Oldtent Archives 2007 - 2008

..so even I can understand it…..Bill,
I missed this article from Bloomberg when it was posted on June 27. You have to like the description of derivatives and how the price of derivatives is determined!

QUOTE

www.bloomberg.com/apps/news?pid=20601039&sid=aMbY7RGPEqQo&refer=home

The most stunning aspect of the demise of two hedge funds belonging to Bear Stearns Cos. is the almost total absence of transparency surrounding the bailout.

The debacle may finally provoke regulators, who have long suspected that buying derivatives is akin to running through a fireworks factory with a lighted blowtorch in each hand.

Their focus is likely to fall on how to assign prices to complex derivatives, created by cooking together different flavors of securities whose values are driven by other assets such as stocks, bonds or mortgages.

The efforts by Bear Stearns’s creditors to extricate themselves from their investments have laid bare one of the derivatives market’s dirty little secrets — prices are mostly generated by a confidence trick.

As long as all of the participants keep a straight face when agreeing on a particular value for a security, that’s the price. As soon as someone starts giggling, however, the jig is up, and the bookkeepers might have to confess to a new, lower price.

END

Mark Gilbert has presented this problem in a light-hearted way but the issue is the most serious one on the planet today. It is naïve to think of the $500 Trillion derivatives market as a sideshow, where some silly prices are agreed for obligations that no one has the creditworthiness to back. This is not just an ugly, non-malignant tumor that can be conveniently cut off. This massive financial activity that bets on the outcome of the pricing of the underlying assets has corrupted the system such that those who would be responsible for paying out orders of magnitude more money than they have if the bets go against them are sucked into a black hole of moral and ethical destitution as they have no other choice but to manipulate the price of the underlying assets to prevent financial ruin.

How can a “$500 Trillion dollar anything” not require regulation as Greenspan vehemently preached. The propaganda perpetrated by the FED is that derivatives are magical financial vehicles that allow risk to be efficiently distributed. Risk of what? It is meant to be the risk of unexpected price changes of the underlying assets that is being spread around. But if the entities who are assuming the risk are not able to pay there is no spread of risk, there is just an illusion of the spread of risk, as Bear Stearns has just discovered.

Derivatives may be complex instruments but the concept is simple. They are insurance contracts against something happening. For example, an interest rate derivative is an insurance policy against interest rates going up beyond a certain level. If they do there is a pay-out to the derivative holder. If not, the derivative expires and the holder has paid an insurance premium for nothing. But the real difference with derivatives from insurance is that insurance is usually for very rare events like a house burning down, or a car being stolen. But derivatives are for protection against mundane things happening like interest rates going up, or the gold price going up, or the stock market going down. These are not catastrophic risks that happen infrequently, they WILL happen at some point in time. What is more if a payout event is triggered, unlike when a house burns down, there will not be just a handful of claims on any one day, payouts will be due in the trillions of dollars on the same day. It is the financial equivalent of a hurricane Katrina hitting every US city on the same day!

Instead of stopping this idiotic sham business from growing to galactic proportions, all the authorities, and all the banks, and all the major financial institutions around the world have heralded it as the best thing since sliced bread. But now all these players are complicit in the crime. They are all on the hook. The stakes are now too high. They must manipulate the underlying assets on a daily basis to prevent triggering the payout of a major derivative event.

Derivatives are a bet against volatility. Guess what has happened? Surprise, surprise! Volatility has vanished. The VIX looks like an ECG when the patient has died! Gold has an unofficial $6 rule. The DOW is not allowed to drop more than 200 points and it must rally the following day. Interest rates must not rise, if they do the FED must issue more of their now secret M3, ship it offshore to the Caribbean and pretend that an unknown foreign bank is buying US Treasuries like crazy.

them that bless them (Israel) and curse them that curse them”.   Also, “pray for the peace of Jerusalem”.

Just to say Hello, don’t let this current holding pattern get you down. stay right and stay tight

I believe you are correct!  

….This is a board that doesnt like Racist Remarks…..a few posters have e mailed me that your last nites post (that i did not see..whe we were dialoging about gold stocks)…is racist..and I have to agree….this is a slander to all (myself included) who share Alan Greenspan’s (and Bernanke’s too)……”ancestory and persuasion……”………..this used to be called antisemitism…havent seen any since i was a kid in the 50s and 60s……..but I remember it….and this is what it looked like….

Posted by factsmatter @ 23:21 pm on June 29, 2007
“sir” Alan Greenspan…and a host of other frauds of similar ancestry and persuasion who all but destroyed what was the American dream.

Many of us here have been trying to hint the same message as Jim’s letter, in so many words this week. When the cartel / hedgies are trying to smash gold for weeks on end, and all we see is a drop from about $680 to $650, that has to be marked down as a complete and utter failure. 

We can be thankful that they’ve worked so diligently on our behalf to discount the metal and dig their own grave. The shares are easier to manipulate and the tape painting has been too obvious and amateur to be even slightly convincing. So has the bashing on various boards I watch… This is a tell, plain and simple, and the hedge funds that pay bashers to do their evil work on internet boards need to finder much better and smarter writers. We can expect them to continue to behave like cornered rats, as that is precisely what they are.

By the way…  thank you all so much for such kind feedback earlier this week.

-Scarab

I think you are my buddy Rem..Clever..best behave yourseLf cowboy,

and I didnt steal your thunder

Not at all trivial, but worthy of discussion. 

Why are we so strongly allegiant to Israel.  It IS related.. imo.. to the price of gold and manipulation of the financial system in general.

Any comments appreciated.

SteaLs Thunder

What you think?

Mrs. Irish here. I’m delighted to see you posting. You were a colorful addition to Totsville III and I look forward to seeing you at the next Goldbugz event, whenever and whereever it may be. Don’t worry about not being a super chartist or anything. We need to hear from regular people (like me!), too.
I miss my Irish but he’s coming home early. It’s too quiet around here! And tonight I’ll be making his oatmeal for church tomorrow….it just won’t be the same, I don’t have his heavy hand with the butter and half and half!
Hi to everyone else. I am peeking occasionally but I’ll wait until Irish is home to ask the dumb questions. Everyone have a safe and fun fourth.

….and dont forget..

There is only a relatively small group of investors who very seriously believe that there is a high level of risk that the (financial) system could break down. You only need a relatively small group to believe this to move the price of gold.” In other words, the metal’s price behavior reflects the trivial obsessions of a discredited fraction of investment opinion.
-Alan Greenspan

…..what trivia shall we obsess about this weekend…?

Thanks FGC.. Murph was one of a kind as I’m sure your pets were also..Hope you’ve taken the plunge and gotten another little critter in your house.. My mom ses she doesnt want another dog…but I’ve already started looking (she’s gonna kill me)  .I know she’ll change her mind ,she always has..