Monday, October 3, 2011

Will Morgan Stanley Be The REAL Tipping Point For The U.S.?

GOLD -- Is not like any other asset.  Gold represents eternal wealth.  I accumulate gold, but I never sell it.  In a severe bear market, the only item that you can trust absolutely to survive is gold.  Gold is the ultimate insurance policy, which is why I don't worry about it and am not tempted to sell it when it declines.  - Richard Russell

Forget Greece/Europe.  To begin with, California alone is a bigger problem than the "PIIGS" less Spain, collectively.  Then throw in Illinois.  With Greece/Italy, we know what the Too Big To Fail Bank exposure is "on balance sheet."  And it doesn't look nearly as bad as that of the European banks.  HOWEVER, can someone please tell me what the "off-balance-sheet" exposure is?  We don't know.  What we do know is that the credit default swap and general derivatives holdings of TBTF's have gone up substantially since 2008.  This is largely an unregulated market and the accounting for it is largely hidden from sight, using off-balance-sheet accounts for which there is very little regulation and oversight - and almost no enforcement of that which is actually in place.  This off-balance-sheet "stuff" is what caused the de facto bank collapse in 2008.

This brings me to Morgan Stanley, the stock chart of which I have been watching for several weeks now, as it has performed even worse than its comparable banking rivals, like Goldman, JPM and Citi.  I saw an article last week which shed some light on this, and I didn't save it so I don't have a link, but it turns out that, including its off-balance-sheet exposure, Morgan Stanley is technically hugely insolvent if you were to do an honest mark-to-market valuation of its balance sheet.  And then there's this news out from the Financial Times which cites hedge funds who are pulling their business from Morgan Stanley: 
Morgan Stanley’s stock fell more than 10 per cent and the price of credit insurance on its debt rose to the highest level since early 2009 as nervousness around the bank caused some hedge fund clients to reduce their exposure, people familiar with the matter said.
Here's the LINK  Recall that in 2008, this was one of the red flags with Bear Stearns before it collapsed.  The reason you don't want your account with Morgan Stanley, or any big bank for that matter, if it collapses is that these banks take your securities and hypothecate them to banks, who lend them money against your securities.  In other words, broker/dealers use your securities as a source of liquidity and short term funding.  They can, in fact, leverage your property up to 140%.   SIPC doesn't cover the kind of numbers this game is played with by hedge funds.  So any hedge fund that doesn't want to stand in line and wait for their turn in the liquidation line will pull their funds from Morgan Stanley, thereby making MS scramble for liquidity.  It's an ugly, irreversible spiral once it's set in motion.

To circle back to my opening paragraph, IF in fact there is a run starting on Morgan Stanley, this could easily set off the kind of domino effect created by the Bear Stearns collapse in 2008, on whom the plug was pulled in March 2008.  But we didn't see the full effect of the behind-the-scenes damage until AIG collapsed and the former Goldman Sachs CEO who was Treasury Secretary jammed through the bailout of Goldman, et al.

I honestly believe that, short of a massive new printing program rolled out by the Fed and the ECB, we are going to see a systemic collapse that will dwarf that of 2008.  Here's a little color to back my view from the Telegraph UK, which is probably the most objective source of mainstream media in the anglo world:  LINK
All of the problems in 2008 were either completely "papered over" and discharged or overtly and not-so-overtly shifted to the balance sheet of the U.S. Treasury aka the Taxpayer.  None of the sources of the problems were fixed and many have become even more severe, such as the derivatives and bad asset problem.  What's even more severe is the counter-party default risk, which is why hedge funds are leaving Morgan Stanley.  This is the "tell-tale heart", in my view.  Interestingly, and before I saw the FT piece on MS today, I was discussing with a colleague about how for some reason this concept of "counter-party risk" has escaped the attention of the media and bubblevision gurus, when in fact it should be one of the main areas of focus for anyone making a serious attempt to either clean up the system or avoid disaster.
Given that no one will ever clean up the system short of complete collapse, here's what you can do to insulate yourself as best as possible.  Make sure your brokerage accounts are with non-bank brokers who don't do much in the prime broker area.  Charles Schwab and Fidelity would be my suggestion.  Second, move as much of your paper (cash) wealth as possible into gold and silver that either you safekeep yourself or you know damn well is not being hypothecated or used in some fractional scheme, like GLD, SLV, Kitco, Monex, etc.   If you're worried about gold, please read this commentary from the CEO of Seabridge Gold, who succinctly explains what happened over the last two weeks and why gold actually doing what it's supposed to be doing:  LINK


  1. Chico,

    MorgueStanley goes down The Mighty USD goes parabolic.

    We're taking out 82 then 86. Lots of blue sky.

  2. (Dave)

    Maybe, unless we finally get a serious rush to gold, which is actually occurring in Asia and the Middle East right now. One of these days the big money in this country will understand that the U.S. dollar is a nuclear roach motel.

    I don't really give a crap about the dollar anymore, because it will collapse. Just a question of when.

  3. Every talking head this morning said the banks are healthier than 2008...not true...

    Four Biggest Banks in America have Huge Leverage

    As a nation, U.S. banks have a total OTC derivative exposure of $250 trillion. So, the fact that just four U.S. banks have this much leverage and risk is astounding! The banks are listed below in order of size and approximate OTC exposure:


    $78.1 trillion OTC derivatives


    $56.1 trillion OTC derivatives


    $53.15 trillion OTC derivatives


    $47.7 trillion OTC derivatives

    Considering that the total assets of these four banks are a little more than $5 trillion, I see a frightening amount of risk with a total derivative exposure of $235 trillion! This is nearly 50 to 1 leverage. On top of that, assets such as real estate or mortgage-backed securities can be held on the books at whatever value the banks think they can sell them for in the future. I call this government sanctioned accounting fraud, or mark to fantasy accounting. Who knows what the true value of the banks “assets” really are.

  4. If positions are being unwound doesn't it make sense that the dollar is going up if the dollar carry trade was the leveraged funding mechanism?

  5. You have a great blog and it is both really informative and really thought provoking.

    My question: You said
    "[Buy] gold and silver that either you safekeep yourself or you know damn well is not being hypothecated or used in some fractional scheme, like GLD, SLV, Kitco, Monex, etc."

    What do you think of CEF relative to other non-personal safekeeping options? Anything better than CEF short of physical bullion?

  6. (Dave)

    re: CEF. I don't care for CEF. It's not real gold because you can't exchange your shares for physical like with PHYS - for sure - and GLD - supposedly. Even with those, you have to own more shares than most individuals are capable of owning.

    CEF used to let you into their vault to see what they got. They don't anymore. I personally don't trust CEF because of that. That's one of the reasons CEF no longer trades at much of a premium to NAV the way it used to.

    Having said that, no matter what ETF you own, and no matter whether it's real or fake gold, unless you can get the gold out and take take delivery, all you are doing is "indexing" gold and when you sell, you still have dollars.

    One of these days the real stuff will trade a massive premiums at coin shops etc. Many coin shops won't even have any. So if you think you are going to "index" gold and then buy the real stuff when you're ready, better rethink that thinking, because you'll either be buyin a lot less than you expect or you won't be able to find any to buy.

  7. What do you think about TD Ameritrade?

    Please let me know, I am holding my breath.

    Thanks for your commentaries.

  8. CME to raise max gold collateral level to $500 mln

    It gives gold additional credibility as the alternative currency. It might also lessen liquidation of gold, as it is now used as a margin vehicle so participants are not actually liquidating," said Bill O'Neill, partner of commodity investment firm LOGIC Advisors.

  9. With 50T derivatives on their book whatever exposure MS (along with the other Wall St banks) has is guaranteed to be papered over. It's just a matter of time.

  10. (Dave)

    TD is owned by a bank/investment bank. Wouldn't trust it. They hypothecate securities for the purpose of obtaining funding. Means your securities held in their Street name have been pledged.

    I also like Trade Station, in addition to Schwab and Fido.

  11. Oh It's Not 2008 Eh?

    That's what all the crooners want you to believe.

    The only thing you have in any economy, or in any market, is confidence. The law says you have a right to trust a balance sheet. That it should reflect, in all material respects, the firm's prospects. The firm is also under an obligation (under Reg FD) to timely disclose material adverse events - like, for instance, the fact that it has no good collateral for its daily market operations.

    If this pattern holds and again nobody is held to account - nobody is indicted, nobody goes to jail, "primary dealers" continue to have the ability to operate in the United States despite playing these games and American firms are not forced to tell the truth or suffer severe criminal legal consequences this is not a time to buy, it's a time to leave. A time to withdraw your consent to be governed through any and all lawful means. Nobody has been held to account for the events of 2008, and nobody is being held to account now. There have been no arrests, no prosecutions, no indictments, and nobody has gone to jail.

  12. banksters trying to take away the last refuge of protection from the people?????

    Will India restrict people's gold buying power?

    NEW DELHI (Commodity Online): Will India, world's largest Gold consumer come up with a draconian new measure to deter people from buying gold and silver.

    The question has been on the air for sometimes after two European nations (Austria and France) took steps to restrict purchase of gold and other precious metals.

    Many believes that India may come up with such a measure to check on climbing inflation,to keep the value of its currency and also to keep black marketeers and fraudsters away from the gold market.

    But why India should take such measures?

    By restricting purchase via banks, credit card or any other electronical methods, government gets records of purchase and also entitled to earn huge amounts as tax from retailers.
    Vast majority of Indian’s are not keeping a bank account let alone credit cards or other amenities. They were paid in cash and most of them aren’t even accountable. So any restrictions will be dealt with stiff opposition from the gold loving common man of india.

  13. It never is different isn't it? Same old same old 2008.

    And Bob Moriaty and his Schadenfreude is so wonderful.

    It really makes no sense to invest in miners - think they break out and then get slapped on the back of your head.

    I am still waiting for the religious experience the short will have - in the mean time they are showing us that experience.

    How far down is it going to end - 2008.

  14. (Dave)

    India ain't going to restrict ability to buy gold and silver. And, quite frankly, France hasn't either. Zerohedge tends to be highly susceptible to the extreme hyperbole. Commodityonline is a good source of news, but often reports rumors as much as fact.

  15. Which is a better investment? Gold or Silver. It's been said: "Gold is a smart investment. Silver is the smartest investment." Is this true? Anyone (qualified to comment)?

  16. What gets me is if the low allocations to miners and bullion are correct as a % of total worldwide they are very low (or under owned) in the hell do they get these very dramatic persistent selloffs?...usually they would have relative strength as bids would be lined up under market..its beyond comprehension.

    By John Hathaway, Tocqueville Asset Management L.P.

    September 15 (King World News)

    Few would dispute that the twelve year (and still counting) bull market in gold has been the
    opportunity of this investment lifetime. Even fewer have participated. From its 20 year bear
    market low in August of 1999, bullion has appreciated more than seven fold. That works out to a $US compound return of 18.0% compared to 0.7% for the S&P 500. There is a paltry $2 trillion of investment gold, approximately 1% of global financial assets. It is not main stream. It is not widely held. The rationale for investing is antithetical to mainstream
    thinking. The opportunity has been missed by almost every conceivable category of investor
    including pension funds, endowments, mutual funds, and central banks, all of whom could be
    safely described as underweight the metal, overweight dicey financial assets. Despite the
    headlines, gold remains under owned.,_Opportunity_of_a_Lifetime.html

  17. (Dave)

    Beta. The primary mining stock investors in big chunks are hedge funds. When liquidity dries up, the hedge funds sell the stuff that has the best bid. Metals and miners fit that category. Credit default derivatives and leveraged sovereign CBO's do not.

    Stay liquid because there will be some amazing bargains in a few weeks. I'm sure you saw the article about the Qatar sovereign wealth fund that is looking to accumulated $10 Billion in mining equities. That will become a lot more commonplace.

  18. Dave,

    What is your opinion of AUMN right now? I know that all the miners are being dragged down with the rest of the equities market but I don't get the timing of the private placement from aumn. Why at a 52 week low would they announce this deal? What am I missing.



  19. (Dave)

    JD your guess is as good as mine. Both AUMN and ECU were highly shorted/manipulated before the merger. No reason to assume that status would change. AUMN has $100mm in cash. I know they plan on spending $10mm drill Valerdena and get the property producing a lot more and they plan on spending $10mm to drill the Argentina silver property.

    Beyond that, it's anybody's guess. This is a brutal market all around. Quite frankly, I'm more worried about system collapse right now than I am any individual stock situation...

  20. Embry on KWN today says the longer-term sustainability of what's currently going on with gold and silver is zero and the price is going to go up to levels that nobody is going to be able to comprehend.

    Could the same be said about the mining shares?

  21. (Dave)

    Yes. The good ones anyway. In fact, assuming we don't collapse altogether - which I wouldn't rule out - we'll eventually see a mining share market that will dwarf what we saw in the bubble. companies with gold or silver in their name and nothing else will fly...

  22. Thanks, Dave. That's reassuring.

  23. Well this kind of reveals the exchange's bias..

    Soaring Financial Vol Leads CME To Announce A 33% Margin...Cut

    Because while soaring volatility in gold and copper, not to mention silver, results in one after another margin hike to "cool off the speculators", when it comes to financial stocks, especially in the "tail wag the dog" variety where the synthetic drives the stock price, a surge in vol means a cut in margins, or 33% to be precise. As of minutes ago, the biggest futures exchange just cut XAF margins by a whopping 33%, exploding vol be damned, or actually, because of it. The CME would be even more delighted if clients were to pledge their gold as collateral, especially following yesterday's expansion of gold's marginability from $200 to $500 million. So just in case anyone missed the message from today, when fins plunged then soared on a rumor, the CME would be delighted if you could repeat all of that but this time with 23% more margin. Expect more margins cuts, this time in ES offset by margins hike in all other instruments, especially of the public enemy #1 variety such as precious metals and crude.

    doesn't seem to matter that most financials are insolvent at mark to market.

  24. re. AUMN:

    The Company also announced the filing on September 30, 2011 of a shelf registration statement with the U.S. Securities Exchange Commission. When the registration statement is effective, the Company would be able to offer up to $250.0 million in various debt or equity securities.......etc

  25. This is fact things every person want to earn more and more money. all country currency can be depended on Gold.Gold is the money of kings and debt is the money of slaves.

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  26. Imagine what they can really see if they'll let others buy this?

    HFT/Algo Trading Alert Systems

    What does it say about the state of our exchanges that trader on proprietary and execution desks now can buy a software program to alert them to the activities of Co-Located Algo Servers?

    “HFT Alert, the first real time software designed to detect high frequency and algorithmic trading systems. HFT Alert identifies when these trading systems are running and what stocks are being affected. HFT Alert can detect several types of algorithms as well as stocks experiencing elevated quote rates associated with algorithmic trading.”

    We are now apparently in a silicon based arms race to learn when quotes are real and when they are spoofed faux quotes driven by HFT algos designed to increase volatility.

    The exchanges once operated fro the greater good of the investing public, akin to nonprofit utilities. They are now hellbent on chasing away private investors who will eventually learn that this is a zero sum game, and co-located HFTs are a tax on saving and investments . . .

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