $78 billion in credit-default swaps to be triggered, real dangers lurk here.

I wish I could analyze the situation better than the rest of the crowd that either screams catastrophe looms or coos that everything is safe, but I cannot. The situation is too opaque, too convoluted, and too complex to tease apart. I simply don’t know what the true nature of the risk really is -- and the truth is, nobody really does. You might as well ask these analysts to tell you the exact size and shape of the first ten waves that will hit Laguna Beach exactly one year from now beginning at 12:05 p.m.

Instead, what I can offer to you is the idea that instead of reducing (let alone eliminating) risk, all that derivatives have done is mask risk. This means that whatever losses are resident in a system with four decades of debt-fueled malinvestment and overconsumption are still there just waiting to be realized.

It is this certainty that the losses remain, the risk is masked, and the bets have only grown larger that makes me very nervous these days as I contemplate the possible implications and repercussions of a Greek exit from the euro.

To Sum Up Part I

Given this environment of massive, rapidly-accelerating, and obfuscated risks, the prudent among us are undoubtedly wondering, How the heck is this going to play out? And how do I prepare for it?

In Part II: What To Do When the Central Banks Blink, I lay out my forecast for how low asset prices will sink before the central banks once again attempt to ride to the rescue with gargantuan liquidity measures.

But this next time won't work as it did in 2008, in my estimation. I see central banks being near the end of their ability to influence developments at this point. More liquidity will affect different asset classes differently, and for the first time raise real (and valid) concerns about the widescale debasement we are witnessing across the world's major fiat currencies.

Putting your capital into those resources best positioned to appreciate most as the result of money printing and hold or increase their purchasing power in such an environment should be a top priority for every concerned investor.

Click here to access Part II (free executive summary; paid enrollment required for full access).

 

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Wed, 05/16/2012 - 17:57 | 2433225 Olympia
Olympia's picture

Loan sharks knew that if they took the dollars printing machines under their control they could suffocate the world ...they could initially suffocate USA and after taking the USA from the Americans, they could move and suffocate the whole world and take the countries from their people.

FED printed cheap money and loansharking multiplied this money in an unnatural way within the American economy boarders and they discarded them abroad so that they did not threaten USA. USA became the first state in the world with artificial “breathing”...

It cannot be possible but just in the USA for only the last year, more than one million houses were seized. It cannot be impossible but the New World has returned to tents and shelters ..has returned to the ages of Columbus. It cannot be possible that we allow to a few loan sharks looting the toils and the assets of people...

http://eamb-ydrohoos.blogspot.com/2012/01/global-debt-crisis.html

.

Wed, 05/16/2012 - 20:07 | 2433521 Seer
Seer's picture

Must consult the Mayan calendar... Uh, no, they were clearly calling 2012 as The year, pretty sure that's what they said...

Wed, 05/16/2012 - 17:42 | 2433182 Bluntly Put
Bluntly Put's picture

"While derivatives are, in theory, a zero-sum game, and therefore could, in theory, be forgiven and forgotten in a pinch..."

That sounds good in terms of liabilities, but how many banks are counting the same derivatives as "assets"? Not to mention rehypothecated "assets" upon "assets" upon "assets"....

Wed, 05/16/2012 - 18:47 | 2433327 chet
chet's picture

The "zero sum" argument has never made sense to me.  There is still an entity on each side of the bet, so yes the loser would love to "forgive and forget", but the winner would be out their initial investment.  Plus, in theory the winner was trying to hedge a loss somewhere else, so he'd take that loss, then have his winning hedge "forgotten."

So still lots of blood on the street for specific firms (maybe all of them?), despite being "zero sum."

Wed, 05/16/2012 - 20:08 | 2433525 Seer
Seer's picture

Even IF it were zero-sum I figure that the entire world would still collapse as all the computers would be tied up trying to un-sort everything (not even making it back to "zero")!

Wed, 05/16/2012 - 18:52 | 2433345 chet
chet's picture

Doop.

Wed, 05/16/2012 - 19:40 | 2433451 boogerbently
boogerbently's picture

Theoretical losses could theoretically be "forgiven/erased/forgotten", but that would need the approval and cooperation of the banks that hold/owe them.

What are the chances of that?

Wed, 05/16/2012 - 20:15 | 2433534 Seer
Seer's picture

Forgiven?  Can't wait to see banks being slaves to other banks!

Wed, 05/16/2012 - 17:42 | 2433184 Peter Pan
Peter Pan's picture

The bottom line is that much of the debt criss crossing the planet is unserviceable and definitely not repayable. Derivatives simply magnify the problem of the debt. Given that it is impossible to negotiate an unwinding/write off of this debt and given that it is too tangled a web, we will one day witness one of the big players making a run for the door and then it will be on for young and old.

Wed, 05/16/2012 - 17:51 | 2433215 ebworthen
ebworthen's picture

QE3 and QE4 along with Bailout II will be implemented.

Not that they will solve the problem, but central banks have no other tools.

When that doesn't work they will begin raising rates, consequences be damned, as it is their only other tool and will help to inflate away deficits.

Wed, 05/16/2012 - 18:52 | 2433348 Rainman
Rainman's picture

Mostly agree, but I'm scratching my head as to how the dollar will be benchmarked against an impaired euro with one, two or three walking dead euro players out of the game....with or without printing. Seriously...I can't figger how the dollar resets, up or down. Need help from a psychic or a psychiatrist.

Stonger dollar turns many yings into yangs

Wed, 05/16/2012 - 20:20 | 2433547 Seer
Seer's picture

When you have to have BOTH imports and exports you're pretty much screwed, as exports get fucked with a strong dollar and imports get fucked with a weak one.  Depending on energy imports to create exports is a precarious thing... while it might seem zero-sum I'm kind of thinking that the chicken-and-egg thing will throw it all into a one big circular function ("race condition").

Wed, 05/16/2012 - 17:55 | 2433220 mammoth mo
mammoth mo's picture

"What we have here is a failure to communicate"

 

You see when banks run on money - and are regulated but unregulated at the same time.

You can tell them they can only earn so much - but the amount they can steal is 100 times the fine if they get caught they steal.

When they get caught stealing they say - just a blimp. 

That's when you realize - all their earnings look like the blimp.

So in effect - they have no earnings they didn't steal.  Since all their earnings are illegal they may get to keep them - but they are worthless.

Not only are their earnings worhtless but so is the regulators they bought off.

The regulators in effect are the governments who winked and nodded.

At the end of the day you have Greece being the blimp.

Put me in the camp that says 2008 if we are lucky.

 

When the market was at 10000 last year - it should have went to 8000.  Instead you got 3000 plus points of puff the magic
QE that wasn't called a QE.  Draghi was hailed a hero for preventing a credit crisis and all was well.....

 

Well illogical.

Now the stink of 3000 bogus points on top of the original 2000 stinking points can't be perfumed over.

Wed, 05/16/2012 - 18:44 | 2433320 Xkwisetly Paneful
Xkwisetly Paneful's picture

How much puff magic is there in gold and silver?

Because I see the same motion involving them with the government actions as with everything else.

So how much puff magic there?

Keep up the fight, it's not like the FED always wins or anything, this time will be different  and the next money spewing won't send up equities/bonds pretty much everything but US wages and home prices or their targets higher-like it did the last 5 times-gold and silver are special!

The world is going to end, the dollar will die for the 4,238 time just in my lifetime alone!

Wed, 05/16/2012 - 20:25 | 2433565 Seer
Seer's picture

And that which cannot continue forever won't.

Up to this point there have been backstops, ways to push the trash into some unexposed corner.  Well, there's no more corners.  The Stink WILL come- I guess it'll then be a test of how long you can hold your nose.  Start practicing...

Wed, 05/16/2012 - 18:57 | 2433356 skepticCarl
skepticCarl's picture

mammoth mo, learn how to conjugate the verb "to go".

Wed, 05/16/2012 - 18:00 | 2433228 TWSceptic
TWSceptic's picture

Everyone likes to pretend they know how the next big thing will unfold, but I bet it will be something more unexpected. Anything can do it, since most economies are now like houses of cards any wrong touch or blow will do it and there is no way to predict when or how.

Wed, 05/16/2012 - 18:15 | 2433266 SheepDog-One
SheepDog-One's picture

Yep exactly...no way are they going to do what everyone expects.

Wed, 05/16/2012 - 21:33 | 2433762 stocktivity
stocktivity's picture

My guess is a run on banks starting in Greece and spreading.

Wed, 05/16/2012 - 18:04 | 2433236 Saucy-Jack
Saucy-Jack's picture

Hopefully, the physical holders of gold and silver will be able to hang onto them while the paper pm prices collapse along with everything else.

Wed, 05/16/2012 - 18:06 | 2433239 Timmay
Timmay's picture

I want to wake up one day soon and go to Zerohedge and see the headline story: 

"THIS BITCH IS GOING DOWN".

Wed, 05/16/2012 - 18:09 | 2433246 hornster
hornster's picture

I am amazed the Greeks have $898 million to withdrawl.  And in just one day.  Wow.

To hell with the banks.  New ones will pop right up.  There will never be a shortage of banks.

Wed, 05/16/2012 - 20:32 | 2433591 mt paul
mt paul's picture

hey rockey 

watch me pull a billion 

out of my hat......

[ insert greek word for hat ]

Wed, 05/16/2012 - 18:13 | 2433256 midgetrannyporn
midgetrannyporn's picture

There is no risk to the bankers, only to the people. The house always wins. The outcome is certain. What will happen is what they want to happen, nothing more, nothing less.

Wed, 05/16/2012 - 18:20 | 2433277 SheepDog-One
SheepDog-One's picture

The central banksters will do whats best for them, and now that the debt is monetized I believe what they want next is to bankrut the shit out of everyone.

Wed, 05/16/2012 - 20:29 | 2433582 Seer
Seer's picture

First part is right.  Second would imply that they have death-wish.  If you have control the LAST thing you want is for things to change.  They have control over everything.  Initiating chaos is more threatening to them: they have much further to fall.

This is what happens when you're able to exponentially leverage greed.  Ah, the computing age giveth and it taketh away...

Thu, 05/17/2012 - 11:48 | 2435789 Iwanttoknow
Iwanttoknow's picture

Not necessarily.BIS can take over.

Wed, 05/16/2012 - 18:18 | 2433269 Peter Pan
Peter Pan's picture

What we are all doing here at Zero Hedge is providing running commentary on a sinking ship and the only sane thing to do is to take precautionary steps lest we become victims of having over analyzed and under prepared.

Please feel free to recommence commentary once you have prepared for when the SHTF.

Wed, 05/16/2012 - 19:09 | 2433384 SheepDog-One
SheepDog-One's picture

'2008 style'...yea best-case scenario.

Wed, 05/16/2012 - 18:20 | 2433274 TheInfoman
TheInfoman's picture

From martenson's article: "what I can offer to you is the idea that instead of reducing (let alone eliminating) risk, all that derivatives have done is mask risk."

Betcha the MSM won't lead tonight's newscast with that observation.

 

Wed, 05/16/2012 - 19:58 | 2433501 Withdrawn Sanction
Withdrawn Sanction's picture

Bet they wont either...but the reason (unbeknownst to the toadies and presstitutes in the MSM) is derivatives in this case do NOT mask risk, they amplify it.  They create a dynamic negative feedback or resonance triggered when just one counterparty fails to deliver.  In 2008, AIG was the monkey in the middle.  Had it not been for Uncle Sugar, the whole inverted derivatives pyramid would have toppled.

Derivatives can be a useful tool when used in moderation.  But as Prof Black pointed out recently, JPM has a balance sheet fo between $1 and $2 trillion.  So a true hedge would likely require something of a similar size if the entire BS were fully hedged, through probably a bit smaller if we leave out cash.  So how then does JPM have a derivatives exposure of $70T?  It sure as hell aint hedging its own exposure now is it?

Potter:  So what have you been doing, George (Jamie)?  Playing the market with the company's money?

Wed, 05/16/2012 - 20:36 | 2433598 Seer
Seer's picture

"Potter:  So what have you been doing, George (Jamie)?  Playing the market with the company's money?"

Shit!  I guess I was wrong about all the folks who thought that it would be a good idea to invest SS funds in the markets.  The govt could have hedged against itself, as it is now it's totally fucked!

Wed, 05/16/2012 - 21:36 | 2433771 stocktivity
stocktivity's picture

...and this is supposedly the smartest of the big banks

Wed, 05/16/2012 - 18:25 | 2433285 kahunabear
kahunabear's picture

Uh.....BULLISH!!

Wed, 05/16/2012 - 18:30 | 2433292 Winston Smith 2009
Winston Smith 2009's picture

"Well, my hat is off to the global central planners for averting the next stage of the unfolding financial crisis for as long as they have."

Chris is a smart man and I've always enjoyed and mostly agreed with his analysis, but the crisis calls from him and others have been a case of the boys who cried wolf.  While I believe there will eventually be a HUGE crisis, far worse than 2008, it's has thus far been a countdown to it like 5, 4, 3, 2, 1, "saved", 5, 4, 3, 2, 1, "saved", etc.  I'll believe it's here once it's actually started and I can again have as I did in 2008 a blast watching CNBC talking heads turn white(er).

Wed, 05/16/2012 - 18:53 | 2433347 Peter Pan
Peter Pan's picture

The issue is not WHEN it will happen but whether you are PREPARED for when it happens.

Wed, 05/16/2012 - 20:43 | 2433623 Seer
Seer's picture

Would you have preferred it would have happened way back when?

If you really think about it everyone is giving us plenty of warning.  The system was always unstable, but it's only been recently that it's run out of fuel and now we're dropping altitude.  Soft landing?  Ha ha... this is a stealth economy, it can't glide!  Parachutes are now going fast, and it's a bit late, even if you got one, to learn how to operate one.  Yes, better to not look silly wearing a parachute when everyone is saying that we're still aloft!

Wed, 05/16/2012 - 18:38 | 2433306 the grateful un...
the grateful unemployed's picture

this situation seems to be a fixture tied to the election cycle. in the last cycle there was no encumbent, (and the resident POTUS gave little or no support to his parties candidate,  and Goldman gave twice as much to the Democratic challenger). but there's multifold reasons why the encumbent would use a financial crisis to gain reelection, or in the event that he lost the election, he would poison the ground sufficiently that the new POTUS would not be able to rebuild the economy in four years, and therefore not be able to win a second term.

it's almost impossible to blame a President for the bad economy, and leaving a healthy economy merely leaves the next POTUS, not of your party, to squander the savings. (if Bush II had inherited a large debt he never could have put on Iraq and all manner of spending which enabled him to get through a second term) the lesson is you don't leave anything for your successor to use against you politically, such as a budget surplus)

of course you hope as Clinton did, that your VP will be reelected. in the case of Bush II his VP was a nonstarter. then McCain was always too liberal, (Bush pummeled him in the primaries 2000).

for a POTUS seeking reelection, an economic emergency suggests to voters that they don't vote for change (don't change horses in the middle of the stream). should he fail to be reelected, the GOP successor will have an economic crisis to deal with, which will push back any programs he might want to implement. even as we speak Obama has quietly allowed unemployment benefits to expire, to show voters what happens if he is not reelected.

Romney is slow to pick up on this, but he understand politics is a contact sport. Reagan knew this when he violated campaign laws by interfering in foreign relations, Iran, missiles for hostages. it's only gotten a lot more ruthless, as 2008 was preemptively arranged. Obama is not entirely unaware, and is likely to use the same tactics Bush II used against him, against Romney.

Wed, 05/16/2012 - 18:59 | 2433364 my puppy for prez
my puppy for prez's picture

you forgot one thing....war!

Wed, 05/16/2012 - 20:50 | 2433641 Seer
Seer's picture

News Flash: It's a global economy.  I'm not thinking that the puppet masters would willingly allow things to get this fucked up just so that they can deliver Product B to US citizens.

Is it time for war?  Don't know.  Clearly it wasn't the last election, otherwise McCain would have gotten the job.  NOTE: Obama has been handed a couple little Grenada-like campaigns, and the keys to wrap up the wars in Afghanistan and Iraq, enough to bestow "wartime president" on him; and we know that such "honors" garner automatic reappointments...

Wed, 05/16/2012 - 18:40 | 2433313 e-man
e-man's picture

You will all know when the real crisis hits.  And after the real crisis hits, there will be no more Jim Cramer or CNBC.  Just like in the good ol' days.

Wed, 05/16/2012 - 18:40 | 2433315 Shizzmoney
Shizzmoney's picture

Again, the real mystery to me is who still has 165 billion euros in Greek banks at this stage of the game?

In poker, we call these people "fish" or "suckers"

Wed, 05/16/2012 - 18:52 | 2433349 Matt
Matt's picture

+1

-1

Wed, 05/16/2012 - 18:49 | 2433331 Pejorative Requiem
Pejorative Requiem's picture

Yes, more recognition that the end game is on. And more recognition that predicting how things will play out is, pun intended, sheer speculation. The fiats are dealing with trillions of x currency, but the masses still percieve 100 of x currency to be "a lot of money". Disagree? ok.... take the Franklin in your wallet out, and burn it. See? $100 is still a lot of money. But it simply can not stand. Looking forward to part 2.

Wed, 05/16/2012 - 18:56 | 2433353 Matt
Matt's picture

Ben Bernanke sure is alot better at this game then Rudolf Von Havenstein or Gideon Gono. I'm not sure exactly what it is he is doing differently, but it seems to be working so far.

Wed, 05/16/2012 - 23:12 | 2434000 Calmyourself
Calmyourself's picture

A world reserve currency will do that for you, make you look very smart for a while.  Gideon and Rudolf had competitive currencies and political headwinds those same conditions do not, cannot exist at this point.

Wed, 05/16/2012 - 20:52 | 2433653 Seer
Seer's picture

"And more recognition that predicting how things will play out is, pun intended, sheer speculation."

I think that the path is pretty clear.  What we don't know is how big the craters in the path will turn out to be.

Wed, 05/16/2012 - 19:05 | 2433361 Monkeyfister
Monkeyfister's picture

Quote:

"Well, my hat is off to the global central planners for averting the next stage of the unfolding financial crisis for as long as they have."

The simplest, and most harmless and efficatious thing to have done in 2008 was to let those criminal, and insolvent "Banks" take their losses/ fail, and prosecute the perpetrators. They ARE STILL Failed Banks, and the perps are still breathing free air, while mocking the Law, the sleeping Regulators, and all of us "Muppets," down here, while evading taxes. They are rolling in their hoarded cash, and calling themselves "Job Creaters,"while revelling in the fact that they are destroying jobs on a daily basis, and pushing the DOW up every time unemployment numbers rise. Sick, cynical bastards that they are.

Had we let the criminals go down, we'd have not printed Trillions and Trillions of Free Money (over $14 Trillion) for those same Banksters to set on fire with nothing to show for it, save for bulging CEO pockets. We'd have hit bottom directly, and we'd be well on our way to recovery. We COULD have put a portion of what has been printed to actually EMPLOYING people. The Housing and Fraudclosure crises would be mostly in the rear-view mirror, and a lot of smaller, stable Regional Banks and Credit Unions would be growing strongly in the vacuum left by the Big Thugs. Instead, we let them hug their precious, faulty Models, and let them continue to "Mark to Model," instead of forcing them to "Market to Market Reality." But, this drug-addled, ADHD nation seems to have forgotten all that.

Now, the entire world is assed-out broke, having tried to help the Criminal Banksters, only to find they weren't interested in helping themselves, just looking for another gambling fix. We're out of Magic Bullets, and can't even take care of our own people, for having kept the Banksters in Filet and Lobster. Time to pull the plug, and finally let them die.

When the Banksters finally start jumping from their windows, I'll be dancing, and singing, "It's Raining Men!" and I cannot even stand that song.

 

Thu, 05/17/2012 - 07:43 | 2434573 WillyGroper
WillyGroper's picture

>>>>>>while mocking the Law, the sleeping Regulators,

Sleeping regulators? Jim Rogers says they're incompetent. 

I say complicit!

Wed, 05/16/2012 - 18:59 | 2433362 Tenshin Headache
Tenshin Headache's picture

"Everybody owes everybody, and there’s not enough productive economy to mask the insolvency of the system any longer."

Nailed it.

Wed, 05/16/2012 - 19:52 | 2433450 Monkeyfister
Monkeyfister's picture

One would have expected that people in their positions would have actually wanted to BE the "Job Creators" they claimed to be, for no other reason but to provide for a Productive Economy that would have kept Customers' funds in their Glorious Institutions and buying their stuff. But no. They rejoice every time UI and Productivity numbers tick up, and the few jobs actually created have been in spite of their best efforts to destroy jobs. Meanwhile, they levy usurous fees on the few remaining customers they have out of spite, and to generate a bit more juice to take to the Casino.

And they have the timerity to whinge when called to this Reality. I'm wondering when the hordes of rabble will decend on the homes of Dimon, Corzine, Blankfein, and the lot, in the middle of the night, set the houses ablaze, and then chop the the entire household down as they flee the fire.

 

 

Wed, 05/16/2012 - 21:07 | 2433683 Seer
Seer's picture

There's nothing left to juice the "economy," regardless of whether anyone did or did not want there to be more "productivity."  TPTB live off of everyone's "productivity," it therefore seems pretty silly that they'd kill the Golden Goose.

People can ransack the perps' homes, even take them out for a nice stroll in town center, but that won't change the fact that we ALL STILL owe the future.  There is ZERO chance that payment won't be in the form of massively curtailed growth (borrowing from the future).  These greedy bastards (I do think that there may be one or two good ones lurking in the barrel) have no more ability to create something from nothing than anyone else, and this is exactly what it would take to perpetuate the growth scheme (there's not enough of real stuff to fuel the continued flight, which leaves us to magic potions and whatnot).

No, keep 'em alive, Scarlett Letter time.  And they should be wearing mirrors so that we also can see ourselves in Them...

Wed, 05/16/2012 - 19:04 | 2433367 Arnold Ziffel
Arnold Ziffel's picture
Shareholders sue JPMorgan Chase over trading loss(Reuters)

 

It said Dimon and Braunstein made "materially false and misleading statements and omissions" on an April 13, 2012 earnings conference call with investors.

"Defendants misrepresented the losses and risk of loss to the company arising from massive bets on derivative contracts related to credit indexes reflecting interest rates on corporate bonds," the complaint said. "These derivative bets went horribly wrong, resulting in billions of dollars in lost capital for the company and billions more in lost market capitalization for JPMorgan shareholders."

 

http://finance.yahoo.com/news/shareholders-sue-jpmorgan-chase-over-13504...

 

Oh my, what shall we do with these pesky shareholders...

Wed, 05/16/2012 - 19:41 | 2433452 Monkeyfister
Monkeyfister's picture

They will pull a Corzine if the suit shows any sign of winning.

Wed, 05/16/2012 - 19:05 | 2433372 michael.suede
michael.suede's picture

Alas, all good things come to an end, and a crisis rooted in ‘too much debt’ with a nice undercurrent of ‘persistently high and rising energy costs’ was never going to be solved by providing cheap liquidity to the largest and most reckless financial institutions. And it has not.

Followed by

The reason we need another QE injection is that the same dynamic of debt destruction is again stalking the markets. 

Because without it the western economic system will collapse.

Hey genius, what do you think is going to happen when hyper-inflation sets in?  Will that be better than letting the ponzi banking system go bankrupt?  You're saying you prefer hyper-inflation over a bunch of bankers and bureaucrats going bankrupt?  

You people want a solution to the banking crisis?

 It's called Bitcoins and gold.

 Stock up now before the bureaucrats follow through with genius boy's policy recommendations.

 

 


Wed, 05/16/2012 - 19:32 | 2433435 Papasmurf
Papasmurf's picture

Bitcoins LOL.   What a bunch of crap.

Wed, 05/16/2012 - 19:42 | 2433464 SheepDog-One
SheepDog-One's picture

Who can afford HYPERINFLATION these days? Oyyyyyyy!

Wed, 05/16/2012 - 21:18 | 2433703 Seer
Seer's picture

I believe he's speaking from the perspective of what the Fed et al feel compelled to do. I further think that he's daring them to print more: he's in to PMs!  And, really, inflation eats up old debt pretty good; of course, it does so at the expense of the future.

This is more than a "banking crisis."  This is a civilization crisis.  The former suggests some sort of manageable economic cycle event.  The later suggests a total unknown: this is pretty much pointed out by the fact that investment is just plain unable to find meaningful targets (it's all just sloshing back and forth in the sinking ship).

Wed, 05/16/2012 - 19:11 | 2433391 KandiRaverHipster
KandiRaverHipster's picture

As expected, the Fed has been waiting for a clear signal that it is time for more thin-air money, and again they are going to wait too long to prevent more damage from occurring.

 

my favorite part!  after all the important people have slowly gone to cash or secured neutral positions, the rest are left behind.

Wed, 05/16/2012 - 19:28 | 2433424 Rick Blaine
Rick Blaine's picture

This is it!!!

Wed, 05/16/2012 - 23:35 | 2434052 jomama
jomama's picture

dude, if i had a walking liberty for every time i've heard that... i wouldn't need ZH nemore.

Thu, 05/17/2012 - 02:49 | 2434298 dark_matter
dark_matter's picture

Yes, this time the wolf really is at the door. No, really, he is. Just come one more time and look. And I promise this is the last time I will say this. Ever.

Wed, 05/16/2012 - 19:33 | 2433440 The Swedish Chef
The Swedish Chef's picture

Look at the ten year gold chart. The last six months look an awful lot like mid-2008.

Wed, 05/16/2012 - 19:43 | 2433453 Withdrawn Sanction
Withdrawn Sanction's picture

The oft-repeated incantation that central bankers will (once again) save the day with ________ (QE3, LTRO5, or whatever) would be quaint, even charming perhaps if it werent so dangerously naive.  It took the Fed 2 years worth of GDP to prop this puppy the first time through.  I seriously doubt five times that amount will be sufficient this go 'round because the losses are bigger and more centralized.

Martenson's reference to 40+ years of malinvestment is spot on.  This house of (Credit) cards has been built over decades.  When it starts to collapse this time, it will be a cascade so rapid that central bankers worldwide will be caught slack jawed.  The reason of course, is the derivatives overlay on top of the credit bubble.  Fear of collapse (not even the actual thing) will freeze payments and liquidity, just as it did in 2008, and the whole thing implodes.  If Bernanke is in the structure w/his molly columns of currency when it collapses, he will be crushed.

Central bankers are not omnipotent, they are not omniscient, they are not well meaning.  They are human (or sub-human, if you prefer) and because of that, they too will fail.

Wed, 05/16/2012 - 21:21 | 2433722 Seer
Seer's picture

Good commentary.

I don't, however, think that the bankers are going to be surprised at all.  They hear the footsteps.  And they know that there's nowhere to run.  This is a sure thing for the top banks.  For the smaller ones those folks likely think that the big banks will burst into large enough flames that they, the smaller ones, aren't the attraction (and if they're "local" they may actually survive with support from the local communities for which they've actually been committed to serving [and not screwing]).

Thu, 05/17/2012 - 01:01 | 2434200 Raymond Reason
Raymond Reason's picture

Well put.

Wed, 05/16/2012 - 19:55 | 2433494 world_debt_slave
world_debt_slave's picture

party like it's 2007, and say.... fuck it!

Wed, 05/16/2012 - 20:01 | 2433505 orangegeek
orangegeek's picture

In Elliott Wave terms, primary wave 3 down is going to be the largest move down this planet has ever seen.

 

Daily chart below.

 

http://bullandbearmash.com/chart/dow-jones-daily-14-2012/

 

Weekly chart shows a better picture of how bad this may  actually get.

Wed, 05/16/2012 - 20:21 | 2433544 Paul Thomason
Paul Thomason's picture

Interesting video comparing 1929 Crash To Current Times - A View Of The 1929 Crash! - remarkable similarities

Wed, 05/16/2012 - 20:19 | 2433550 chump666
chump666's picture

Worst than 2008.

Wed, 05/16/2012 - 20:21 | 2433551 kedi
kedi's picture

I would expect U.S. financial institutions to go big into Greek debt, hoping for it to fail. The U.S. government then has a perfect excuse to bail them out yet again, to not allow a foreign event to harm U.S. interests. It is all blamed on the Greeks and EU. Another huge bailout is the only patriotic thing to do.

Wed, 05/16/2012 - 20:26 | 2433570 AgAuMoney
AgAuMoney's picture

"a withdrawal moratorium and capital controls?"  Why in the world would the euro-zone treaties allow any such thing?  The entire reason for the euro is to create a free flow of capital.

Even if the treaties do not explicity forbid capital controls, it seems the only possible explanation for Greece (and other eurozone cripples) not imposing restrictions is because they understand it would be an implicit violation.

I expect such restrictions will be part and parcel of withdrawing from the euro, if for no other reason than to slow down that initial mass exodus.

Wed, 05/16/2012 - 20:33 | 2433579 Tom Green Swedish
Tom Green Swedish's picture

Shit Rolls Down Hill Economics Part3 in 10 years.  The billionaires will survive and profit.

 

The more I watch the financial industry the more I think its like some kind of entertainment.  Its like who can make the biggest loses and look like the biggest fool is the biggest celebrity.  Its like a reality show but really stupid.

 

What other industry out there looks forward to crises. (Other than the government and law enforcement?)

 

 

Ina Drew:

 

Her eyes light up at the mention of last summer’s European currency free-for-all and she breaks into a grin when talking about the 1987 stock market crash.

“Crises make markets volatile, increase the flow of funds and provide us with more information,” she says.

 

I'm so happy to know our suffering gives her pleasure.

Wed, 05/16/2012 - 20:34 | 2433593 The Watchman
The Watchman's picture

Where is a good spot to set up my lawn chairs to wait for the helicopter drop? It's got to be coming soon.

Wed, 05/16/2012 - 23:29 | 2434041 Calmyourself
Calmyourself's picture

Helluva movie completely underrated and underappreciated..

Wed, 05/16/2012 - 20:50 | 2433646 MikeMcGspot
MikeMcGspot's picture

One thing we know for sure, it will either happen or it won’t.

 

 

 

Thu, 05/17/2012 - 02:29 | 2434278 dark_matter
dark_matter's picture

Yes, and it will either be now or some time in the future.

Wed, 05/16/2012 - 20:56 | 2433663 GlenD
GlenD's picture

The dilution in the value of fiat does make it hard to comprehend the market in dollar terms but if you price the stock market in gold we already at the 2008 lows. 

Wed, 05/16/2012 - 20:57 | 2433666 andyupnorth
andyupnorth's picture

The last time the CAD and USD were at par, things got ugly quickly!

I'm having a deja vu.

Wed, 05/16/2012 - 21:22 | 2433720 tony bonn
tony bonn's picture

"...Regardless, more printing is on the way, because the alternative is the utter collapse of the entire Western banking system. And quite probably a few governments, too.

To me, that is an unthinkable outcome, and one that I have every faith will be avoided at any every cost...."

you are a principal actor of the extend and pretend problem.....and two year old emotional blackmailer....

Wed, 05/16/2012 - 21:37 | 2433770 Stock Tips Inve...
Stock Tips Investment's picture

This crisis could be much more severe than 2008. In addition, most economies mayaffect the world. The global effort to save the situation in 2008, has made it weakenedmost of the countries. If the management of this crisis is not fast, thorough and very professional, face a situation that is very difficult to imagine.

Wed, 05/16/2012 - 21:57 | 2433832 zippy_uk
zippy_uk's picture

Greek civil servant: "But Minister - we turned the WHOLE OFFICE over and we still could not find any evidence of anyone in Greece paying tax!"

Wed, 05/16/2012 - 23:15 | 2434009 q99x2
q99x2's picture

Why do the best ZH articles appear when precious metals are going down?

Wed, 05/16/2012 - 23:52 | 2434088 cranky-old-geezer
cranky-old-geezer's picture

 

 

But this next time won't work as it did in 2008, in my estimation. I see central banks being near the end of their ability to influence developments at this point. More liquidity will affect different asset classes differently, and for the first time raise real (and valid) concerns about the widescale debasement we are witnessing across the world's major fiat currencies.

Yes, they've printed about as much as they can print and bought about as much worthless debt paper as they can. 

Trouble is, the coming sovereign debt collapse is way bigger than the MBS collapse of '08. 

There's absolutely no way central banks can print enough currency to buy up all that worthless sovereign debt paper without collapsing the US dollar and Euro (and Yen).

But try they will, guaranteed, and it might be the end of the US dollar (and Euro and Yen).  If not, then it'll be full on hyperinflation, destroying what's left of the American economy and euro economies and jap economy.

Yes, central banks will destroy their currency and destroy their economies trying to save the damn banks.  They're just fucking crazy.

But then maybe not.  I've always felt it was big looting spree under the cover story of saving the banks.

Putting your capital into those resources best positioned to appreciate most as the result of money printing and hold or increase their purchasing power in such an environment should be a top priority for every concerned investor.

That's a round about way of saying get out of paper currencies, they're about to be printed to oblivion during the next big collapse, the sovereign debt collapse, way the hell bigger than anything in '08.

Thu, 05/17/2012 - 01:04 | 2434203 FreeNewEnergy
FreeNewEnergy's picture

My favorite line in the article.

 

Was this one:

Widespread defaults seem certain.

 

Just because nobody else has used the term in the comments, may I present to all of you muppets, agri-culturalists, preppers and precious metal hoarders the jubilee?

What is in your immediate possession will be yours and what you owe will no longer exist, unless you insist on paying.

Massive deflationary spiral solves almost all economic problems, though it takes years of pain by many - most of whom have no idea what's happening to them, their lives and those of their family and friends.

Best of luck to all because The S is Hitting the F. RIGHT NOW.

Thu, 05/17/2012 - 01:19 | 2434214 Cosimo de Medici
Cosimo de Medici's picture

Also a mystery is why Greece has not yet imposed a withdrawal moratorium and capital controls?

The lack of any government might have something to do with this.  Unless someone can claim authority to enact such controls, it could turn into a free-for-all from now to the next election.  One wonders how much "physical" Greek banks have on hand, and that would be Physical PhiatNot enough, I'd bet.  Some depositors are only going to get paper promise paper, and one probably cannot eat with that.  Even debit cards will be denied at some point.

In this instance early is not wrong.

'Honey, I think I'm going to swing by the bank this morning on my way to the tea shop.'

Thu, 05/17/2012 - 01:28 | 2434218 terex
terex's picture

bla bla,,,, zzzz, please give me something new, like actualy there will be no QEx unless.... or why FED is ACTUALLY thinking of how to rise rates without giving guys like CM an even more serious blow to their PM portfolios (and bloodpreassure)

Thu, 05/17/2012 - 08:04 | 2434611 michaelsmith_9
michaelsmith_9's picture

Completely agree.  We are very bearish, and the CADJPY is one way that we are trading this cycle down in the economy. -  http://bit.ly/JRqeMG

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