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4.26.2017 - Free Investment Newsletter Bookmark

Why Nothing Matters Part II
 
For the weekend I wrote about why nothing seems to bother the market. Not wars, not falling sales, not a 1% or less GDP, not false flag attacks, not missiles flying through the night....nothing.  And we revealed to you the reason, the Central banks have bought up 1 Trillion dollars worth of financial assets in just the first quarter.
 
Then I went on to explain why. See, there’s so many things “connected” to the markets, that if the markets were allowed to fall, the ripple effect would be huge. Consider a pension plan that is allowed to keep a certain percentage of their money in stocks. That plan might be the life savings of 25,000 people. But if the amount they have vested in the market was to be slashed by say 50%...that’s a lot of people that just saw their retirement go to hell in a handbag.

So, we’ve got pensions, insurance companies, sovereign wealth funds, etc, that count on a market that’s stable...to always rising. A big hit in the financial markets puts a lot of people on the wrong end of a bad situation.  So just this alone is reason enough that the central banks of the world want to keep markets “up”. But there’s more to the story, much more.
 
Our world works on credit. Virtually everything you see from the moment you get out of your house to the time you come home is only there because of some form of credit. As you drive down your own street on your way to work...you’re probably in a car that’s been financed or leased. That’s credit. Those houses you pass on the left and the right, are 97% financed via mortgage. That’s credit.
 
The road you’re driving on was probably financed via a bond sale in your township. That’s credit. As you pass the gas station, the gas in those tanks was probably financed via the futures spot market, that’s credit. And the truck that delivered it was part of a fleet financing deal. Not to mention the 30 year lease the gas station itself has with BP. That’s credit.
 
From the food you eat, the trucks that bring it, the fuel they burn,  the clothes you wear to you name it...it’s all based on credit. Somewhere in the chain, credit has been applied. Maybe it’s 20% down and the balance in 30, maybe it’s 60, maybe it’s 30 years. But make no mistake, if credit stops, everything stops.
 
Well this is why you hear the word derivatives so much. Remember when Warren Buffet called derivatives the “financial weapons of mass destruction?”  Well one of the reasons for him saying that is because there’s somewhere around a Quadrillion worth of them floating around.  The Bank of International Settlements(BIS) data shows around $700 trillion in global derivatives. Along with credit default swaps and other exotic instruments however, the total notional derivatives value is about $1.5 quadrillion
 
A credit derivative is a financial instrument that transfers credit risk related to an underlying entity or a portfolio of underlying entities from one party to another without transferring the underlying(s). The underlyings may or may not be owned by either party in the transaction. The common types of credit derivatives are Credit Default Swaps, Credit Default Index Swaps (CDS index), Collateralized Debt Obligations, Total Return Swaps, Credit Linked Notes, Asset Swaps, Credit Default Swap Options, Credit Default Index Swaps Options and Credit Spread Forwards/Options.

A derivative, put simply, is a contract between two parties whose value is determined by changes in the value of an underlying asset. Those assets could be bonds, equities, commodities or currencies. The majority of contracts are traded over the counter, where details about pricing, risk measurement and collateral, if any, are not available to the public.
 
In other words, a derivative does not have any intrinsic value. It is essentially a side bet.  People are betting on just about anything and everything that you can imagine, and Wall Street has been transformed into the largest casino in the history of the planet. After the last financial crisis, our politicians promised us that they would do something to get derivatives trading under control. But instead, the size of the derivatives bubble has reached a new record high.
 
According to Uncle Sam himself, the top 25 banks in the United States now have a grand total of more than 236 trillion dollars of exposure to derivatives.
 
This is so big, we cannot even follow the plot. But at a micro level, lets say you’re a pension fund manager. You’re worried about the value of your stock investments as they’re now well over 20 billion worth. So you buy a derivative contract, basically an “insurance policy’ against that holding. Now the outfit that sold you that derivative, he got paid for providing you that protection. But he doesn’t want that risk on his hands, so he sells your contract to another party. And on and on it goes. So just like how each single OUNCE of silver on the COMEX now has 300 paper claims on it.... That one pension plan might have 200 contracts written against it.
 
Now, suppose the derivative was written with a stop. In other words, the derivative might have been structured like this “XYZ agrees to make whole the Joe Blow pension fund, if the underlying stocks in portfolio A1 falls by more than 25% in any 3 month period”.  But something ugly happens... and the market falls by 45% triggering that derivative. The first guy that wrote it says “sorry, we’ve sold that contract to ABC. Well, ABC figured that the market’s not going to drop more than 25% and so they’ve sold “bets” against the entire portfolio....but not just to one outfit. Heck no, they’ve sold it to 22 other companies and pocketed the premiums.
 
 
But that’s just one little pension plan. Folks read the number I posted again. There’s a Quadrillion of these things out there. So as you can see, a drastic fall in the markets can trigger systemic collapses never before seen.
 
Then of course there’s the credit “creation” in the first place. If you have a huge portfolio of stocks, you can of course use that portfolio as “collateral” to create credit. The higher stocks go, the more credit that can be created “against it” and as all ponzi’s require...ever more “input’. Well like all things Wall Street, they find a way to pervert the whole concept. So, if you can use your portfolio as collateral to create say a billion in credit, why not use that same portfolio, and use it as collateral at ten different lenders??  Impossible you say? Sorry, it’s done day after day. That collateral portfolio might be the collateral for 5, 10, 50 different loan bases.
 
With so much counter party exposure, with trails no one could ever follow,  now you can understand why Central banks keep this market up at any cost. The constant need to “feed the beast” with ever more credit, demands that the central banks have no choice but to buy financial assets.
 
If they don’t... this all stops. We enter outright depression. This isn’t fear mongering, or fear porn. It is simply a fact.  The central bankers didn’t buy up over a TRILLION dollars worth of stocks and corporate bonds because they are good investments. They’ve bought them to keep the ponzi from crashing.
 
So the question becomes... what’s to stop it? Not much. One of course is if the Central banks decide not to play anymore. If they decide to stop their buying, markets will come down. Now, if they can manage that in an orderly drop, then they can plug the holes as they blow up. But if they wanted to be nefarious and literally take down the world, all they’d have to do is start selling.
 
Some believe that’s exactly the reason why they “allowed” Trump to be President. The theory is that they put Trump in, because they’re going to pull the plug on the global economy, crash everything and then do the “reset” where debts are discharged, currencies are revalued and we “start over”. The crash would be on his watch, an “outsider” so to speak, and one of those ‘nationalist” folks that wants borders.  Was that really the plan? We’ll chat about that Sunday.
 
The Market....
 
Wow. What else can you really say?  According to the talking heads, we came into a 200 point up day on Monday because over in France the “insider banker puppet” won the first round of the election.  They said that the “market” liked him because he’d be “much better for France, and the EU” than LePen.  Okay, so explain to me how that makes Home depot, who does NO business overseas, go up 2 bucks a share here in the US?? 
 
I have a much different take. I think the reason we had a global rally on Monday was to “condition” people. I mean that literally. Look the establishment globalists want their guy in there. Macron is an ex Rothschild banker. He’s insider connected. He’ll play their game. By boosting markets around the world it instills the idea in people’s subconscious that “Macron won = high stock prices = higher 401K”  Thus... I should vote for Macron because it makes my life better. 
 
Tuesday they kept the party alive. Partly on the France thing, but then they shifted their focus to the “great earnings”.  I’ll pick on CAT for a minute. They declared CAT had “blow out” earnings, a monster, as they were supposed to make something like 65 cents and they posted 1.16. That had the whole machinery space on fire. But of course those were “adjusted” earnings. Their GAAP earnings were just .32 cents. Oh and compared to the same period a year earlier? They made .46 cents last time.  So the Street celebrated a 14 cent a year YOY decline. That’s the market in 2017.
 
But it worked. Between CAT and some others, they manufactured yet another 200+ point day. It was the first time in the whole month of April that we had two up days back to back.
 
Today the futures started out sort of flat, but then gained steam. We opened green and slowly pushed higher. Mostly because of Mnuchen talking about the President’s tax cut plan, and how it will be the biggest tax change of policy in over 40 years, and everyone’s going to love it. By 11 am, we were wedged right up to the S&P all time closing high. Would we get over it?
 
The President came out at about 11:15 and signed an executive order concerning the Antiquities act and the monument act. Those acts were used for the Federal Government to cordon off 250 million acres of land, mostly out west. Well Trump wants to return sovereignty of those lands back to the states that hold them.
 
The market soared on the news...for a few moments. Why? Well if the States are in control of that land, and the State decides it’s in its best interest to say allow mining or timbering or what have you on portions of it, it would certainly be a boon to jobs, truckers, miners, lumber mills, etc.  But then almost instantly the environmentalists went nuts screaming that Trumps going to destroy our wildlife and turn the Grand canyon into a coal pit, blah blah blah. The market settled back.
 
During the late afternoon, there was a press conference where Mnuchen and Cohn gave out the “outline” of the tax plan. They weren’t big on actual specifics however and the press hounded them about that. For instance they say there’s going to be 3 brackets, 10%, 25% and 39%...but when asked what income levels triggered each bracket, they said they were still working on that.
 
At first the market loved it and we were trading Above the March 1st all time closing high. But as they nit-picked it and thought about it, the excitement faded. Heading into the closing bell, instead of being up 60 DOW points and 7 S&P’s we were red by 20 and 1 respectively.
 
Breaking over all time closing highs is never truly easy. Some times it takes several attempts and they all fail. Sometimes however they pull it off and start a new leg higher. I’ve been in the camp that says we don’t belong going higher for a long time. But the Central Banks had other plans...they pushed it up no matter what.
 
So here we are, perched at the doorstep of all time highs again. Are they going to push us through, or are we looking at a pulldown fade?  Until the last few minutes of trading, I was thinking they were going to go for it. It looked like they were ready to jump us over. Then the air came out. So right now we’re in no man’s land. However... SOMETHING is going to happen. We’re either going to break free and soar, or we’re going to get smacked back down some. It was with that “something’s gotta happen” stance, where I decided to go long a little SPY and go short via being long some SPY puts. One of these is going to prove to be right. ( I just hope the movement is enough that I can close out the wrong leg and still have a profit.
 
It's a roll of the dice folks. After two enormous up days, it makes sense that we couldn’t pull  off a third. So their desire for more up is probably still there. Gathering the firepower to make it happen however, could be lacking for a couple days.  It will be interesting to see which way it resolves. Take care, I’ll see you Sunday. 

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