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Guest Post: The Greatest Short - Why All Correlations Are Moving To 1
Submitted by Finster
The Greatest Short - why all correlations are moving to 1
Why do all correlations go to one recently, even in asset classes or sectors which traditionally have moved with a negative beta?
I will attempt to provide an explanation, which rests on understanding the fractional reserve banking system and it's intermediation of the currency we use in everyday purchases as well as in investing. As providers of the currency to banks money is a liability. Your deposit is a liability on the bank's balance sheet. During a period of credit expansion as the US housing bubble prior to 2008, as well as the funding of governments like the Greek deficits after joining the Euro zone or the lending for the US unfunded wars after 9/11 the banks provide currency. They extend their balance sheets, take on loans and bonds as assets while providing currency to the markets. Essentially the banks go short currency according to the leverage of their balance sheets. The margin required from them is their deposit with the central bank. The resulting stream of fresh cash has an expansionary effect on the economy and drives prices higher, as additional funds become available to pay for existing scarce goods or fund projects. Asset prices tend to rise and inflate the asset side of the banks balance sheets, permitting them to book MTM gains on their positions, while not actually conducting trades or testing the market by selling off the assets and accordingly reducing the money stock while extinguishing their liabilities. In essence IFRS has permitted banks to cash in on phantom gains achieved in a disequilibrium of supply and demand of investable goods versus currency.
Once the credit cycle turns and a credit crunch sets in, the banks have to mark down their assets and a vicious cycle of deleveraging sets in. In essence banks have to sell assets to repurchase the currency they have issued through the granting of demand deposits and credit. If the banks had held on to all the phantom capital gains through the expansion cycle, the reduction might be achieved in a symmetric way, shrinking the balance sheets. But if not all bank capital was saved, a shortfall will be registered.
Systemically we are seeing the biggest short sellers in history here. Short currency, long loans and assets. Every short seller has to cover in a squeeze. The great conflict in our times is the question how this short squeeze will be handled: Will the short sellers be required to come up with undiluted currency and sell off their books or will their margin holder (the central bank) provide them with the necessary units. Previously during the credit expansion the creation of new currency units dispossessed all previous holders of currency by a proportional amount according to the amount of currency created. As long as a real factor expansion of the economy took place, the price level might not have been moved too much by this or in the case of rapid credit expansion to fuel a speculative bubble have distorted the relative price levels substantially. The difficulty of spotting this mechanism is embedded in our use of currency as an accounting unit, as well as a unit of transaction.
In our current environment, credit expansion has been exponential world wide up to the great crisis of 2008. Now the currency shorts (the banking sector) has to cover in the face of falling asset prices. The FED's decision through TARP and the FASB's decision to suspend mark to market accounting for many securities only disguises the true value of bank assets that might have to be sold to buy back the currency in deleveraging. On the way up the credit expansion fuelled inflation through the creation of new units. Now the system immanent deflation is being prevented by another round of credit expansion and a time lagged debt forgiveness through negative real interest rates. The margin holder of the banking system is stealth covering the shorts through an architecture of synthetic interest rates, as well as handing back currency units by buying overpriced assets.
The most blatant and obviously invisible short is the US Treasury: Funding by the FED, the PBoC and the fractional reserve system is providing currency for expenditure of the US government, which is running unprecedented deficits. The banking system through this action long US paper and short currency. If this currency would ever have to be repaid in kind, it would create the greatest US-$ rally in history (read an oversupply of paper and an undersupply of dollars to repay it). This would be associated with immense deflation.
The entire fractional reserve banking system rests on the premise that the short currency long assets/loans trade works, by creating a future economy that provides real greater output to sustain the circulated currency, because expunging it through deleveraging is a dangerous process for bank balance sheets and a deflationary event. The great question at the present time is: Has the recent credit expansion provided the US or Europe with an economy which can sustain the currency stock in circulation with it's accruing interest or has the malinvestment been so bad, that the currency amount in circulation is unsustainable and the resulting deflation will be met by central bank debt forgiveness to the currency shorters.
When banks create currency on their balance sheet and trade it for an asset, they sell something they do not have and which they have to repurchase in the future! This mechanic in an environment of latent deleveraging, and massive policy intervention by central banks and governments generates 'Risk on, Risk off' and the banking systems gyration towards selling short currency or covering versus all possible assets is pushing all correlations to 1. You're short currency and long assets/loans or the other way round. Bank balance sheets have moved to aggregate sizes greater than many underlying economies, so their choice of short currency long assets/loans moves the underlying price levels profoundly. The fact that US Treasury paper is accepted collateral with the FED and most banks makes this asset the most liquid marginal trading object for playing this trade. This marginal utility makes it uniquely valuable in the current environment. It is a risk buffer for banks and on a scale for liquidity it marks the very top, while mark to model and non liquid investments mark the bottom. As banks do not need to hold capital against US Treasury paper, they do not incur opportunity cost by holding it.
For the private and institutional investor the fundamental question in this market is: Do I go long currency or long assets/loans (credit). If you go long currency, you effectively take the opposite side of the banks. Is this a wise choice? If the banks are forced to cover on their currency unmitigated and undiluted, you will will hold a powerful asset that will go up in a short squeeze. But will policy makers permit that to happen? It is a bet on deflation and bank balance sheet impairment. If you hold the view that negative real interest rates, creation of additional currency units by the central banks and reflation will dilute your stock of currency, then it might be better to hold assets which benefit from inelastic demand or the eventual indemnity granted to the banking sector for its short. Currency or assets. Do we bet with the banking sector or against the banking sector? They are short currency, will we go long?
In a follow up, we will observe the effects of negative real interest rates on the relative price levels and a possible distortion of the asset and consumer prices in the run up to this crisis
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(> '')> <('' <) (> '')> <('' <) \0/ /0/ \0\
I'm guessing that like me you've not got the hang of HTML tags yet ?
;-)
nah i meant to comment on a different post and i couldnt figure out how to delete this post so i figured id dance a little.
Actually your post made as much sense as the article.
It is a simple matter. If according to the CFTC hearings last year, the amount of gold traded by the LBMA is 100 times the amount of physical gold in the market today, then the value of credit must fall by 99% to maintain the price of physical bullion today. If the value of credit falls by only 50% then the real price of physical gold will rise by a multiple of 50, and we won't go into what happens when bond markets fail, interest rates rise and governments various must suddenly start printing real cash to pay for food, imports, to pay policemen and armies and to pay all the welfare they're currently paying everyone to not riot...
Inflation/deflation, take your pick, the price of gold is going UP, though it may take the destruction of the derivatives markets i.e a COMEX default to demonstrate it...
I for one consider the 9 negatives your previous post got to be completely unfounded
This is actually a good post and sums the issue up well. Is there any difference now in the price of a junk bond fund versus the stock price of a company that produces a real good?
If Bernanke isn't removed, then banks will never have to write down the value of their "assets." He will just print forever to reliquify them. Of course, gas will be $10/gallon and bread $5/loaf but what does he care?
the bread I buy is already $5 a loaf.
Yea thats the truth, any bread worth a crap is already $5+.
And I dont know about $10 gas, I say truckers and shippers shut down at around $5.50 area. This is probably why Ben is so shy to print now. Of course under-the-table printing goes on unabated. And Im sure that ends real well too.
Once again, Bernanke doesn't call the shots. He's an employee of the owners of the Fed, he obeys orders. I hate to keep repeating myself, but everytime I see the delusional post that Bernanke is doing this, or Bernanke is do that, I have to say it again. Bernanke doesn't call the shots.
yup - I've said the same thing, Dawg... back in my posting days
Can anyone explain Christina Romer's article in the NYT today, where she suggests that Bernanke have a "Volcker moment," in that Bernanke should, among other things, expedite "further quantitative easing, more forceful promises about short-term interest rates, and perhaps move... to lower the exchange rate."
See the link here.
Wouldn't this just make things worse?
And these were not her primary suggestions. As far as I could ascertain, her main suggestion was that Bernake mumble more forcefully.
The intellectual well these folks use, has run dry.
sounds like she went full retard..
i listened to the interview of adam furgesson with great interest (posted earlier today).. one of the most interesting things he said was that during the hyperinflation, there were camps who basically lobbied for more and more monetary expansion.. i take this romer article as being in the same class of insanity..
Nara:
I would agree. The policy she appears to be advocating is the kick the can down the road model that was practiced by Greenspan with such devistating effect. In fact, it is the fundamental economic policy underlying the US electoral cycle - it is impossible to have a down GDP in a presidential election year.
Worse, there is no collection of central bank policies that can make up for the exporting of jobs. Everytime a company moves production offshore, products that were once exports become imports. No matter how loud Bernanke mumbles that does not change.
All presidents need an economic rebound near the end of their first term. All presidential advisers strangle logic to provide some basis for that recovery. Obama and his advisors are no better and no worse than any other group of essentially political people trying to solve an economic problem to meet a political timetable.
From another article today - “we all know what has to be done; what we don’t know is how to get re-elected once we done it.”
Hoard dollars to pay your bills for at least 8 months (this includes food etc.). Make the minimum payments on all debt. Take any surplus in cash reciepts beyond your 8 month saftey net and buy gold/silver assets. As things develop change your % of positions. Done.
I've actually started to go long physical 100 dollar bills. Not a ton but enough to ride out an "electronic event" where an ATM card or wire transfer would be useless.
I wonder if everyone started to Hoard actual Dollar Bills if that would not create a Crisis. They have been printing Money Electronicly. If everyone wanted their Money in actual Bills there would not be enough to go around.
I think you are actually right to start to Hoard physical Dollars as if everyone wants their Physical Dollars under the Mattress there would not be enough Physical Dollars to go around.
I talked to my Cousin about this. When they say they are printing Money the are not actually printing Dollar Bills. Only Electronic Money.
Good thought I think I will do the same.
Yeah do it. No harm in some physical fiat sitting in your safe next to the gold and silver (and the smith & wess). Not sure why but I'm afraid of the "oops" electronic balance no longer functioning event more than ever these days. Do you know how easy it would be for hackers (read US gov't) to electronically sweep your funds into theirs? I'm guessing it's not hard.
Nothing connected to the internet should be trusted. One recent hack compromised 20 percent of the Fortune 100 companies, at least 760 companies in total. Of the 338 command and control networks involved 299 were in China. It would require thousands of analysts to process intelligence from that many companies. There are several countries in the world capable of launching such an attack. Nothing is safe. http://krebsonsecurity.com/2011/10/who-else-was-hit-by-the-rsa-attackers/
I believe they will create an artificial shortage of paper currency, to drive up the purchasing power of their digital dollars, before buying assets at fire sale prices. then there will be a flood of paper dollars, diluting the value, of existing frn's http://quotes.liberty-tree.ca/quote/andrew_jackson_quote_4f92
hey, w_f_s, good 4U!
PMs, supplies, and CASH
Go long pre '86 nickels. They are US currency rather than Federal Reserve Notes, and currently worth 9 cents, with free, perpetual, 5 cent put. Plus, ackward booty for thieves, who loose face 'spaining to their friends why they need a get-a-way truck.
You had me at awkward booty...
why pre-'86?
Metallic composition of coins changes often.
if you don't know wtf you're talking about,
stop pretending, toy boy
You're right Slewie. A US nickel's had the same content since WWII (and before it).
aguadulce.. i went the other way. we had a blackout here recently in southern california.. using this as a proxy experiment, it became clear that smaller bills were superior to bigger ones. harder to store, but likely more useful..
I agree. I thought of that as well. With 100 Dollar Bills the cashier may not have change. Best to stick with 20's and lower. Although, as you said harder to store.
Plus, it makes you wonder just how much of the Money they have Electronically printed has been printed in Physical Dollar Bills.
LongBalls, I'd like to personally thank you for changing avatars.
Here, Here! I'm no prude, but I hated that old avatar.
mnyeaaah. One thing this article doesnt factor in is that there's only so broke a central bank is gonna go before it starts nationalising SOLVENT entities and assets.
and then you can flip all those switches back to zero.
I think I've seen this before.
This, or something similar. Personally I need, and appreciate, the review. I look forward to the next post by this guest. /no sarc
To summarize(for my own benefit at least):
"If a Black Swan sticks its head in the sand when no Bears are shitting in the woods, will anybody hear it when it falls-
until it doesn't?"
Yes, this article restates the obvious. If the reader doesn't already know that either all fiat burns or everything is going to a firesale then they're behind the curve. The answers are all within, at this point, what our 'elected', bought-and-sold kiddos will do. The natural laws of economics and finance unambigously say what's coming, and the only remaining knowable unkowns are these policymakers and their behinds-the-scenes alliances.
My position is that these guys are weak willed and unethical enough that my chips are on the former without hesitation. But that doesn't mean I don't have 20% cash if/when these guys are orgaanized enough to position and then find religion, buying up everything with pennies on the dollar in the aftermath. These guys are smart enough for that -- the real question is are they organized enough.
Dear BLt.
In reference to: "all fiat burns or everything is going to a firesale".
They are doing both and will rinse and repeat at least once. The firesale was in 2008, after which they burned $20T of fiat (distributed to insider trading partners only) with which to buy all at cents on the dollar.
At this point the question is will they rinse and repeat.
Everything is now "lockstepped" with the Euro indefinitely.
Until it changes, then everyone is going to continue to trade that way accordingly.
I'll let you know if there is a "glitch" in the Matrix where this correlation breaks down:
Dow 15,000 = Gold $2,500
we look forward to more of wisdom and insight on the markets and specific stocks...
so we can do the exact....
opposite
Dropped a decimal point in yer gold there.
DOW 15,000 = GOLD 25,000
Fixed it fer ya.
Dow 15,000 gold 1900
I'll let you know?
Sure you will after it already happens.
The common denominator of all jokes: expectation that is diverted by an unexpected twist necessitating a complete reinterpretation of fact.
Greed is not the problem.
Cutting off your nose to spite your face.. or short sightedness, quarterly bonuses are more important than if the company will be in business the following quarter. this is and was the problem.
we as a country have not poured ourselves into rebuilding our infrastructure.. why not? it would stimulate the economy and meet the demands of failing roads and bridges?
if money or credit is the problem? then why hasn't 300% growth of the monetary system solved at least part of the problem?
back in 2008, production was down in the mid-west.. not because of money or credit.. but because the power simply was not there.. not enough juice to go around.
people turn a blind eye, mostly because they don't want to admit to themselves the problems that we face not only as a country but as a planet.. all because of the quarterly mentality, short sightedness.
Bernie Sanders
he doesn't sound like a commie, pinko to me.. and might I add that protectionism is the precursor to war.. which will jump start Americas descent into the darkest hole this country has ever seen.
Pretty bad times when a self proclaimed 'socialist' is about the only sane sounding voice around.
The botton line is that hard assets and arable land with water will be the investment for the next decade. I envision at least 20%/year inflation, prhaps more. BOJ, FED, PBOC and the ECB will print. $10/gal gas is a given;probably as soon as 2013.
I can just invision all of those on Wall Street trying to Plow their Balcony.
They will have all of the Money in the World but will not have any food or water.
Yep, paper is not a store of value.
5 years TIPS has yielded as low as -1.00% and been decidely negative for a few years. This ZIRP and negative real rates is in my opinion a squeeze to get any and all possible investment into the system (as human nature is averse to automatic losses). But the negative real rate paper keeps getting bought by corporations to protect their cash hoards with government backing(FDIC is so minmal). This isn't going to end pretty. The corporations will NOT invest into this economy.
Right theyve pulled out all the tricks to get 'investors' to buy the pump from the FED's books...pumping and ramping stocks to induce 'riverboat gambler fever', disuading people from daring to own PM's...its not going to work. Real capital will not form in a system this corrupt.
Speaking of Bonds and the EU Zone BS:
http://www.bloomberg.com/news/2011-10-29/european-bailout-fund-could-one...
Really? A NEW RUMOR to comfort the markets? One of these days the "Rumor" will not the one Mr. Market will want to hear. Bonds for bailing out the EU in Yuan? NOW I HAVE heard the most ridiculous thing.
Yea but that was discussed in the earlier ZH post on China 'no bailout' as not impressing China at all.
It shows how stupid Sarkockzy and Merkel are and the rest of the EU. The Oct rumor/shock and awe metltup trade is finished now. The desperation rumor mill will kick in ala China bailout of the world. France and Germany should be sh*tting their panties on the massive slide in Iron Ore prices from Sept to now. China is not saving anyone because China's economy is not looking so good.
Reality will return to the markets in Nov
more ridiculous than the idea of UK joining the Euro?
http://www.guardian.co.uk/commentisfree/2011/oct/26/uk-euro-eurozone?new...
and more on Beijing talks:
(Reuters) - The head of Europe's bailout fund said Friday he does not expect to reach a conclusive deal with Chinese leaders during a visit to Beijing but expects the surplus-rich country to continue buying bonds issued by the fund.
source: http://www.reuters.com/article/2011/10/28/us-europe-china-fund-idUSTRE79...
"more ridiculous than the idea of UK joining the Euro?"
Or this...
UPDATE: No UK Referendum On EU Membershipit's impossible (at the point) to just hedge completely on short positions. The Risk on/off daily/weekly/monthly remains until China implodes. Then it's a straight line down.
it's still swing trading till the end
And China will never telegraph an implosion, so that event can come at any minute now.
correct. at this point the iron ore prices look tasty. china could be crashing now i.e wengshou (spelling?) region could be becoming a contagion.
yeah any moment for China.
I stopped counting by now - how many times China supposed to bail out Europe?
How many times has Greece and the EU Zone been "bailed out" in the last 2 years?
How many times can Europe keep the con going?
I dont know. 'The con' is not being bought by me, I dont know how long others will keep buying into it.
How many times have the banks bought sovereign debt only to see the sovereign bail out the banks ... seems like an infinite loop to me. Or it's like my wife gives me her credit card to pay off my credit card bill, so I can give her mine to pay off her bill.
Very much like a game of Hot Potato. Don't you think? No one wants to hold it for very long or they get burnt.
Like musical chairs ... only one winner when the music stops. Of even pin the tail on the Jackass, where the bankers are the pinners and we are ... oh, the ass
This is a hot mess of a post. for starters, banks are not "short currency" when they lend. The money supply should not remain unchanged - as the economy expands the money supply must increase proportionately. The demand for loans grows as people undertake projects that will create wealth (start a new business, etc.).
The correlations going to one in the stock market have to do with the increasing number of ETFs. There may be other reasons, but I fail to see how fractional reserve banking is one of them and this convoluted mess doesn't explain it.
Sorry, Tyler, love ya', but this one's a miss.
Tail doesn't wag the dog, kitty kat- the ETF conspiracy theorum was shot down a long time ago- still makes for something for the talking heads on CNBC to babble on about, true.
It's not a consipiracy. It's a contributing factor.
Short currency by selling cash today with the hope that upon reversal of the transaction at a later date they will have more cash.
Sounds like banks are always counting on being short cash. It is their business.
As far as correllations approaching one there are a number of reasons including the world being more interconnected and interdependent. We have traded stability to gain a tiny bit more productivity. We dont have a measure for stability, so it is hard to assess when this is a good tradeoff, but we will have reached maximum efficiency when all global regional markets trade with a correlation approaching unity.
That will be the true End of History. If it ever happens.
All that means is that the banks are levered. IAnyone who borrows money is in the same position. This harping on fractional reserve banking is idiotic (this is by far not the first place I've heard the "argument")
The problem isn't the fractional reserve banking but the central planning of our currency courtesy of the Fed. There are a lot of problems, but they all stem from that one.
You've mentioned some of the reasons for higher correlations, but a huge reason is that correlation increases in times of stress. Historically, poorly correlated assets (for instance, emerging markets and developed economies) have all become very correlated during periods of global shock. That's when diversification stops being a good hedge. That's not new and their is a lot of academic research documenting this phenomena.
We're in a period of worldwide stress as Merkozy figure out how to most painfully get rid of the Euro.
Agreed that fractional banking transformed banks into what could be said to be the world's earliest leveraged hedge funds. This is the foundation of the author's thesis. Seeing as how the original '08 crisis was essentially a banking crisis, that premise is sound. However, i hold my reservations on the article's conclusions.
Reasons being:
1. Reserve requirements per se aren't really that big a hurdle to work around. Central banks, given their 'disciplinary' roles, can adjust RRs as they deem fit, or shore up member banks' capital as needed.
2. Even if banks were pressed to liquidate assets for cash (eg. withdrawals), it does not compel them to sell assets of various stripes, in matched amounts, at the same time! There must be some other explanation for the near-perfect correlation we've been seeing.
On the other hand, i do agree with you that ETFs might be a large contributing factor. As RobotTrader kindly pointed out in one of his recent comments, nowadays liquidity is most readily found in index ETFs (with respect to equity markets). That said, it still does not quite account for the correlation across disparate asset classes.
I didn't get this one, either. Those assets and liabilities are hard to keep track of but I sure was hoping for a good explanation of "short cash". Richard Russell mentioned a "synthetic short" of the USD a couple years ago and I never got that either.
I like gold. No liabilities on it. Simple.
cash short and over account
Definition
General ledger account that records any disparity between the actual amount of cash at hand, and the beginning amount of cash plus the cash receipts for the day.
.
in an asset deflationary environment, credit dwindling
the reserve requirements create this "cash short" condition.
no?
The Markets have swung to an overly optimistic bullish tone with no real susbastance to reasonably sustain a rally. The longer term will likely see deflation with a sharp USD rally and Equity bearish move that will last several months. Many investors will be caught on the wrong side of the market and be squeezed out of their long equity and short USD positions. Also a shorter term intermarket analysis shows that we may be very near to a significant turn in the markets. After another possible push in "risk on", the bears are looking to gain control with a strong "risk off" move for the longer term. Here is a look at the ES, DX, and GC. http://bit.ly/tckY8L
Just a fancy way to say wash rinse repeat...until every retail investor is broke. Then, the system is collapsed and brought up under 1 world govt, 1 bank, 1 currency.
World Serfdom, bitchez.
At that point I don't care, I SHOOT BACK.
"Your deposit is a liability on the bank's balance sheet"
That one phrase says it all.
Be no one's liability, own physical gold/silver.
Be no one's liability, own physical gold/silver.
"neither a borrower or a lender be"
Funny how we always have to relearn the same old things every few generations. Shame really....
This is an excellent article.
Does anyone know where I can read more by this writer?
I have searched for "finster" but can't find any other articles.
How 'bout this: In addition to allowing banks to lever up 12 to 1, they can also "sweep" their liabilities under the rug by sweeping a portion of their deposits off the balance sheet at 23:59 on one day only to have them reappear magically at 00:01 the next. The "snapshot" of the balance sheet is taken at midnight, showing less liabilities (deposits) than are really there, allowing them to lever even more. We've been letting them get away with this stupidity for years. We really are sheeple, you know.
Yea pretty much, we allow it after all.
speaking of sheep..
Roberto Benigni - Night On Earth - Taxi Cab Ride 1 of 2 - English Subtitles
http://www.youtube.com/watch?v=dCKxro6s7e8
Excellent point, Pauhana, and one which is almost universally overlooked. Fractional reserve lending is a fallacy, as the required reserve hasn't been enforced for many years, thanks to trickery like sweeps.
hey, w_dawg!
the "new" standard for the europeon banks is: 9% captial ratio
and, you can count on the fuking tooth fairy to git er done, too BiCheZ!
Hey, Slewie! Hope you're doing well. Yep, the tooth fairy is working hard, but to no avail. Aye.
Can somebody provide a three or four sentence translation that my 76 year old mother could understand?
Yes, just tell her 'All your wealths and pensions are belongs to us'.
I could be way off but will try
You take a loan at a bank for $100.00 bucks. They have to keep $10.00 on hand in case you want some but are able to lend out $90.00 of your $100.00 to the next guy, note they are still liable if you want the whole $100.00. The banks requirement is fractional and the money they took in is a liability. The entire system goes on and on based on the expectation of growth. Meaning all loans will be paid back or assets will cover unpaid loans etc. Now homes in forclosure and failed businesses have left banks with assets that will not cover the loans and not enough cash to pay back your $100.
If the Banks had to pay all the people who put in just 100 with 90 loaned out they are fucked. Your cash is now worth something as the banks don't have it. or will the feds cover this and print and you loose big time. Having assets or cash I guess is the question? Many people smarter than me can school us.
A minor correction.
Yep, that's why we read!
Thanks Futureshock. That helps
"Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers, seeing that there were many monkeys around, went out to the forest, and started catching them. The man bought thousands at $10, and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20.
This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further, and people started going back to their farms. The offer increased to $25 each, and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!
The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf. In the absence of the man, the assistant told the villagers, 'Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each.'
The villagers rounded up all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere! Now you have a better understanding of how the stock market works."
- Author unknown
My own contribution is that, unlike in the story, people took out loans to buy monkeys.
Better than my MBA! Thanks.
Thanks LT. Don't worry bout the length of explanation.
I just got lost in the "long currency; short assets's"
the question they are asking is will your savings in federal reserve
notes hold purchasing power given the structural nature of "money" as
debt and the systemic importance of banks and their balance sheets,
severely deteriorating at this time due to the collapsed bubble of
real estate mal investment, etc... the implication is that the fed will not
hold the financial sector or banks responsible and will provide them
with cash to make up for the lost asset prices on their books. this will
devalue your savings, reduce your purchasing power ( even without official
inflation, they don't care how much cat food costs ) so assets might
be a better store of value for mom or grandma. no investment advice here.
as they say, you get what you pay for. buy silver, physical.
that is what i got out of it anyway.
.
ps. i also like this writer, finster. fiat currency is not money,
a store of value. it is a conceptual ball and chain and is self referential
to the authority that produces it. that would be the federal reserve bank,
the central bank of the usa. those who depend on it are subjects of
the bank, that would be us.
if you consider the amount of debt, fraud and mal investment, waste
the fed is ready to backstop with monetary policy ( they openly embrace
inflation ) you should worry concerning the future purchasing power of
federal reserve notes.
"debt that cannot be repaid will not be repaid." m. hudson
but that does not stop the fed from printing money and giving it to ...
themselves! in the name of honoring debts by inflating them away.
now that is really twisted and i wish it were just a personal problem
but it is the essence of the worlds monetary system. this is why
we are all crazy and screwed, for the time being. apologies for exceeding
the 4 sentence limit.
Finster,
Nice writing, though, it is over my head. I could only think of the question:
What happens when the CBs no longer have the credibility to sustain the game?
So, I lost track of your argument and am still stuck with my question.
It has been obvious from the 2008 break in the markets, the banker's tears on tv during same, the Fed's actions and lack of action(most notably in suspension of M to M requirements), and the extreme focus upon holding the system together at even the risk of revolution that the machine is completely destroyed. Obvious to each and everyone of us even though most are in denial of this fact.
There are no 'assets' involved---only debt----how do you pay off debt without assets or an income stream when no one believes that you will ever have the capacity to pay off new debt? I mean, what are we really expecting here? The bankers are out of the game---this is all just theater so they can steal the last few coppers out of the dead machine's eyes.
I don't really understand any of this----I just have so many questions that I need to download a few here before my brain implodes like the system already has. What has happened no longer matches what 'is'----so we are not in the old paradigm and cannot seem to embrace the new one.
I just keep waiting patiently for something to shift in the mind of this species---but I don't have forever, I'm an oldman om
I'm not sure who they still have 'credibility' with at all at this point.
Yes of course old man you are smarter than you seem to think.
Trust is the very basis of the system. Without it the central banks lose control.
95 percent of the population or more implicitly trusts the fiat based financial systtem. There are still huge reservoirs of trust.
You, sheep, and others are in a small minority. I halfway trust them to keep it from imploding. Dont know where i fit in
Thanks, Top
You are a smart guy so maybe you can help me on this one:
If TPTB can bomb Iraq, Afghanistan, Libya at will----Why can't they just call these banker clowns together with all their 'derivative positions', flatten the damned things out, and send these boys home with half of whatever gains there are, all the losses, and a new rule that prevents the same fiasco from happening over again with depositors, shareholders, and taxpayers money?
If they want to play with their bonus bucks then they are limited to a private game among themselves.
I am not a moralist, so don't get me wrong, I don't care about their sexual prefernces, how important they are, what schools they went to or what church they do or do not attend, but why are these terrorists allowed to implode the economic basis of societies and cultures around the globe, dealing out a hell of lot more death and destruction than the ones we are spending a trillion or more each year to defeat?
This is all bullshit and theater from my perspective; it has nothing to do with reality----------------I'm a'do-nothing guy' as all here know, but this game has gone to far for everyone. It's time to pull the plug on this crap----there are so many better ways to live out one's life than with a constant background of 'fear and loathing', to quote one of my favorite americans.
So, aside from ideology and it's 'isms', what are we going to do about this? Nothing, is my preference, but there other ways and I've worked myself up into a state of intolerance tonight, but maybe it is all because of the Air France strikes which may keep me here in the Basque country longer than I had planned----actually, this might be fun---a schedule un-scheduled, so to speak
Thanks Top, I see the humor in all of this once again----i,m looking forward to see what the sun brings with it in a few hours----
But, the question still stands, so let me know if you have a thought on this om
Actually YOU understand this perfectly. The "model" of economics is the problem. In their stupid warped world, this all makes sense. But YOU and I know the world is not an academic vacuum or petri dish for theory, There Must be checks and balances.
Just have Beans, bullets and bourbon. Don't forget bullion as well. These people that are cheerleading AND those politicians and bankers will , IN TIME be dragged to the street and shot for their crimes. This will devolve into an anarchistic mob and then will have to be put down. But the elite and the "1%" have put targets on their backs.
Thanks for the complement, Everyman
Let me propose something very interesting to you, though. How about NOT preparing with beans, bourbon, and bullets----just riding it out trusting that you are a survivor?
I'm old enough to be just a little crazy, you see, and I'm not afraid of death----he's not going to tell me how, when, or where; he's pretty mum, this dude riding on my left shoulder since I was six years old.
Besides, I'm a non-violent violent guy and even though I had a weapon nearby the two dudes that beat me to death a couple of years ago snuck up on me while I was doing Zazen---and I gave that sweet-tasting nectar of the gods in 1984 to get rid of arthritis and I'm not going back to either at this late stage and----I cured myself of diabetes by a regimen known as macrobiotics which includes beans, but not enough to live on-----all of this personal stuff I'm writing to this oldman, because he doesn't understand why I am curious about what is going to happen if I just take my shoes off and walk through the coals
So you see, I am a little crazy, but also I am a survivor interested in discovering how strong these genes are------instinct is a pretty amazing part of being an animal and I want to see if I can get to the other side of this just trusting in the universe's justice rather than man's.
Good luck to you, brother----I'm sure you are right om
Wow, dude. Good luck, old man. I hope you make it to the other side, and I do, too. I'd love to hear your stories.
yup
in the long run, why not?
"...how do you pay off debt without assets or an income stream when no one believes that you will ever have the capacity to pay off new debt? ": that question should be asked of both citizen wage-earner-taxpayers, as well as of bloated federal agencies carrying unpayable debt.
If you're a hopelessly indebted individual or family, the easy solution is to eliminate your government-sponsored credit-binge legacy debt through bankruptcy.
If you're a bankrupt federal agency (think Fannie/Freddie) or a TBTF bank, the chapter belly-up plan leading to recovery is much more difficult.
The greek 50% bond haircut is the first step in the journey of a 1000 miles toward the goal of much-shrunken, worldwide administrative governments following balanced budgets, and most importantly, no longer with power to cripple small businesses that are the heartbeat of all national economies.
This positive recovery supposition, from the current unpayable debt malaise, to a resurging economy of job-producing small businesses freed of non-productive state and federal interference, is certainly a stretch: my WAG is that the equity markets may have already begun to discount a post 1945 and post 1980 people's business recovery, and that further rises in the equity indices may point to the the business resurgence that is in store after the various sovereign, federal, agency, bank and other TBTF business bailouts, along with their chokeholds on small business and job-ceation, have finally failed.
NAZ100 at a 5 year high at 2401 is the chart equity leader, and if other indices continue upward to defy insurmountable sovereign and other debt difficulties and also rise to recovery highs, I will renew my belief in the earnings and job recovery potential of world businesses unfettered by self-aggrandizing, non-productive, wasteful government spending and delusional regulating.
Franzpick,
Please, let's not go over the rhetorical points of the mindless; Help me out, PLEASE.
What can be done about the BANKS with no assets, a dysfunctional business model, no MONEY, except what the taxpayers/depsitors have fronted and is lost in the blackhole, and no viable income stream except the charade with the Fed and charging debit card users a monthly fee for using their own funds?
Do you understand my question is not about 'what if' but rather about what'is'? There is no money---no capital in capitalism but a cannibalism of shareholders and depositors.
No MONEY is a big fucking deal if you are a bank---or a depositor---or a chump that owns the bank called the 'shareholder' not to be confused with 'sharecropper' which has been allocated to what we used to call the 'taxpayer'.
OK, Franzpick----I'm getting carried away with these stupid words that I love to play with----nothing personal here, we don't even know each other, my friend----but, what about banks with no money, isn't this a point worthy of discussion?
You know, I've been stuck on this since '08 when I saw the head of some big bank crying on camera. This wasn't a put on, the dude knew that the game was over. I kept this to myself, mostly, because no one wants to admit the banks are broke and only on life support from the Fed. But lately I have been reading that fool Reggie Middleton and realize that what he is saying is what I saw in the tears of that banker in '08.
Honestly, I have never really understood any of this; I was a hustler as a retail puke in La for 20 years---I cared not a whit about my client's money, I was trying to pay my rent, man. I had twenty clients with a million or more when a million was a lot of money in the retail game---I had my name and consequently their trust, but no interest in the business except for making a humble living. There were a lot of guys like me in those days----it's a game and we executed the orders in a respectful and convenient manner and when the market closed I went every day to play basketball for four or five hours before heading home, happy as a clam. It was a very easy trick if one did not get caught up in the 'money game'.
But this is different-----there is only debt---there is no money in the game except OP's. And soon, everyone will know and confidence will evaporate with the trust that enables the Fed to be lender of last resort, knowing the depositor, the share-holder, and the sharecropper the chumps to be left holding an empty bag.
OK, so that's the long way around the question---please, mull it over and get back to an oldman with some good news om
open to all for comment
There are no 'assets' involved---only debt----how do you pay off debt without assets or an income stream when no one believes that you will ever have the capacity to pay off new debt?
I think that's it. The banks have lots of assets in the form of loans yet have liabilities in the form of deposits. The borrowers have a dry income stream. Some savers have cash in the bank ( a liability) and when those FRN's are withdrawn, the bank is left only with worthless (or worth much less) assets that are nonperforming, illiquid, and marked to fantasy. So the Bernank backstops this with the printing press, the taxpayers pick up the tab.
It's a lose-lose for everyone except the banks
SPADOC4,
"It's a lose-lose for everyone except the banks"
Trust me, in this case no one will be excluded, especially not the banks nor our deposits. Sorry, to haveto admit this, but it is something I have been in denial of, also. But, now that I have written it to you, somehow, I feel lighter. We will be all, but it is going to be a long time before we feel that way.
The Fed and Treasury have, effectively sopped up all excess capital, and blocked nearly all other nations from borrowing for nearly two years, when the confidence of the markets is lost by the Fed----I believe the dynamics will change to where the Fed will be laughed at and we will either have to fund our own debt or go without; this will be a long war and we,as a nation will have lost, but at least we will have to be the 'do-somthing, dudes'. This is what we are all about, this 'doing', so we will work it out easily, and hopefully, in a manner that we never again become the policeman of the world in perfect serfdom to the military-industrial complex again.
OK, enough of an oldman's hopes and dreams----we have a long battle ahead of us between us----no one else.
After all, this is a democracy, is it not? thanks om
I just started reading A History of American Currency, by William G Sumner, (1874). It seems we're going through the same shit that was going on in the colonies late 17th and early 18th centuries. Americans invented modern fiat currency to pay soldiers for "expeditions" against Quebec. There were also massive public works programs. It was believed that they needed paper currency to "stimulate" trade. The mistakes that were made back then, and their effects are as clear as day to see, yet here we are, over 300 years later, doing the same exact shit and expecting different results. What do they say about those who do not learn from history?
http://mises.org/books/currency.pdf
True enough. In the 1600's Massachusetts needed money to go to war with Quebec but didn't have enough gold or silver (sound familiar?) so they decided to issue paper money. They knew people wouldn't like it so they said two important things: first, that it would be redeemable for gold and silver in the future, and second they promised not to issue more beyond the original allocation. Within a year they had issued five times the promised amount...pretty soon the stuff was worthless.
Just think of the great Krel machine and what happened to the Krell because the machine could not be turned off. That is what is happening today to the global financial system, but rather than monsters from the id the machine is creating fiat.
great movie
I'm a little confused by the central concept of this post: that banks, due to the makeup of their balance sheets, are short currency.
"They extend their balance sheets, take on loans and bonds as assets."
Aren't those assets - loans and bonds - denominated in currency units? And if so, don't they represent long exposure to currency?
With both the assets and the liabilities apparently representing long currency exposure, then I'm a little unclear on how it doesn't net out, and leave you worrying about defaults vs the difference in interest rates.
Or are the banks taking my deposits and purchasing assets like gold and stocks? That claim is absent from the article, but also sort of implied in its overall point as far as I can see.
Can someone explain? I'm confused. I was sort of already wondering about this because of this whole BAC transfering derivatives into the FDIC-insured depositor zone.
Perhaps your confusion arises from the author's use of the word "currency" (monetary units of exchange) in places where he/she really meant "cash" (the asset class).
if i borrow a dollar from a bank and then deposit that dollar
in the bank the bank has a liability and asset of one dollar
but i owe them interest and that is my debt that is their asset
and it does not exist and never will until someone else defaults
on their loan and that loss is recorded. realized. through multiple
and many iterations this dynamic dictates economic austerity and/or
inflation to sustain the system of satisfying financial agreements.
and the author points out, generally, the problem with using this
"unit", the dollar, as both an exchange medium and an investment
medium.
"A unit of measurement is a definite magnitude of a physical quantity, defined and adopted by convention and/or by law, that is used as a standard for measurement of the same physical quantity.[1] Any other value of the physical quantity can be expressed as a simple multiple of the unit of measurement."
the problem is there is no qualitative aspect to this "unit". it is just
a quantitative note, a denomination, a number with no physical reference.
yet it is born or brought into existence with an associated interest debt
attached to the borrower. the creditor is not obliged to lend or create the
systemically needed interest, as principal with further interest.....
it is a ball and chain scam resulting in debt slavery and economic ruin and
malinvestment of resources, by design.
.
Keep Wall Street Occupied
http://www.youtube.com/watch?feature=player_embedded&v=2JlxbKtBkGM
Somebodys been pouring their energy into figuring stuff out. And making good results.
You are almost ready to look at m1 and m2 and m3 and figure out what a load of crap that is.
Just kidding nobodies ready for that. It's just a game of scategory categories.
The weights and measures of the money masters are only weights with no measure.
I wouldn't want to bet that the banks can be totally bailout on their short currency position. Remember the shorts are so huge (larger than entire economies and growing exponentially). The asset behind the shorts are worthless and growing more so every day....this is much bigger than will ever be admitted...as it is a total failure of the regulatory process and shows how in bed the regulators and the bankers were.....the regulators were either stupid and incompetent or totally bought off.
Excellent description Finster. The whole thing is a balance sheet. Any debtor has to acquire what they borrowed. The banks borrow money when they lend it, spend it or use it to buy. The problem or benefit is that the money unit is always 1 or if interest is paid, 1 +. If others don't inflate the asset values following purchase, the banks are stuck with them. So pay $1 million, issue $1 million in credit, fall to $900K, book $100K loss.
It is my understanding that this is what has cornered the Japanese banks for 2 decades. They can't ever sell to mark their profits. If the product is stock, companies can rot over a 20 year period. Note that Olympus got caught hiding losses. I doubt Sony is what it used to be. Think AAPL will be a big gainer the next 20 years? Could be, but doubtful. CSCO was $600 billion in 2000, now $100 billion. Anyone who was leveraging based on the $600 billion price 11 years ago has undergone a squeeze from hell. Lot of PE's look good until you look at the dividend payouts, which quite often represent PE's double stated, figuring a 50% payout. Thus a 2% dividend corresponds closer to a 25 PE, half the 50 price dividend.
Excellent description Finster. The whole thing is a balance sheet. Any debtor has to acquire what they borrowed. The banks borrow money when they lend it, spend it or use it to buy. The problem or benefit is that the money unit is always 1 or if interest is paid, 1 +. If others don't inflate the asset values following purchase, the banks are stuck with them. So pay $1 million, issue $1 million in credit, fall to $900K, book $100K loss.
It is my understanding that this is what has cornered the Japanese banks for 2 decades. They can't ever sell to mark their profits. If the product is stock, companies can rot over a 20 year period. Note that Olympus got caught hiding losses. I doubt Sony is what it used to be. Think AAPL will be a big gainer the next 20 years? Could be, but doubtful. CSCO was $600 billion in 2000, now $100 billion. Anyone who was leveraging based on the $600 billion price 11 years ago has undergone a squeeze from hell. Lot of PE's look good until you look at the dividend payouts, which quite often represent PE's double stated, figuring a 50% payout. Thus a 2% dividend corresponds closer to a 25 PE, half the 50 price dividend.