Paul Knott's Blog

Why get your haute couture knickers in a twist? Here, courtesy of Chris Duane is probably all you need to know to avoid financial meltdown. Alternatively put a pair on your head and buy two pencils.

In a binary world sometimes you have no other choice than to reboot the operating system. If it had been designed correctly in the first place you could argue this shouldn't ever be necessary but alas in practice its 'a different gether altomatter'. Frequency of reset often depends on the underlying quality of the system itself and the same could be said of non-binary systems such as governments and our monetary system.

If we take a look at what's really happening with our system of paper money then its unsustainability is clear to anyone willing to open their eyes.  As Herbert Stein once remarked "Something that can't go on will stop" and stop it will. However just because something is inevitable doesn't make it imminent. When is the question, not whether.

So as of today the US national debt is just shy of $16.2 trillion. Sounds like a lot until you realise that this along with nearly everything else within the financial system is a manipulated fantasy. According to Laurence Kotlikoff, Prof of economics at Boston University, if you take all the unfunded liabilities into account (which is the honest way of looking at it) then the real debt figure is over $200 trillion - He's already declared the USA bankrupt...OUCH!

Let's remind ourselves of the Woody Allen quote employed at the front of the book, "Down one road lies disaster, down the other utter catastrophe. Let us hope we have the wisdom to choose wisely"
 This somewhat neatly ties in with the Austrian school of thought or as Ludwig von Mises put it "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
 So if you believe all this to be the case then kicking the can down the road only has one real effect - to make the collapse worse when it does happen. OK, but if it's going to be worse later on isn't there a do-gooder case for helping getting it underway a little earlier? Perhaps there is something wholly righteous about taking down a system that is so corrupt that it is even in danger of stealing your liberty? Threats to your freedom are a discussion for another day - let's just focus on monetary matters and what you can do about it.

Our monetary and banking system should be like a utility - moving money into productive activities and where it is needed. What it shouldn't be, but has morphed (further) into, is a parasitical model that is killing the host. Now I have postulated in the book using John Mauldin's fingers of instability concept that the whole shebang might not need any help in collapsing - it may just happen anyway. Or as Nassim Taleb and Mark Blyth state:

'Complex systems that have artificially suppressed volatility tend to become extremely fragile, whilst at the same time exhibiting no visible risks.'

So what's the problem? Mmm... that's a long list - but for today's post let's focus on the derivatives market. A derivative is a security (contract) between two or more parties whose value is derived from the price of the underlying asset. It is not itself a 'tangible' asset. The second aspect is that many of these derivative contracts are extremely difficult to undo as Warren Buffett found out after trying to unwind one - despite his best efforts he didn't manage it and just had to let it run its course. The derivatives market is larger than 1 quadrillion dollars per year (that's bigger than Bernard Manning's underpants). Much of it is also based on margins (you don't have to have all the money down - just a small %) - so not only is it ridiculously large in terms of $$$, but highly leveraged - or put another way, if it all goes wrong the SHTF in a spectacular fashion.

Many commodities are traded via these 'paper' derivative contracts. If we take gold and silver for example it is estimated that the volume of paper contracts exceeds the actually physical metal availability by 100:1. So in effect there is a lot of fresh air being traded. It's the emperor's new clothes scenario in that it is a construct that only requires a change of perception to negate. So in the case of paper contracts supposedly backed by the underlying asset - it may only take one of these contracts to be fictional to have everyone suddenly questioning, not only other contracts in that asset class, but every other derivative contract based on that system. Just like the Emperor's attire - it may not be there when everyone has a reality check. Being leveraged to the moon and not being able to extract yourself - now that's what I call a proper financial panic.

So what's special about silver? Well, it's not the only Achilles heel out there but it is the one that the general populous can most easily influence. The derivative fantasy game ends when no-one can get their hands on the physical. And whilst silver is similar to gold in that its partly a monetary metal its has some unique characteristics. Firstly a lot of the silver market is used for industrial purposes - so it has more 'intrinsic' value than gold. Its unique characteristics e.g anti-bacterial, high conductivity etc means its uses are expanding in many fields. Most smart phones use silver as do many solar panels etc but as its cost is relatively low it is rarely recovered for re-use and ends up in land fill. Its currently being depleted at an increasing  rate. The large stockpiles of silver that did exist have dwindled and there are now predictions (always dangerous!) that Ag will be depleted within the next 9 to 29 years.

Whilst the natural ratio of silver to gold in the earth's crust is approx 15:1, current estimates mean that the ratio drops to 1:1 when it comes to above ground stocks. Industry accounts for over 50% of its usage so the size of the investment market for silver is much less than gold and is therefore subject to much higher volatility. The price of silver normally gets temporarily battered in a recession because of this industrial aspect. But let's return to the physical Vs paper market discussion and also possible price manipulation. The price of silver is based on the Comex (or Crimex as some wits prefer to name it). In fact rather than have me explain it all let's enlist the help and hilarity of the two bears. Its a couple of years old but the arguments are still applicable.

Alles klar? You can't fight the FED and JPMorgan right?  You can if you are the Chinese government or maybe if your name is 'Wynter Benton'. But in the case of silver you can even do it as an individual. Buy physical silver and help return a bit of honesty and freedom to the market. Industry needs physical not paper silver. Once there is none for delivery its game over. If the system crashes whose fault is that? Don't take it personally, it was going to happen anyway.






  

If you ever meet this guy buy him a beer for doing the right thing and winning...

"Fear is the psychological weapon of choice for totalitarian systems of power. Make the people afraid. Get them to surrender their rights in the name of national security. And then finish off the few who aren't afraid enough" - CH

Well that lasted all of a week - back to the totalitarian drawing board it is. Worth reading the detail on this.

Spot the difference competition (U.S. leg) returns. Take a second to remind yourself of the P.I. blog from 18th May: Vote Delusion and then watch this and then let's throw in a soupçon of Carlin. just to spice things up a little.

The cult of the Looney is normally something to be avoided at all costs depending on which particular commonal variety of 'loon' you are dealing with.  There are some which prove to be entertaining such as The  Monster Raving Loonies, or the more ubiquitous Looney Tunes which many of us were happily brought up on.

Once you step beyond the fun side of things the descent is pretty rapid into crackpots and the 'here's some padded wallpaper and self-cuddling apparel to enjoy for an unlimited time period'. Of course not everyone who ends up in a psycho-ward is nuts eh Bradley? and vice versa, there are plenty of people out there roaming around who perhaps should be voluntarily checking themselves in to a secure establishment for the general benefit of the rest of the planet.

With the above in mind, and a dumper truck of other caveats thrown in you will want to have a listen to this rant from Ann Barnhardt. To say her general views sit in the more extreme category is possibly this months understatement of the decade but just because what you sometimes do or say is utterly bonkers doesn't mean everything always is.

So why bother featuring this particular stream, well...mainly because its a very necessary wake up call. Often an impassioned plea has more affect than just a matter of fact delivery and unlike much of the other stuff she bangs on about 99% of this is bang on the money - especially pertinent is her title quote of "If you are still in these markets you are either stupid or on drugs". This is of course a U.S. centric appeal but given the level of fraud and manipulation in the entire financial system it is without doubt a canary in the coal mine for all (well along with several other canaries - in fact, given how many are appearing it seems the mine is also producing viagra).

The suggestion that you should remove your money from the system shouldn't be news to regular readers as we picked up on this theme in the first P.I. blog dated 11th May and have just retweeted this from the Motley Fool. In really simple terms the risk of having your money vaporised into thin air with little recourse to recover it seems to have increased dramatically and this is the point Ann describes in some detail.

So lets stick with it a second because the wider implications are to be ignored at your peril. In the U.S. a savings plan is called a 401K. Its like a UK pension scheme which is often invested in equities or government bonds. The idea being you can't touch it until you retire. Under normal circumstances its not a problem but what happens when every market is rigged, excessive fraud prevails, there is absolute fragility inherent within it and the whole financial system is one massive Ponzi scheme? The most sensible approach is to disengage or as the computer Joshua conluded in the film War Games:   'The only winning move is not to play'   And this, as several others have pointed out, seems to be about the best advice there is at the moment but why?

We've already mentioned the vaporisation of client money from MFGlobal (and now Peregrine Financial Group) in a previous post and Ann highlights the legal ruling with respect to Sentinal Management Group:

However, what is most frightening is the recent ruling in the Sentinel Management Group case by the 7th Circuit Court of Appeals. The court ruled that the Bank of NY Mellon be placed first in line ahead of customers seeking return of their money. “That Sentinel failed to keep client funds properly segregated is not, on its own, sufficient to rule as a matter of law that Sentinel acted ‘with actual intent to hinder, delay, or defraud’ its customers.”- U.S. Circuit Judge John D. Tinder This ruling shows that not only does the Bank of NY Mellon move to the front of the line, but that using customer segregated funds as collateral is no longer considered a crime, and that co-mingling customer segregated funds with proprietary funds is no longer considered fraud. This ruling implies that customer assets held at a bank or trust are the legal property of any counterparty to loans the depository institution takes.
This might all be about the U.S. but don't think just because you are in the UK you are necessarily  immune. Did you know that when you put your money in a bank it is no longer your property only your asset. You have loaned your money to the bank. If the bank fails you may not be entitled to your money back. There is an £85,000 per account per separate institution deposit protection scheme in place but remember - its not forward funded and governments can and do change their positions especially if cornered. Nothing to worry about there then.

There is a lot more than just the above to consider as is covered in OUCH! and we will return to this in later posts but sceptics might want to have one eye on the £130 million bet Rothchild has placed on the break up of the Euro. I will be more shocked if we don't have the mother of all financial panics this side of Christmas than if we do. Have you arranged yourself accordingly? Of course you haven't - because there is nothing to worry about, right?

I don't know which made me cry with laughter more, re-watching Jim Kerr's neck appendage take on a life of its own or reading in Thursdays's Evening Standard that the Bank of England is claiming QE ('printing money') has made each of us £10,000 better off.

Chuckle muscle worn flaccid? Here's why printing money as highlighted in OUCH! doesn't make youricher :

Imagine that you are a counterfeiter producing £5 notes. You are so good at your chosen profession that no-one can tell the difference between the fake £5 and the real £5. You print lots of £5 notes and start spending them. This has 2 effects:

1.      The total money supply of the country increases thus driving up prices because the purchasing power of the existing currency unit is decreased. This decrease is directly proportional to the amount of fake cash you put into circulation.
2.      You get richer whilst everyone else gets poorer. It changes the wealth distribution because whilst there is a general lowering of purchasing power per currency unit there is a disproportionate amount of money in your hands as the counterfeiter. If you are first in the chain you get the benefit.
The same reasoning is valid if the ‘counterfeiters’happen to be the government. By diluting the total by printing money it also acts as a wealth transfer mechanism to the state at the expense of the general populous.

Its really quite simple, if money printing made us richer then why not just print £10 million for every person in the country, dish it out and then we could all retire? Afterall what could possibly go wrong? Zimbabwe managed to get to 100 trillion dollar notes (worth about US$ 5.00) before their currency finally collapsed. Zimbabwe's annual rate of inflation in November 2008 was 516 Quintillion % that’s 516 followed by 18 noughts (516, 000, 000, 000, 000, 000, 000) - although they narrowly missed the world record inflation rate set by Hungary where prices doubled every 15.6 hours.

Why are various western central banks/governments resorting to money printing? 'Velocity' and a collapse in the money supply may be the raison d’être stated but peel back the layers of manipulation and the alternative is default - but why do it overtly when you can do it covertly? That way, you don't get the direct blame. However this game is not without consequence. As Tim Price points out in his latest newsletter, Bill Gross may have called it too early (exact timing is always tricky) but stated UK governnment debt was resting on a bed of nitroglycerine.

You may be being 'promised a miracle' but the reality you will be experiencing in the near future may not feel that miraculous when it arrives.

 

The lastest offering from Positive Money. Popcorn time.

Most of us have experienced PMT, either first hand if you belong to the fairer sex, or vicariously through a loved one if you don't, but when it comes to HFT, the majority of either sex are probably using that other 3 letter acronym WTF?

For those of you unfamiliar with HFT (high frequency trading) you might want to alter that state of ignorance 'tout suite' ( as our cheese fondling brethren across the Channel might say). Why? Well something has just happened that demonstrates just how fragile and exposed the stock market is to rogue algorithms, these are a bit like Rogue Trooper but far more destructive.

HFT virgin? No problem. Pop your own cherry by having a look at this. Kevin Slavin's brilliant TED lecture concludes that "We are now writing code that we can't understand, with implications we can't control". As I say in OUCH! Who could have seen that coming?

Well obviously Kevin is one, and the other 'one' is the 1 million plus viewers who have watched it. So when this all goes horribly wrong and some numpty appears declaring it to be a black swan event - the rest of us will know better.

Let's get into the nitty gritty and take Slavin's observation one step further. We might be writing code that we can't control but we are also writing code we can. The problem being the motivation behind it isn't necessarily benign as we have seen with the Stuxnet worm. The New York Times reported on 24th June 2012 that Stuxnet was deployed by the US and Israeli intelligence services to target the Iranian nuclear programme. Clearly a genius move as no-one will ever consider writing one that targets the instigators instead, right?

But let's move on from alleged politically driven cyber espionage to your personal savings. Got anything invested in the stock market? You might want to re-think that cunning plan given what's just happened to Knight Capital. As usual, Zerohedge coughs up the beans allowing us to see what happens in practice when there is 'trouble at t' algorithm mill'.

Many claim 'buy low and sell high' is the first, simplest and best mantra for investment. So when an algorithm goes rogue and does exactly the opposite you have what is often referred to as a 'minor inconvenience'. Except what happens when those trades are being enacted every millisecond and you are losing money on every one? Your minor inconvenience has just switched to an instrument of financial torture and in extreme cases potential company insolvency. So if all this is eminently possible, and with Knight Capital we have just seen the minus $440 Million practical play out of it, what is to stop anyone writing malicious code in order to manufacture these situations? Well no-one gets involved in that sort of behaviour do they?

The solution of course is to stop all the HFT nonsense either by applying a minimum time limit to all trades or applying a tax per trade so the frequency element is penalised. Will this happen in advance of any disaster? Unlikely. We generally need a cataclysmic event to shift the mindset. Are we human, or are we dancer? The puppeteers are in town - you might want to bear that in mind and check your pockets.

Why worry about Aloe Blacc when you can be rubbed all over with Aloe Vera? Getting soothed is usually more appealing than reality checks but then sometimes ignorance isn't always bliss.

Meredith Whitney predicted in Dec 2010 that 50 to 100 Municipalities in the USA would become insolvent, saying "there is not a doubt in my mind you will see a spate of municipal bond defaults". So what? Well two points, firstly Judgment Day seems to have arrived, see here, here and here. Secondly that they are a microcosm of our whole financial system. So while you can sit back and think who cares, the fallout may be coming to a town near you sooner than you think.

The real reality check is that most Western countries are broke. This may not seem like an insurmountable problem when you can print your own currency but as you might of guessed that path is never without consequence. Zimbabwe being the most recent example of what can go wrong. As I say in OUCH! money printing isn't a cure, its another disease. 'Sore throat madam? Try two teaspoons of botulism and let me know how you get on'.

The other slight problem is that the official debt is massively understated. When you throw in all the unfunded liabilities its about 5 times the size. A recent claim for the USA was that its real debt stood at $75 Trillion. So what you have seen in some USA municipalities is replicated all the way up the chain. What stops everyone panicking about this? One word, belief. Belief because so far everything has worked out OK. Well all you need under these circumstances is a change in perception and then as Emperor Kenny might say "suddenly all my new clothes fell off". Welcome to planet Ponzi playmates.

You might therefore want to heed the following statement, In a depression 'the winner is the person who loses the least money' . How much are you personally going to lose. Well, you are about to find out. Of course you could just recognise the urgency and choose to do something about it. And that way you won't have to repeat the hookline on a street corner.

TTIOT...well it might be but trying to track it down via the mainstream media seems to be getting harder and harder. Even Mulder and Scully would be struggling with this one although there is at least a plethora of conspiracy theories as a consolation prize.


We are forced to get more radical in our choices if we want to have a fuller picture. Radical...not as in, ‘let’s stuff my underpants full of semtex’ radical (who could ever have envisaged that getting your wedding tackle blown off could be turned into a negative?) but radical as in ‘can you please tell me what’s really going on?’ So in fact not radical at all.
Well as usual the truth ain't too pretty but what is sometimes bizarre is having to go through a strange series of hoops to find it. So, if we want to discover what's really happening it appears we have to go to RT (the 'Putin Dodgy Propaganda' tool). It’s a rum do when you have to rely on a Russian TV channel to find out what is actually going on in Wall St.


So Max Kaiser's financial war reports and Capital Account whilst being hardly unbiased do seem to occasionally churn out more truths than most of the other media outlets put together. This may not come as a great surpise to those in the know as the U.S. media has been consolidated down from 50 companies in 1983 to now only 6. The unplatable truth is that there is sometimes nearly as much media manipulation being served up in Democracies as there is in Totalitarian states. Noam Chomsky argues its more.

Its worth watching this Capital Account from April to understand what happened at MF Global. A one off you say....err no... try this for size. Makes you want to watch South Park. and then think long and hard about what comes next. OUCH! - Wake up or get wiped out people.