http://blog.milesfranklin.com/the-butto ... ady-or-notThe Button Has Been Pushed…Ready Or Not
Author : Bill Holter
Published: June 24th, 2013
This week has started off miserably. China had problems within their banking system last night as bank transfers, ATMs, online banking and wires did not work. Europe announced that their E500 billion bailout fund for banks is no longer the case; they now say that 60 billion Euros will be the limit…retroactively. To put this in perspective, Spain had already been promised 100 billion Euros for their banking system; I guess the money is not coming? Our stock market has started the day down 230 points and the 10 yr. Treasury yield is now 2.64%, this is another .12 basis points higher on the day and now nearly 70% higher than it was back in April.
As I wrote over the weekend, this is “one gigantic global margin call.” Please understand how many of these interest rate derivatives work. When the rates go against you, “margin” must be posted. By “margin” I mean collateral. Collateral must be shifted from the losing institution to the one on the winning side. When the loser “runs out” of collateral…that is when you get a situation similar to MF Global or Lehman Bros., they are forced to shut down and the vultures then come in and pick the bones clean…normally. Now it is no longer “normal,” now a Lehman Bros will take the whole tent down.
To put in perspective what is happening, Zerohedge calculated that the Fed lost $35 billion this morning alone and $250 billion over the last 2 months. The Fed only has (had) $65 billion of equity capital yet in just several hours they lost half of it…again…this is because they hold $3.5 trillion in assets. This is the equivalent of a trader putting up $2 and buying $100 worth of assets, they have 50-1 leverage. They may not even be the most egregious out there. There are derivative contracts that are over 100-1 leverage that must post collateral each day. At least the Fed doesn’t have to post any collateral against losses because they can be “trusted.”
Can you see what is happening? The “button has been pushed” either on purpose, inadvertently or because “they had to.” Banking laws over the last 3 months have been altered to allow “bail ins” where depositors lose rather than governments “bailing out” losing banks. Do you think that these laws were changed by mistake, or inadvertently? No, the laws were changed because they KNEW this was coming. Now control has been lost in the sovereign government bond markets which are creating “losers” all over the place. The problem now is that the entire world’s banking system is a chain, a daisy chain where if one goes down…they all go down. Yes, yes I know, there are those running around saying “but we are hedged”…so there is nothing to worry about. Really? Someone somewhere is on the losing side of the trade. With over a $1 quadrillion (with a big fat capital Q) derivatives market a 5% move creates over $50 trillion worth of winners and losers. Do you know of any institution that could absorb even a small piece of this? What if JP Morgan took only 2% of this loss, could they pony up $1 trillion? Maybe… and only… if they could use customer funds would be my first thought.
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