The World’s Worst Kept Secret
by Rob Kirby, Kirby Analytics. March 10, 2008
When bond maven Bill Gross openly writes about it – as he did in his January Investment Outlook – it’s perhaps inappropriate to use the word "secret":
"But today's banking system as pointed out in recent Investment Outlooks, has morphed into something entirely different and inherently more risky. Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever. Financial derivatives of all descriptions are involved but credit default swaps (CDS) are perhaps the most egregious offenders."
Perhaps it was a Freudian slip, Gross naming this piece Pyramids Crumbling, but he surely hits the mark – albeit from a narrow bond / credit centric point of view – that today's financial system is an elaborate and grotesque ponzi scheme with its hallmark being the "crafty dodge."
But it goes much deeper than this.
If one takes a moment to consider this from Investopedia, the Top 5 Reasons For A Stock Slide, you would see that all reasons for sharp price declines are precipitated by a "crystallizing event" with the bottom line being:
There is almost always a tangible reason behind the downward movement in a given share [or market] price after earnings are released, but it's up to the investor to play the role of detective and to try to determine what that reason is.
The Role of the Detective and Forensic Economics
When markets experience sharp or dramatic price movements – there is usually an identifiable cause or reason. Bill Gross illustrates how the bond / credit complex has denigrated into the morass of an alphabet soup of derivative defaults – all under the watchful eye of regulators and at the tacit direction of the Federal Reserve.
So, when we see market movements like this one in the silver market – with no discernable reason – that we were "treated to" this morning:
Odds are, we've been witness [or victims, perhaps?] to what Bill Gross terms "a crafty dodge" or worse.
What folks would be well advised to remember is this: market moves like the one depicted above are "paper plays," achieved through selling futures [derivatives] in a thin market. We are given further evidence that these "paper plays" are orchestrated manipulations due to the fact that the market for "physical tangible silver" remains tight and in short supply, evidenced by the stiff price premiums of physical metal over the futures price.
Price manipulations, like the one above, involving "selling down" the paper price of a commodity have historically failed when manipulators run-out-of or are unwilling to part with dwindling physical supply.
There are many who follow the metals markets closely who feel that time is now close at hand.
Overseas equities began the week on a sour note with Japan's Nikkei Index falling 250 points to close at 12,532. North American markets didn't fare much better with the DOW dropping 153.50 to 11,740.20, the NASDAQ off 43.15 to 2,169.34 and the S & P falling 20.00 1,273.35. NYMEX crude oil futures gained 2.77 to end the day 107.92 per barrel.
On foreign exchange markets the U.S. Dollar Index gained .17 to finish at 72.98.
The 5 yr. bond finished the day at 2.37% while the 10 yr. ended the day at 3.46%.
The precious metals complex was hit hard with COMEX gold futures losing 1.40 to finish at 971.80 per ounce while COMEX silver futures ended the day down .49 at 19.70 per ounce. The XAU dropped 7.47 to 189.05 while the HUI fell 16.24 to 471.09.
On tap for tomorrow, at 8:30 a.m. Jan. Trade Balance data is due, expected -59.5B vs. prior -58.8B.
Wishing you all a pleasant evening and happy and prosperous tomorrow!
© 2008 Rob Kirby