Derivatives – The Real Story
QUESTION: Martin…have been wondering if you could comment, on your email blasts,something with regards to derivatives. Who invented them? When were they invented? For what purpose were they brought into being? Buffett has called them weapons of mass financial destruction, while folks like Lindsey Williams, have mentioned them as being part of the system that will be used to implode the current system and replace it with a new one, likely cashless…any light you can shed on this would be helpful….thanks very much
BY
ANSWER: Derivatives were around in ancient times and have been a vital part of establishing any economy. While people claim that derivatives suppress prices in things like gold or create volatility in food prices as the Socialists argue in Switzerland demanding all speculation be outlawed, the truth is simple. Derivatives (Futures Contracts for Delivery) are essential to providing the economy and stabilizing it for they create a market. Without stable prices and a place to sell, produces would not risk everything on the chance someone will be there to buy it or even want it. Farmers cannot hire people and pay them without some guarantee of selling the product and locking in a profit. The same would be true for gold miners. Nobody will simple do something that costs a fortune and see if they can sell it. There has to be a market FIRST. That is the truth about all markets. Claiming this suppresses prices or creates wild price increases, may sound logical to Goldbugs and socialists alike both takes the opposite side of the same issue. However, both are outright dead wrong.
Derivative contracts for future delivery were even most likely the second contract to be invented by mankind following marriage. Before there was Hollywood, the marriage contract was precisely that. It was the earliest known pension whereby the man was always 15-20 years older because he had to establish himself FIRST and then approach a woman to be his wife demonstrating that IF she married him she would be taken care of. None of the love at first sight stuff that was pure lust transformed into love to sell movies.
Derivatives are not dangerous nor weapons of mass destruction but are the foundation of a market economy. Warren Buffett had no problem trading silver all leveraged up in 1993 and 1997 through PhiBro. They are a vital part of the economy that reduced risk for farmers. They can plant now based upon what prices are today and secure a profit otherwise they cannot function without risk. If prices changed by harvest, they could be wiped out. Derivatives allow transactions for FUTURE delivery whereby a third-party buys that risk from the farmer, miner, or candlestick maker.
The “danger” comes in when derivatives are abused by banks who leverage themselves through the ceiling all out of greed with other people’s money. Whatever degree of leverage you allow, you must also understand that the leverage will reverse in a contraction against you. Hence, if you allow 10:1 leverage $1 million will control $10 million in face, but during a decline where the market falls by a normal 40% contraction you will lose $4 million leaving you out-of-pocket by $3 million assuming the magnanimous banks work for free.
Derivatives by themselves are NOT evil any more than a glass of red wine. Drink a few gallons of red wine and you may not remember your name. Everything in moderationas they say. So no, derivatives are not weapons of mass destruction and such a statement is idiotic. Likewise, they are not the instrument that will cause the system to implode and be replaced with a cashless society. You might as well say bullets kill not people. You need a gun, someone to point it, and at last for someone to then pull the trigger. The bullet does not kill by itself. It takes a human being. Eliminate guns and you will not stop murder. They have been killing people with rocks, clubs, spears and swords long before guns.
The system is imploding BECAUSE government has historically acted in its self-interest and never for the people just like the EU Commission need not listen to anyone elected. The system is imploding BECAUSE of the debt that these people borrow year after year with no intention of paying anything back and when they fear they cannot pay the bankers, they raise taxes and blame you for cheating them. Don’t be absurd. It could never be them. This has nothing to do with DERIVATIVES – it is POLITICIANS and their complete fiscal mismanagement of the state. This is like that Norwegian woman who was raped in Dubai and was sentenced for 16 months. Obviously, the whole problem is there are women. If there weren’t any women, then there would be no rape of them. Perfectly logical. Sounds strangely like the Derivatives argument from both sides. Eliminate Derivatives, prices will soar according to Goldbugs, and according to the Socialists prices would decline. Both preach to their choirs. Who is right? What they do not realize is they would eliminate the free markets and that was the precise objective of Karl Marx.
The Safe Harbors in a Economic Storm
The three main countries where capital has been hiding not for taxes, but for sheer safety are Switzerland, Singapore, and Dubai. Yes, the Arab Spring has turned up political unrest and uncertainty in the Middle East. Turmoil has hit Egypt, Libya, and Syria just to mention a few. Throughout the region people are looking for a safe spot to just park their money. This has fueled a building boom in Dubai that is not likely to peak until 2015.75 as is the case in Switzerland and Singapore all where real estate prices have been booming.
DEBT CRISIS – It Just Keeps Going
Like the pink energizer Bunny, the DEBT CRISIS just keeps going. The solutions of the EU, IMF, and the USA, are simply brain-dead. They offer nothing to solve the problem and hope beyond dreams that some miracle will happen and it will all go away.
Greece has apparently cheated on its current deficit messages to the men in black – the notorious Troika once again. The Troika has now stated that they will continue their testsONLY when NEW savings exist that go far beyond what the Greeks have planned thus far. They have no idea of the social chaos they are creating and this idea that austerity will somehow save the day without revising the monetary system is just insane. The Greek government now talks about how this is Troika Blackmail. What is unfolding in Athens is pushing the country closer and closer to civil war and revolution. The Troika are out of their minds.
France’s Tax Policy – If it Moves Tax It!
Thank You Snowden
We have to admit that Edward Snowden has exposed the most insane conduct that any government can possibly do – spy on everyone everywhere. Obama and Feinstein have been forced to concede that the NSA will stop monitoring friendly leaders of countries. That does not mean they will not monitor everyone else or stop vacuuming up every phone call in Europe or Asia.
Italy – Continued Political Chaos
Italy has plunged into the political incapacity for over the weekend Silvio Berlusconi,split his own party. Thus, the government Enrico Letta is actually left completely incapacitated for he does not even know who the opposition is any more.
Unemployment among the youth in Italy is 40%+. The EU Commission will not even allow any democratic process to take place in Italy and because Berlusconi, was contemplating withdrawing Italy from the Euro, the EU Commission orchestrated a coup to remove him from office. Italy is not yet down for the count. This deflationary atmosphere to support the banks is tearing everything apart at the seams. Austerity is destroying Italy.
Thank You Dodd Frank for Currency Controls
Thank you so much for your protection Dodd Frank – you are so thoughtful. As of October 28th, 2013, you cannot wire money out of the USA any more. God forbid, there may be some terrorist with a camel pretending to be your aunt Sadie who will intercept that wire and blow up some ladies room in Uzbekistan.
Thank you Dodd Frank for caring so much about the safety of our money and creating the Consumer Financial Protection Bureau. Can’t wait for the SAFE Act to assume control of all pensions next Mr, Hatch. Gee – perhaps you all should just assume control of everything and provide us with a broom, hammer, sickle, shovel, and hoe eliminate all guns and automobiles to prevent us from killing each other and clean the air while telling us where to show up for work each day and protect us all the time. It would be so much better just to be taken care of. Who needs to make such mind-boggling decisions like trying to decide which roll of toilet paper to buy when there can be just one.
And those who see only hyperinflation, well keep your one eye looking in that direction. As long as you do not open the other eye, perhaps you will not see the deflationary trend engulfing you from every other direction. By the time these people are done, you will be damn lucky if there is any semblence of a free market still around.
Currency Controls Are Here – Your Money is No Longer Yours
From JP Morgan:
Due “to the new regulatory requirements you can no longer send foreign currency/foreign wires out of an individual brokerage account. Therefore, we will no longer be able to facilitate this for you unless the account is in entity name. This is all governed under the REG E (Dodd Frank) if you have any questions.
Apologies for any inconvenience.
Kind regards,
This email is confidential and subject to important disclaimers and conditions including on offers for the purchase or sale of securities, accuracy and completeness of information, viruses, confidentiality, legal privilege, and legal entity disclaimers, available at http://www.jpmorgan.com/pages/disclosures/email.
NSA Tapping All Phone Calls Worldwide – Hello Stasi! Can you Hear Me Now?
NSA has now been caught tapping all phone calls in Spain.According to BBC, they monitor 60 million Spanish phone calls per month. On top of that, it has also been revealed that Japan rejected the NSA tapping into the Asian-Pacific cables. These people are taking absolutely every phone call in the entire world. To listen to Obama’s bullshit that they were not listening to every call taken from Verizon, who believes this stuff other than a mindless drones from the Democratic Party. If it were Bush, likewise the counter-part mindless drones from the Republican Party would have defended him as well. It is a sad day when far too many people support whatever a given party does against the constitution and the best interests of freedom.
I went behind the Berlin Wall before it fell to visit a friend’s family who had been trapped there. Whenever someone was near us, she would brag about how good the government was. As soon as nobody was near, she would curse those in government as horrible vindictive people. Looks like history repeats.
Dow Closed at 15570 – Not in Take-Off Mode Just Yet
The Dow Jones closed last week above 15438 settling at 15570 but not yet above 15679. This suggests we should press a bit higher, but we are not in take-off mode just yet. Nevertheless, we should press high into this week where we may see the intraday high or the highest weekly closing.
Was Navy Seal Team Six Murdered Thanks to Joe Biden?
The death of Navy Seal Team Six is being called another conspiracy blamed on Joe Biden for even blabbing who killed bin Laden as pointed out by the Washington Times. Congress was to begin an investigation, according to The Hill, but the lack of faith in government has led to the accusations that they were murdered and Obama is yet covering up this one as well. This is part of the collapse in the confidence of thePUBLIC sector. There is nothing at this point that the government can say that is simply believed by everyone as it once was.
Today, more Americans Believe World Trade Center 7 Was Demolished On 9/11 than believe the Government’s Explanation about it simply fell by itself in the attack without ever being hit by anything. It was that building WTC7 where they took the Artificial Intelligence computers they stole from Princeton Economics that self-destructed. While claiming the contempt was for assets, behind the scenes Tancred Schiavoni and Alan Cohen in writing demanded the source code to the computer models or everyone would be fired.
All the tapes that would have been enough to jail the heads of the NYC Money Center Banks for market manipulations that they are routinely fined for countless times, were also destroyed in building 7 according to the SEC. There is written proof that Cohen and Schiavoni demanded the source code to the model or they would fire everyone.
All the tapes that would have been enough to jail the heads of the NYC Money Center Banks for market manipulations that they are routinely fined for countless times, were also destroyed in building 7 according to the SEC. There is written proof that Cohen and Schiavoni demanded the source code to the model or they would fire everyone.
We indeed live in interesting times when nothing the government says is believed any more. Will the truth about 911 and Navy Seal Team 6 ever surface? Perhaps only when the government falls as was the case in Russia and East Germany. He who has the power controls the rules. Perhaps 25 years from now our children will read the truth, but that will be ancient history by then.
Was Byzantium any Better than Rome?
QUESTION: Mr Armstrong,
Thanks for sharing your knowledge of Ancient Coinage.
The Eastern Roman or Byzantine Empire lasted for over a thousand years and is fabled for its immense wealth.
Thanks for sharing your knowledge of Ancient Coinage.
The Eastern Roman or Byzantine Empire lasted for over a thousand years and is fabled for its immense wealth.
Was the Byzantine Empire more successful in its currency management than the Western Roman Empire?
JR
JR
ANSWER: Actually no. The split between East and West came AFTER the Great Monetary Collapse of the 3rd Century, Constantine established the new capital in 330 AD during the 4th Century and issued the tokens above to celebrate its opening.
The Byzantine Empire was no more successful in its currency management than the Western Roman Empire? In fact it may have been worse. Rome reduced weight of the gold but debased the silver. Byzantium debased the gold as well. There was the Great Monetary Crisis of 1092 AD that effectively marked the peak from which it never really recovered. By 1204, Byzantium was under Latin Rule from Venice. If we add 309.6 years to the founding of Constantinople in 330 AD, we arrive at 639AD. It was in December 639 that the Arabs left for Egypt with a force of 4,000 troops. So Byzantium peaked right on schedule with the ECM in 6 waves of 51.6 years equal to 309.6 years.
If we look at Rome itself, the Social Wars to the peak during the reign of Marcus Aurelius, is also 309.6 years.That was the start of the Decline and Fall. From that peak the debasement of the coinage became rapid and it finally reached a low in 268AD.
The rapid decline toward the end was just 8.6 years for the still silver sppearing denarius to turn into crude bronze imitations.
We now face the Sixth Wave as well due in 2032. Are we ready for the Decline & Fall of Western Society? Between the politicians and the NSA, they are following precisely the same time line and behavior pattern as every failed state that has gone before us. Very interesting indeed parallels.
The peak
Who is the Largest Hold of US Debt?
QUESTION: I have read the following statement & wish to corroborate it as fact from you, whom I consider best informed:
“ Today the two largest holders of US Treasury debt are not investors or even foreign central banks. The two largest holders are the Federal Reserve and the Social Security Trust Fund. “
Is that statement correct? Thank you.
ANSWER: Yes. The majority of the national debt is held internally among agencies. This raises the potential for debt repudiation. It is possible for the government to “forgive” about $2 trillion among agencies and that would reduce the crisis over the debt ceiling. It would then account for a massive readjustment. This is also on the table for discussion behind the curtain.
NSA has left the Reservation
Here we go with Feinstein wanting to imprison anyone who dares criticizes her NSA. Will this be used as justification to invade Europe now? It would be a major understatement to say that the NSA had a bad week and Feinstein stuck her insane rantings square in the middle of this insane nonsense. First came the news that the NSA spied on millions of French phone calls and texts. From there, it was just downhill as the week grew worse by the minute. It came out that the NSA had tapped the cell phone of German Chancellor Angela Merkel for more than ten years prompting her to call Obama herself. Then came the revelation that the NSA had monitored the phones of at least 35 world leaders as reported by the Guardian. This has destroyed the image of America as the leader of the “free world”. This crisis in confidence demonstrates that politicians simply NEVER are capable to taking responsibility for anything even when they publicly endorse it.
Using an NSA document provided by patriot Edward Snowden who clearly deserves the medal of honor, the Guardian reported that the U.S. spy agency snooped on foreign leaders’ phone conversations after obtaining the numbers from officials within the Executive Branch, including the White House, the State Department, and the Pentagon. The NSA was given more than 200 numbers, including those of the 35 world leaders, none of whom are terrorists. The NSA memo revealed by Snowden produced in 2006, also suggested that such surveillance was routine! They even admitted that it had produced “little reportable intelligence.”
There is nobody in charge here and the NSA has run amok jeopardizing everything the USA once stood for. Worst yet, Obama and Feinstein dig in their heels rather than warn the NSA that they have left the reservation.
Timing
QUESTION: Also as you mentioned many times japan being in a 23-26 year Depression is this sequence also a Bear Market Count ?
Your Inside is much appreciated.
Don’t worry about the Hate Mails..Been in Retail Finance and experienced the same in the early 80′s. People hated you just to mention Gold was going down.
So lose your Friends-Clients or Join them in their Foolishness. Was not an Option for me…I stood my ground. So need you.
On the OTHER HAND look at the positive …as soon as you declare a Bull Market they all will be your friends again. Human Psychology at its best.
Hope all is well
E
ANSWER: As long as I get the hate mail it is an indicator that gold must still decline. When the stop I bet the low will be in place for they will have lost their shirt, house, and often the wife.
Statistically, economic declines are resolved 2-3 years when left alone by government. The more people try to prevent them, the greater they are extended. The Silver Democrats caused the first “Great Depression” 1873-1896 that attempted to overvalue silver ignoring the world. The US put the ratio at 16:1. This resulted in an arbitrage opportunity and.they would bring silver to USA and returned with gold. Even in the face of bankruptcy when JP Morgan had to arrange a loan to the US Treasury of gold to prevent bankruptcy, William Jennings Bryan was the Presidential candidate and gave his fired speech how thou shalt not crucify man upon a cross of gold (meaning no gold standard).
That was the end of the Silver Democrats. They cause a major depression just as Japan and it lasted 23 years. The name was changed from Great Depression after the 1929-1932 crash and it became then known as the “Long Depression”. Looking historically at such events, they last 23 to 26 years when manipulation is involved by the government. Let the market resolve itself, it is over 2-3 years.