Friday, January 24, 2014

Something Ominous May Be Coming At Us

Earlier this week 30-day/4-wk T-Bills were auctioned off a 0% rate.  Intra-day, after the auction, the rate went negative.  Negative short term rates were last observed in 2008, before the Lehman/AIG/Goldman collapse occurred.  Of course, Lehman was allowed to implode and Goldman, who's ex-CEO was the Treasury Secretary, was bailed out.  AIG was the beneficiary of that bailout because Goldman had impaled itself on AIG nuclear waste.

The point here is that negative T-bill rates only occur when very big investors are concerned about the return OF their money and not the return on their money.   Think about what a negative T-bill rate means.  It means that someone is paying more for the T-bill than they get in return when it matures a few weeks later.  Why would someone do that?  It's the "safest" place to park large sums of cash.

A big institutional fund or very wealthy investor pays for a T-bill because they they see something which indicates that the risk of the Government defaulting in the next four weeks is less than the risk of  parking that money in a bank or a money market fund.  We're talking millions and tens of millions in short term money.  Bank deposits are insured only up to a small amount.  After 2008, it has been decided that money market funds will no longer be bailed out by the Government/Fed.

In other words, big big investors with cash that needs to be parked are seeing something that gives them concern about the financial system.  The negative rates on T-bills means that whatever was spooking big money in 2008 is spooking it again.  My best guess right now is that there is massive risk of derivatives default.  This would be the derivatives that blew up the system in 2008 but that the Fed/Government quickly monetized.  The problem was never fixed, contrary to Obama's recent end zone dance on the safety of the banking system.

In fact, the Fed swallowed a portion of the bad derivatives and has been using the better part of the $85+ billion per month it's been printing since early 2009 to monetize the rest.  In other words the catastrophic problems were kicked down the road.  Worse, the big banks went out and replaced the crap the Fed took off their balance sheets with even more crap.  Accounting rules were changed, and ratified by BOTH political parties plus Obama, which enabled the big banks to hide the problem.

But now the financial system is wearing the Scarlet Letter of negative T-bill rates.  The source that is lighting the fuse is emerging market problems, reflected in the currency devaluations by Argentina and Venezuela.  But the currencies of other important emerging market economies have been plunging against the dollar as well.  The cost of derivatives "insurance" on the sovereign debt of these countries has suddenly increased at a rate that would make Obamacare insurance providers blush.

What the currency plunge/derivatives blow-out implies is that sovereign bond defaults are on the horizon.  This is not just confined to "emerging" economic countries.  Spain, Portugal, Italy and France are on the ropes financially and economically as well, despite the official European story-line that Europe is in "recovery."

The issue for the U.S. here is that the Too Big To Fail banks are the ones who have underwritten most of the credit insurance derivatives associated with the sovereign debt that may be at risk to default.  They also hold a lot of it on their balance sheet.  That's why the Fed's Excess Reserve accounts of the big banks have ballooned up in correlation with amount of QE that has been printed.  The Fed has monetizing the derivatives exposure but that works only up to the point of a default event.

In other words, a big nuclear derivatives may be coming at our system.  Another interesting tidbit to think about.  While the paper price of gold was being plunged using Comex futures by the Fed-backed big banks, a major portion of the gold held in the GLD Trust was removed.  The common narrative scooped up like dog crap and tossed in our face by Wall Street analysts was that the decline of the gold in GLD was indication of a new bear market in gold.

Essentially gold bottomed in price on June 28th, with a retest of that bottom at the end of December.  Based on the $1180 bottom, gold has risen $90 since since the end of June.  But guess what?  Another 179 tonnes of gold - or 19% - of the amount of gold in the GLD trust at the end of June has disappeared.  If gold is rising again, shouldn't gold be flowing back into GLD?  The 500+ tonnes of gold that has been removed from GLD in a little over a year has disappeared down the rabbit hole.  There's no way to know for sure but I'm sure a large portion, if not all, has been shipped to China.

But maybe not all of it.  In addition to the huge ratio of paper gold to physical gold visible on the Comex, according to the latest OCC bank derivatives report the top 4 banks - JPM, Citi, Goldman, Bank of America - are long over $81 billion in gold OTC derivatives.  That's the equivalent of about 1800 tonnes of gold at current at the current price.  1800 tonnes is slightly less than than the annual amount produced globally by gold mines.  That amount dwarfs by many multiples the ratio of paper/gold on the Comex that has drawn everyone's attention.  Maybe that's why the Comex publishes as much data as it does about Comex futures positions and inventory.  It draws everyone's attention from the much bigger gold derivatives problem.

Here's a link to the OCC derivatives report for anyone interested (it's from Q3, 2013 - there always a big time lag):  Latest OCC Bank Derivatives Report

Something really ugly is coming at our system.  Have a great weekend. 


  1. This latest piece you have written reminds me of my time riding in a Huey. I remember as we were flying over enemy territory my Sgt. telling me to take my helmet off and sit on it. I guess your telling us all to sit on our helmets or C.Y.A. Thanks for the heads up.

  2. Germany is still waiting for their gold to be returned from the Fed.

  3. Thanks for taking the time Dave. While I've discovered I'm lousy at investing in the equity markets, I've taken comfort in some other great investments I've been making - investments of time in learning foreign languages, learning to play a musical instrument, and gaining proficiency with weapons of various calibers, as well as a big investment of time in reading and understanding exactly what is going on around us. Your blog is part of that. I'm long precious metals, personal liquidity, hard assets of various utility, and a truckload of concern as well as the belief that those of us who aren't drinking the Kool-aid have to stick together. I'm short personal debt and any faith that TPTB care one iota about the bottom 99%. But I also think they underestimate us...

  4. Seasonal sales anomaly or trouble in the Hamptons?

  5. Get Physical while there is still time...bottom line.

    Great work Dave most valuable to those who pay attention to this sort of thing.

  6. Inside London: 'Demand Delivery For the True Price of Gold'

    I nearly fell out of my chair when I read a description of the divergence between the paper and physical gold markets from the Inside London column of the Financial Times.

    "But one day the ties that bind this pixelated gold may break, with potentially catastrophic results. So if you fancy gold at today’s depressed price, learn from Buba and demand delivery."

    And this in the prince of mainstream financial publications. Quick, alert the spinmeisters for Davos man that the natives are growing restless.

    As the fellow says, one day the ties that bind the actual and the traded commodity will snap. So if you fancy gold at today's depressed price, take delivery.

  7. > are long over $81 billion in gold OTC derivatives.

    have a notional amount of 89 + 20 --> 109 billions.
    we don't know if they are long or short.

  8. Dave

    Gundlach Counting Rotting Homes Makes Subprime Bear

  9. Has anyone noticed the effect that the 3% on the 10yr treasury has done already? Can you all see the emerging markets are already in trouble by this? This is the reason that they have now sent it(10yr yields) back down retreating hard. Believe me when I say the FED has already lost control of the bond market. There will be plenty of MOPE and SPIN talks coming up to try to calm investors. However this train wreck is already set in motion.

    No one is speaking about this, but the interest rates rising has caused a major hit in the derivatives market and that is a major factor in the stock markets tanking. People who have money in bonds are looking at whether they will get a “return of their money”, not a “return on their money”, so they are bailing out.

    SIRI opening the Gates of Hades is not by chance something major is afoot here people. Get GOD, Get GOLD,and Get out of Dodge if you can. And if you file taxes,do your taxes if you are getting a refund as fast as you can,because you may not get it once this thing goes in motion. When this super volcano blows, hot lava will kill everyone in its path!

  10. I am really afraid. No doubt about that. This may be the big one and where it goes nobody knows.
    I believe in my own big three. FOOD CLOTHING SHELTER, everything else is a luxury

    1. You might want to include water and protection. Knowledge, is your greatest asset. People who "understand" will be much better off when this thing goes down.

    2. yes, water!

      water rationing is already being declared in california and will soon swept into other states as the drought goes into year 4. farmers are saying they have never seen it this bad. mainstream media is avoiding all this news as usual.

    3. Interactive U.S. Drought map - 1999 to present

  11. I'm new to your blog. Thanks for the article, but I'm just so dang confused. Default is default, wouldn't that cause T-Bills and the dollar to head WAY down south? This whole system is rigged. Who, if anybody, gets their money back? What is the definition of money? Fiat monopoly paper or gold/silver?

    I'm hearing bad news from almost every front. China is crapping out. Europe's bad news has been silenced, but the problem is still there. Japan.... Abenomics, total failure. And now, "we" are seeing major cracks.

    This is going to be a smoking hole of pain and misery. Who really knows the path and destination to the de-noue-ment.

  12. HSBC imposes restrictions on large cash withdrawals

    Some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it, the BBC has learnt.

    Listeners have told Radio 4's Money Box they were stopped from withdrawing amounts ranging from £5,000 to £10,000.

    HSBC admitted it has not informed customers of the change in policy, which was implemented in November.

    The bank says it has now changed its guidance to staff.
    New rules

    Stephen Cotton, from Worcestershire, went to his local HSBC branch this month to withdraw £7,000 from his instant access savings account to pay back a loan from his mother.

    A year before, he had withdrawn a larger sum in cash from HSBC without a problem.

    But this time it was different, as he told Money Box: "When we presented them with the withdrawal slip, they declined to give us the money because we could not provide them with a satisfactory explanation for what the money was for. They wanted a letter from the person involved."

    Mr Cotton says the staff refused to tell him how much he could have: "So I wrote out a few slips. I said, 'Can I have £5,000?' They said no. I said, 'Can I have £4,000?' They said no. And then I wrote one out for £3,000 and they said, 'OK, we'll give you that.'

    1. HSBC cash flow problems ?
      Not uncommon for banks to ask for a weeks notice for large sum withdrawls ( my credit union does this) But to ask what cash is to be used for ? Who makes the rules , and who judicates them . Something wicked this way cometh !

    2. HSBC Holdings: End of the Charade

      When it comes to HSBC, the Street cannot come up with enough disingenuous excuses for the group’s glaring problems – notably at the subsidiary level. In our view, HSBC has not made the necessary adjustments during the quantitative easing reprieve. Rather, it has allowedlegacy problems to linger as new ones in emerging markets gather pace. The result has been extreme earnings overstatement, causing HSBC to become one of the largest practitioners ofcapital forbearance globally. This charade appears to be ending, given how few earnings levers remain besides selling off core elements of the franchise and the stringencies of Basel III compliance. We expect EPS pressures and dilution from capital increases to be high. Adividend cut may even be on the cards. SELL.


      HSBC Holdings (5 HK; HSBC or the Group) has overstated assets at the major subsidiary level to the tune of US$63.6bn-US$92.3bn, by our calculation, amounting to between five and seven years of results. Given this unaccounted-for level of balance sheet risk and the enormous increase in the Group’s Basel III/CRD IV capital requirements, we believe HSBC needs to raise between US$58bn and US$111bn in capital (depending on the implementation of a counter-cyclical buffer), representing 32-61% of current stated equity. Given how much new equity HSBC appears to need, a dividend cut or suspension is quite plausible.


  13. Some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it, the BBC has learnt.

    Listeners have told Radio 4's Money Box they were stopped from withdrawing amounts ranging from £5,000 to £10,000.

    HSBC admitted it has not informed customers of the change in policy, which was implemented in November.

  14. Wikileaks in 2010 on gold: ------------------




    "China increases its gold reserves in order to kill two birds with
    one stone"

    The China Radio International sponsored newspaper World News Journal
    (Shijie Xinwenbao)(04/28): "According to China's National Foreign
    Exchanges Administration China 's gold reserves have recently
    increased. Currently, the majority of its gold reserves have been
    located in the U.S. and European countries. The U.S. and Europe have
    always suppressed the rising price of gold. They intend to weaken
    gold's function as an international reserve currency. They don't
    want to see other countries turning to gold reserves instead of the
    U.S. dollar or Euro. Therefore, suppressing the price of gold is
    very beneficial for the U.S. in maintaining the U.S. dollar's role
    as the international reserve currency. China's increased gold
    reserves will thus act as a model and lead other countries towards
    reserving more gold. Large gold reserves are also beneficial in
    promoting the internationalization of the RMB."

  15. The Gadfly of Greenwich Real Estate

    One of the gaudy estates is owned by a hedge fund kingpin now residing in prison; others belong to a real estate investor just coming out of prison and an investment adviser who steered his clients and their billions to Bernard L. Madoff. Then, to cap it off, a guy in an 8,000-square-foot mansion is charged with crushing his wife’s skull in with a baseball bat.

    This is “Rogues Hill Road,” or so Mr. Fountain has called this 3.5-mile stretch of asphalt. “All these aspirational schnooks came out here thinking that they had really made it,” said Mr. Fountain, a real estate broker, blogger and lifelong Greenwich resident. “But then the tide went out and what you are left with is a bunch of crooks.”

    The essence of his complaint — that decades of easy money and ceaseless greed have created a glut of unsalable houses that will remain a blight on his hometown for many years — highlights one of the more curious anomalies of today’s explosion in asset prices.

    Though the Federal Reserve’s policy of rock-bottom interest rates over the last few years has revived the value of many of the nation’s subdivisions and sent stocks soaring to historic highs, it has prompted only modest interest in the over-the-top Greenwich mansion, a classic emblem of quick riches.

  16. Bank Of America Caught Frontrunning Clients

    What is this newly promoted product, and why is there demand for it? This is what the CME had to say about the benefits of "DIRPs" (even though the technical acronyms is DSFs):

    Capital efficient way to access interest rate swap exposure
    Flexible execution via CME Globex, Block trades, EFRPs and Open Outcry
    Allows participants to trade in an OTC manner:
    Ability to block calendar spreads
    Lower block thresholds and longer reporting times
    No block surcharges

    But, as in the case of CDS, and all other novel products, the main reason for DIRPs is simple: an even lower margin requirement compared to Interest Rate Swaps and Treasury Futures (margined together), allowing one to express a position, or better, manipulate the market in Interest Rate products, using the least amount of margin (initial capital) possible.

    In other words, while Reuters is focused on the Fannie and Freddie frontrunning angle, it appears the frontrunning activity spread substantially to involve the entire Treasury curve as well!

  17. Dave, do you think the Fed will taper more next week? I know you believe the Fed's tapering attempts are misleading and they will increase QE in the future. But Jon Hilsenrath's article says there will be more taper next week.

    1. Don't know. Not concerned with it. Hilsenrath is a dope. Can't think for himself. When he does try to, he's wrong. Figure out what you think and believe and don't let media shills infect your thinking. Focus on the facts. 95% of what you read coming from the mainstream media is planted there as a distraction. The whole taper/no taper narrative is designed to deflect the debate away from what's really going on. It's a vile Orwellian smokescreen.

      What do you know about what is going on with the system? Is really getting better or worse? Has taper made any difference at all? Yes, it has. It's kept the banks from collapsing and it's enabled the Government to balloon its debt at low interest rates. What changes if QE if reduced?

    2. I think you meant "has QE made any difference at all?"

    3. LOL - yer right - "taper" = "QE"

  18. Yes, the MSM are the biggest outlet of disinformation. Warren Buffett, the most successful stock investor according to the MSM could in fact be Bernie Madoff on steroid. The real world could be in fact upside down.

    1. "The Truth About Warren Buffett"

      Buffett Message Is ‘Do as I Say, Not as I Do’: Alice Schroeder

    2. Dad, Someday Can I Grow Up to Be Too Big to Fail?

      Even if you idolize Berkshire and believe Warren Buffett is infallible, there’s no telling how Berkshire’s businesses will perform once he’s no longer at the helm. It makes sense, too, that the nation’s most favored rescuer of ailing megabanks itself would be deemed too big to fail. Under Fed supervision, an investment from Berkshire might become an even more powerful endorsement than it is already. The Fed conceivably could gain influence in deciding who gets one.

      But this isn’t how capitalism and free markets are supposed to work. As Buffett wrote in a 2010 letter to shareholders: “Too-big-to-fail is not a fallback position at Berkshire.” It sure shouldn’t be.

      Nobody told Buffett on his way up which securities, derivatives and business acquisitions were appropriate risks for Berkshire to take on, or how concentrated or diversified his company’s bets should be. Nor is it right that the government should deem Berkshire so vital to the financial system that it deserves special treatment.

      Regulators and lawmakers can crow all they want about how the Dodd-Frank Act ended “too big to fail.” But there don’t seem to be many investors who believe that. Fannie Mae and Freddie Mac are still around as wards of the state. Congress has been known to change its mind in a panic, as it did in 2008 when it passed the law that created the Troubled Asset Relief Program. Plus, Dodd-Frank gave the government the option of placing insolvent, systemically important companies into a special resolution program and letting them avoid traditional bankruptcy proceedings.

  19. Dave -

    Thank you ! Few blogs have been discussing Thurs / Fri bond market moves. I too have a sick feeling in my stomach of what may be coming on us . My hope is in a higher power than Gold .
    Although prudence says hold physical .
    We have huge issues in Argentina , Venezuala , and Turkeys problems are buried by nearly all media forms . Watch the virus spread. Monday won't be pretty .


      all is not well at all!

    For three days and at the strangest possible time when the New Year Festivities begin, Chinese bank tranfers halted. They claim it's for system maintenance. Maybe they mean monetary system...