Thursday, June 30, 2011

Eric Sprott: Let the Silver Seller Beware!

It's been a while since we've done a post on Silver.  Since the big take down at the start of May, Silver has hovered at the $35 mark and the COMEX supplies of phyisical Silver have continued to diminish as the disconnect between the paper market and the Silver market intensifies.

As we have said before, it simply means Silver is on sale and the world is rapidly accumulating massive amounts at fire-sale prices.

Eric Sprott has come out with another excellent article in his Markets At A Glance newsletter. Here is the article:

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Caveat Venditor!

The recent bear raid on silver has left many concerned about the sustainability of its historic run. Silver, being a relatively obscure market for most mainstream commentators, attracted much attention in the ensuing days following the May 1 takedown. Indeed, though the 30% drop in silver occurred over only four days, seemingly all eyes were on silver, with commentators who could’ve cared less about the silver market only a couple of months ago, suddenly tripping all over one another to make the bubble call. Silver bubble 2.0?

Hardly. Anyone who has been fortunate to have been invested in silver over the past few years would unfortunately be used to such blatant takedowns. The Chinese don’t call it the "Devil’s Metal" for no good reason. With so much talk these days about the risks of investing in silver, we think that perhaps it may be timely for us to weigh in on the matter. The silver market is riskier than ever, but for reasons the vast majority of pedestrian commentators have failed to grasp.

There is no doubt that speculative dollars have been flowing into the silver market. We note that in April record trading volumes were registered in the SLV, Comex futures, LBMA transfers, and the Shanghai Gold Exchange futures. In fact, converting the average daily trading volume in the aforementioned silver instruments to the amount of ounces of silver they are supposed to represent, there were on average, over 1.1 billion ounces worth of silver traded every day in the month of April. Truly a staggering number when contrasted against the actual amount of silver available for investment.

To wit, the world will only supply about 979 million ounces this year from mine and recycling of scrap, of which it is estimated that 657 million ounces will be used up for non-investment purposes. So in effect, that leaves roughly only 322 million ounces available this year for investment purposes. Converting to days (recall that at least 1.1 billion ounces traded each day) it leaves only about 1.3 million ounces per trading day of available supply. So, we are essentially trading the amount of physical silver actually available for investment, 891 times over each day! It really begs the question; just what are people trading in these markets?

Consider the largest and most prominent of those markets - the Comex, which we believe has owned an effective monopoly on silver price discovery for decades. In fact, the Comex churned over 800 million ounces of silver futures and options on average each day in April. Indeed, notwithstanding the massive but very opaque over-the-counter silver derivatives market, trading on the Comex dwarfs both the physical and the other (known) paper silver markets, combined.

Despite its dynamics being relatively complex and generally not well understood by most, the world’s financial community continues to view trading on the Comex as representative of the fundamentals for the physical silver markets. A market built on a high amount of leverage, both the buyers and sellers of Comex futures and options contracts are able to establish a position in "silver" with pennies on the dollar in collateral and even more astonishingly, no physical silver backing the contracts at all. The following charts illustrate just how unreal these markets have become.

Chart A (click on all images to enlarge):

Chart B:

In chart A, we compare the total open interest in Comex futures and option contracts to the actual amount of silver held in registered inventories able to be delivered against those contracts, since 2009. In chart B, with the steeply-sloping line shows the ratio of open interest (i.e. paper silver ounces) per ounce of physical silver held in inventory. We believe the historical trend of rising open interest and falling inventories deserves considerable attention from anyone attempting to understand the silver market. And though we do note that since October 2010 the trend of rising open interest appears to have abated, the inventories have been evaporating steadily and thus the ratio of the two measures has continued to trend higher. In fact, since 2009 the ratio of paper silver to physical silver has increased fourfold from approximately 8 times to almost 33 times, where it stands today.

What is the significance of this discord between paper and physical supply on the Comex? Recall, that over 800 million ounces traded each day in April on that market. Further, consider that as at the end of April there were only 33 million ounces of registered inventories to back up all of that paper trading. Just imagine if a mere 5% of all of that buying actually stood for delivery; the entire inventories would be more than wiped out. Yet despite the steady erosion of these already scant Comex inventories - a characteristic which would surely be interpreted as most bullish in other commodity markets - the price of silver has actually declined since April. We endeavour to provide a framework for understanding this phenomenon below.

Those who were following the developments in the silver market in April and May (we note that there were many who were) will likely recall that the CME Group raised both initial and maintenance margins five times within less than a two week span effectively raising the minimum amount of capital required to participate in the silver futures market by 84%. This is significant due to the amount of leverage in the futures market and also due to the losses resulting from the precipitous selloff which began on Sunday, May 1st, when several thousand contracts were wantonly dumped onto the very thinly traded after-hours silver futures market causing the silver price to plunge 13% within the span of less than 15 minutes.

For example, consider a hypothetical speculative trader who went long, say 200 July 2011 SI futures contracts on April 28th. At that time this trader would have been required to post an initial margin of $2.565 million for a position of one million ounces of "silver" and thus would have been levered 18.5 times1. Below we present what the trade blotter for this trader might look like over the next few days assuming he maintained his position.

Following the initial trade, each day the trader’s positions would be marked-to-market and any losses or gains would be applied against his account’s equity balance. Should the losses on the position bring the equity balance below the maintenance margin level, the trader would be required to deposit the additional capital required to bring the equity in the account back up to at least the initial margin requirement level.

While the margin increases alone would have forced a decision for this leveraged long to either post the additional margin or close enough positions to bring margin balances in line with substantially higher requirements, the trader was actually fighting a battle on two fronts. This is because in addition to the margin increases, the trader was also experiencing massive losses to his capital due to a rapidly falling silver price. So it is also important to consider the extent of losses to the trader’s equity following the precipitous drop which began on the evening of May 1st. In our scenario, before finding a bottom around May 17th, the cumulative losses would have amounted to over $14 million, or over five times the initial margin deposit of $2.565 million that was required to take on the position on April 28th.

This meant that with margin call after margin call, the capital committed to the position ballooned almost 700% by the time the silver price finally bottomed in mid May. The significance of such a dramatic erosion of capital on a leveraged position cannot be overstated, particularly in the context of rising margin requirements. The CME Group would know this very well, and so it strikes us as particularly suspect that they would continue to raise margin rates in the face of such a sharp selloff. A selloff, we might add, which emanated from highly unusual trading activity on May 1st that, in our opinion, just reeks of manipulation.

How else can one explain the dumping of several thousand SI futures contracts within the course of 15 minutes, in one of the most illiquid hours of trading, without seemingly any regard for price or a fundamental catalyst to speak of? Though we will let the reader connect the dots as to what the intent of the CME Group and the seller’s of SI futures contracts on May 1st really was, we can certainly observe what effect these actions had on the market by looking further into the weekly Commitments of Traders (COT) reports published by the CFTC.

The COT provides us with the weekly open interest held by various categories of silver futures market participants, and thus gives us clues as to how these participants reacted in response to these margin increases and ensuing volatility. We present the following table showing net open interest for the various categories, converted into silver ounces, which we obtained from the COT report for selected dates.

First, note how in the three weeks following the margin hikes, the speculative net long position dropped from 212.7 million ounces to 170.1 million. This very clearly indicates that the speculative longs, when faced with rising margin requirements and losses to capital, did close out a substantial amount of their long positions. The commercials who were short those 212.7 million ounces appear to have been taking every opportunity to cover their own positions. Rather than shorting further into the ensuing weakness, the commercials covered approximately 42.6 million ounces in the three week period.

Another piece of information gleaned from the COT data is that despite what many commentators were hailing as a bubble caused by excessive speculation in the futures markets, the net speculative long positions had in fact been dropping over time. Even during the April run up preceding the five margin hikes, the net speculative long position actually decreased by 23%.

That commercial short position deserves further mention. What is unique and of interest to many silver market observers is not only the size of the short position on the Comex, which is dominated by those "commercials", but also the concentration of the short interest. We provide the percentage of the total open interest held by the four largest short sellers on a net basis in the table above. Note that the net position of the four largest equates to 29% of the total open interest as of May 17th. Further we would also note that the concentrated short interest of the big four, though still quite high has actually dropped substantially over the past year coinciding with the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the resultant public discourse on position limits. Comments from CFTC commissioner Bart Chilton acknowledging the "repeated attempts to influence prices in the silver markets," and that, "violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted," perhaps have also had an impact on the behavior of silver market participants. And though the CFTC’s investigation into the silver futures and options market remains open after three years, we remain hopeful that its findings will further serve the interests of the investing public who rightly expect a fair and transparent silver market void of manipulative forces.

Could the drop in open interest and the reduction of the concentration in the commercial short open interest be perceived as an indication that those top four short-sellers are positioning for the inevitable imposition of position limits rules? Perhaps, and if so, it would follow that likely the short sellers seized the opportunity to further reduce their "liabilities" by buying up contracts in early May at a 30% discount.

Let there be no mistake, we view the current setup as extremely bullish. In our view, whatever froth and excess was present in the paper markets has likely been shaken out in the recent selloff. The remaining longs do not seem willing to part with their silver at these prices. These are the strong hands with longer time horizons that are likely not overly leveraged or are willing and able to withstand substantial volatility. Moreover, perhaps the "game" on the paper silver markets which has been meticulously documented over decades by Ted Butler14 and others, will soon be coming to an end.

What is perhaps most important is that despite what has recently transpired in the paper silver markets, the robust demand fundamentals for silver have not changed in our view. For confirmation of this, look no further than the physical silver market (i.e. the real silver market) which is providing us with evidence almost daily of a sustained bull market for physical silver. The US Mint recently stated that, "demand for American Silver Eagle Coins remains at unprecedented high levels." Likewise for the Perth Mint, the Austrian Mint and the Royal Canadian Mint as well. The Chinese, who were net exporters of silver only four years ago, imported 300% more silver in 2010 than 2009 and such large quantities of imports are expected to continue. Last year, Indian silver imports increased nearly six-fold, and this year consumption is expected to rise nearly 43% according to the Bombay Bullion Association. In Utah, silver (along with gold, of course) will now be accepted in weight value as legal tender. According to Hugo Salinas-Price, a prominent Mexican billionaire, there is now "very strong support for the monetization of silver" in the Mexican congress. We suspect the Europeans are likely to account for an increasing amount of silver purchases going forward as well. In fact, we just can’t imagine a better outlook for silver fundamentals. This really makes us question who could be short such massive quantities of silver and why? Particularly in those leveraged paper silver markets, where as we demonstrated, only a fraction of the outstanding notional ounces are actually available in physical quantity.

We have a very tough time understanding those bearish arguments against silver. We look at the real silver market, and based on the supply and demand data coming from the real, physical markets for silver, the fundamentals are only getting stronger.

And yet there exists another silver market, which as we’ve shown, is not very connected to the physical realm at all. And though silver investors have for decades suffered the tyranny of a rigged paper monopoly over silver price discovery, it appears to us that the tides are turning. In the age of QE to infinity, investors are being more scrupulous with their capital and as such they are demanding physical silver in quantity.

With more and more dollars flowing into the silver markets and a finite supply of physical to meet that demand, the theoretical losses for the paper silver short-sellers are near infinite. And with such a skewed and obvious risk/reward payoff vastly favoring the longs, we pose the following question. Who is most at risk in the silver markets: the buyers of a scarce and real asset that serves a growing multitude of purposes, or the sellers, who are short a quantity of silver which may very well not even be obtainable at anywhere near current prices?

 Let the Seller Beware!

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Wednesday, June 29, 2011

Wednesday Post #2 - The Latest from Anonymous on Empire State Rebellion (OpESR)

The above clip is the latest from the hacker group 'Anonymous'. Back on March 12th introduced you to them as they announced "Operation Empire State Rebellion".  Below is their original clip and follow up clip:

This is the 2nd clip they put out:

Will they amount to anything?

Who knows?  I do agree with their assesment that the Federal Reserve is the source of many of the financial problems we currently face. 

I also believe that the Federal Reserve, established in 1913, will be disbanded, probably sometime during the term of the US President elected in 2016 or 2020... but that's a topic for another day.

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Anyone got a pin? - Updated

For three years now there have been articles all over the Canadian blogosphere warning that the debt levels of Canadians has been getting too high, that real estate valuations are out of whack and that, much like the rest of the world, the real estate bubble in our country will burst.

Over the past year, many of those same warnings have started to appear in the mainstream media, lead by the consternation's of our central banker and federal Minister of Finance.

But while the mainstream media has been content to simply warn of the consequences of too much debt and over valued real estate, recently articles have started to suggest the bubble is getting ready to pop.

Yesterday CBC carried one such article.

Headlined "Canada's Housing Bubble deemed close to bursting", the Mothercorp detailed ruminations of economists from Capital Economics, an economic think tank founded in 1999 to provide "independent macro economic research in the US, Canada, Europe, Asia, Latin America, the Middle East and the UK, on the property sector."

Glancing their ivory tower eye towards Canada, they conclude that the Land of the Maple Leaf's housing market is in a bubble that's set to burst.  And they say housing prices could plunge by as much as 25%.

“Housing valuations have lost all touch with fundamentals and household debt is at a record high.”

And that's for the nation as a whole, imagine if the study were centered on Vancouver?  Particularly in light of the new 'facts' from the Real Estate industry which conclude that HAM is not a significant factor in our inflating land values?

Capital Economics says that Canadian house prices are overvalued at "close to the excessive levels seen in the frothy U.S. market at its 2006 peak."

None of it is news to the blogosphere.

The linchpin, in our opinion, is that significant drops will be driven by rising interest rates.  As we have said ad nausem, there may be a slow melt in the short term but the big crash will not occur until interest rates start to rise.

And Capital Economics's expects that the Bank of Canada will stay the course in the near term on interest rates as financial worries at home and abroad keep Mark Carney from taking action to raise rates.

So is a correction still a long ways down the road?

Interestingly Realtor Larry Yatkowsky has posted data (also hilighted over on VREAA) that shows R/E sales on the 'HAM-infused' westside of Vancouver are down by over 60% this past month.

As VREAA asks, "Is this the start of the seasonal summer slowdown, or the beginning of buyer drought? Who will be stepping up to take the über-jumbo-mortgages necessary to ‘buy’ these properties when prices start falling?"

Pin anyone?

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Monday, June 27, 2011

The looming Canadian Debt Crisis?

I was going to post my thoughts on the new R/E theme that 'HAM is not prevalent in Vancouver' yesterday but didn't get a chance.  Look for it later this week.

Other themes from the past couple of weeks have been the European/Greek debt crisis, the US debt situation and Carney/Flaherty's comments on the Canadian debt situation.

Ultimately all these topics are inter-connected, which is why we focus on them.

And the Canadian debt situation will hinge on how all these external factors play out.

Our blogging colleague Ben Rabidoux, who now blogs on his great new site The Economic Analyst, has come out with some great graphs that reflect the status of Canadians. 

The first clearly show how debt is exploding in Canada as the growth in lines of credit is compared to the growth of disposable income, GDP and inflation (click on images to enlarge):

Next the growth in Mortgage debt is similarly compared:

Mortgage debt as a percentage of GDP:

And finally how mortgage rates have fallen over the past 30 years:

For the past 2 years there has been a steady stream of warnings from analysts that the artificial accomodative money policies of the past 30 years will be coming to an end.

Our own central banker and federal finance minister have spent the past year issuing warnings that Canadians should get ready for interest rates that will return to the historic norm.

These charts clearly show why they are concerned.

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Saturday, June 25, 2011

They say things come in three's

Ya gotta love watching the way a entity attempts to manipulate it's message.

First it was a Greater Vancouver Real Estate Board survey of Realtors which told us that after studying 1246 sales over the Jan-May 2011 period, the GVREB concluded that more than 80% of buyers of Vancouver Real Estate are locals and only 7.5% came from outside of Canada.

On the heels of that study came another. This time conducted by Landcor Data Corp as reported by the Financial Post.

Landcor Data Corp said it has been been tracking property tax assessment bills to pinpoint the percentage of transactions driven by foreign investors in Vancouver’s suburbs. It concludes that that while sales of Vancouver Real Estate to foreigners are prevalent in high end properties, the dollar amounts of those sales are severely skewing the average property values in Vancouver.

This prompted the Urban Futures Institute, a Vancouver research firm that worked with Landcor, to say the data proves that influence of foreign investment is not a major factor in most of the Lower Mainland. "These data contradict what seems to be largely anecdotal evidence indicating foreign investment is a significant driver to residential price increases in the Lower Mainland.”

And now, completing the troika of articles disavowing the idea that Hot Asian Money (HAM) is playing a significant role in the Vancouver Real Estate bubble, is this offering via the Globe and Mail.

The article attempts, in one paragraph, to reduce the topic of HAM to a vicious Internet rumour. Headlined "What's driving Vancouver House Prices", we are told:
  • "The China Daily ran a story – later picked up by a Forbes blog – which said that "according to Colliers International, a real estate service provider, the proportion of Chinese buyers in Vancouver's property market is on the rise."
The new 'reality'?
  • But alas, nothing is so transparent in a market such as Vancouver, which doesn't actually track foreign investment. The Colliers report believed to be at the heart of the article – Marketshare First Quarter 2011 – doesn't actually quantify the number of buyers and goes out of its way to play down the effect they may be having. 'There seems to be more myths than facts about Mainland Chinese investing,' Colliers president Greg Ashley wrote in the intro.
And this is the meat of the latest tactic; to discount HAM as a 'myth'. Collier's (a local real estate company) outlines how, while HAM exists, it isn't dominant:
  • "This trend is certainly impacting single family housing values in Vancouver-West and Richmond. However, it is not the driving force behind all sales. A number of recent launches reported large numbers of Asian buyers - yet a significant portion of these buyers are actually local residents not foreigners."
For almost 2 years now the Real Estate industry has been keen to promote HAM, to use HAM to justify the Vancouver housing bubble, to use HAM to defend the low interest rate policy/lax mortgage rules. To use HAM to promote the setting up of Real Estate offices in mainland China to sell local R/E. To use HAM as media events promoting helicopter trips to showcase local developments to overseas buyers, etc.

They have done this while insisting that Canadians aren't really over-extending themselves with debt - by claiming that it's actually foreign investment that is making all these outlandish purchases, not Canadians.   

Local blogs, who have insisted that the impact of HAM is not as signficant as many realtors have claimed and have been saying that Vancouverites are IN FACT over-extending themselves with debt, have been dismissed and marginalized.

Suddenly the tables have turned.  Suddenly we are awash in stories from the R/E industry about how HAM is not a significant factor in Vancouver Real Estate.  That the vast majority of purchases are being made by locals and not foreigners

Why do you think that is?

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Friday, June 24, 2011

Riddle me this?

Last Sunday's post was titled 'What's Wrong Here'

Juxtaposed against a Global TV news story about Vancouver home prices being the most expensive in the English speaking world when compared to the income we make (the cause of which is attributed to the infamous Hot Asian Money - HAM - whereby wealthy Asian foreigners drive up local real estate prices with their Tsunami of purchases in the Village on the Edge of the Rainforest) was a survey from local realtor Larry Yatkowsky showing that only 7.5% of buyers of Vancouver real estate are wealthy foreigners from outside of Canada.

Curiously, only days later, a Financial Post story recounts the results of study by Landcor Data Corp.

Landcor says it has been tracking property tax assessment bills to pinpoint the percentage of transactions driven by foreign investors in Vancouver’s suburbs.

Out of the 55,512 sales in 2010 only 195 were to people outside of Canada. Foreign investors only own 0.5% of the total housing stock of 774,600 residential properties in the Lower Mainland.

Interestingly... sales to foreigners are prevalent in high end properties, the dollar amounts of which are said to be severely skewing the average property values in Vancouver.

In 2008, there were 69 sales of homes priced at $3-million or more, the most expensive $10.5-million, and 46% were purchased by Chinese buyers. By 2010, there were 164 sales in the same category, the highest-priced being $17.5-million, and 74% went to Chinese buyers.

Andrew Ramlo, executive director of The Urban Futures Institute, a Vancouver research firm that worked with Ledcor, says the data proves that influence of foreign investment is not a major factor in most of the Lower Mainland.
  • “These data contradict what seems to be largely anecdotal evidence indicating foreign investment is a significant driver to residential price increases in the Lower Mainland.”

Is HAM a major impact or isn't it?

Is our region plunging itself into massively unbalance debt as a ratio to income? Or are the high prices justified because of foreign investment and thus there is no debt problem that has to be addressed?

Should limits be put on foreign investment or is all the talk about foreign investment an urban myth?

For several years now the Real Estate industry has been telling us that Asian money is flooding into the market, that it is driving prices higher and that we should buy now or be priced out forever.

Now, suddenly, studies seem to be popping claiming there isn't that much Asian money flowing in, after all.

I sense a disquieting metamorphosis in the information being put out be the real estate industry and I can't help but question the motivations behind it.

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Thursday, June 23, 2011

Jon Stewart on Derivatives and the Greek Crisis

Last night Jon Stewart had a great take on the Greek Crisis which summarized many of the points from yesterday's post, including how America's debt situation is actually worse that Greece and how no one knows the impact of the derivatives mess.

Unfortunately I can't embed a clip from the show, however if you follow this link you can watch the segment (if you are viewing from Canada) on the Comedy Network.

If you are in the United States, go to and it's the first segment on the June 22nd, 2011 show.

There is an audio version of the segment on youtube put to assorted pictures here:

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Greece, the PIIGS and why it is so important

On a day where the main distraction is Ben Bernanke, the Federal Reserve and QE3, the real story remains Greece and the PIIGS of Europe (Portugal, Ireland, Iceland, Greece and Spain).

This issue has never really gone away.  And the average person really doesn't have a clue what all the fuss is about.

Oh sure... it's about sovereign debt, but no one really knows much beyond that.

It all has to do with derivatives, that obscure financial concept that everyone seems to have vaguely heard about but no one seems to really understand.

Derivatives are financial instruments that were created to reduce risk, and their use on Wall Street is known as hedging.

In recent years their prevalence and complexity has ballooned creating new kinds of risk.  The name "derivative'' comes from the fact that their value "derives" from underlying assets like stocks, bonds and commodities.

In the years leading up to the financial crash, banks made billions by selling complex derivative contracts directly to buyers, pocketing hefty fees but absorbing considerable risk as well.

And it is that risk that is the problem.

Although America’s housing collapse is often cited as having caused the financial crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators - sometimes even beyond the understanding of executives peddling them

Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman Bros.

In the case of A.I.G., the derivative virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models.

By 2008 these derivatives nearly decimated A.I.G, one of the world’s most admired companies which had seemed to be a sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.       

When all was said and done, A.I.G. needed a $182 billion dollar federal bailout.  And it was all because of these infernal 'derivatives'.

In years past, when financial crises in Argentina and Russia left those countries unable to make good on their government debts, they simply defaulted.

But this time around, credit default swaps and other sorts of derivative contracts have become so common and so intertwined in the financial markets that there are fears among regulators and financial players that a Greek default will wreak havoc among derivatives holders.  

The looming uncertainties are whether these derivative contracts - which insure against possibilities like a Greek default - are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default.

If there were a single company standing behind many of these contracts, that company would become the A.I.G. of the euro crisis.
The central banks of both Europe and the United States will not say whether their researchers have studied holdings of derivative contracts among nonbank entities like insurance companies and hedge funds.

When Ben Bernanke, the chairman of the Federal Reserve, was asked about derivatives tied to Europe at yesterday's press conference, he said:

  • “A disorderly default in one of those countries would no doubt roil financial markets globally. It would have a big impact on credit spreads, on stock prices and so on. And so in that respect I think the effects in the United States would be quite significant.”
Derivatives traders and analysts are debating just how much money is involved in these contracts and what sort of threat they pose to markets in Europe and the United States.

According to Markit, a financial data firm based in London, the gross exposure is $78.7 billion for Greece. And there are many other types of contracts, like about $44 billion in other guarantees tied to Greece, according to the Bank of International Settlements.

The gross exposure of the five most financially pressed European Union countries - Portugal, Italy, Ireland, Greece and Spain -  is about $616 billion. And the broader figure on all derivatives from those countries is unknown.       
This is why the Europeans have been wrestling this week with the ridiculous “voluntary” Greek bond financing solution.  They are trying to sidestep a default because they simply don' know what's out there.

And they're afraid.

Afraid of an outright default because the financial industry is still refusing to provide the disclosure needed to understand the depth and scope of the actual problem.

Said Christopher Whalen, editor of  the Institutional Risk Analyst: "They’re holding us hostage. The Street doesn’t want you to see what they’ve written.”       

It is suggested that the depth and breadth of the contagion that might occur among swaps holders in the case of a Greek default is massive.

European leaders have said there’s no way we’re going to let Greece default even though it is abundantly clear to everyone that this is the best solution - just as it was for Argentina and Russia several years ago.

Skeptics fear their commitment is so severe because they aren't really sure what they are dealing with.

When asked what data the Federal Reserve had collected on American financial companies and their swaps tied to European debt, Barbara Hagenbaugh, a spokeswoman, referred to a speech made by Mr. Bernanke last May in which he did not mention derivatives tied to Greece.

At yesterday's press conference, Bernanke said that commonly cited data on derivatives do not take into account the offsetting positions banks have on their Greek exposures. And with those positions, he said, even if there is a Greek default, “the effects are very small.”

(This, of course, is the same Ben Bernanke who swore up and down to congress in 2006 that the subprime mortgage condition was also 'very small' and would not be an issue)

At the European Central Bank, Eszter Miltenyi, a spokeswoman, said: “This is much too sensitive I think for us to have a conversation on this.”           

It is widely believed by many insiders that the financial industry's process for unwinding credit-default swaps couldn't possibly run smoothly if Greece defaulted.

Derivatives tied to a country’s debt do not pay out over time, they pay out on one occasion: if a default occurs. That makes sovereign derivatives  similar to derivatives on corporate bonds and different in some ways from the situation at A.I.G. Under normal circumstances they can be unwound smoothly.  But not if the risk were concentrated in just a few weak institutions.

Derivatives have been called the 'financial instruments of mass destruction'.

Will the derivatives of the PIIGS blow up the financial world the same way the derivatives of Bear Stearns, Lehman Bros and A.I.G. did?

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Tuesday, June 21, 2011

Once again Jim Rogers succinctly summarizes the situation...

Rogers is talking about Greece. The key problem with Greece and why it matters to North America is that so many North American banks have huge exposure to Greek debt.  If Greece defaults, those banks lose massive amounts of money.

And in this segment below we see the root of the economic problem in North America... we're too busy blaming China for our woes as opposed to understanding why we can't bring the manufacturing of products we consume back to North America. 

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Monday, June 20, 2011

Those who forget history...

In 1929 the Stock Market crashed.  After pumping massive stimulus into the economy, the markets regained over 60% of what they lost.

The recession was over, the recovery had begun.  Happy Days had returned.

But the underlying problems that created the crash had not been addressed.  The massive buildup of debt had not been addressed.  In reality, the reckoning had only been delayed.

Fast forward 80 years.  The stock market crashed in 2008, a great financial crisis plunged the world into chaos. Massive liquidity was pumped into the system.  In 2009 the Federal Reserve could see sighting of economic "green shoots" everywhere.

But conditions are rapidly deteriorating.  The underlying problems that created the crash have not been addressed.  The massive buildup  of debt has not been addressed.

Is another violent financial episode looming?

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Sunday, June 19, 2011

What's wrong here...

Above is a Global TV story which argues that Vancouver home prices are the most expensive in the English speaking world when compared to the income we make. 

And the underlying reason offered is that the infamous HAM (Hot Asian Money) is the cause of the explosion in housing prices.  Wealthy foreigners, with ample cash, are driving up local real estate prices with their Tsunami of purchases in the Village on the Edge of the Rainforest.

The argument offered is that comparing the insane local real estate prices to local incomes in not an accurate measurement of the market.  Vancouver's growing reputation of a 'world class city' is altering the dynamic and that prices are an accurate reflection of the moneyed demand for real estate from Asian buyers.

But, at the same time, local realtor Larry Yatkowsky releases a Greater Vancouver Real Estate Board monthly survey of Realtors which tells us something entirely different is going on.

The survey provided by Yatkowsky covers 1246 sales over Jan-May 2011 and concludes that more than 80% of buyers are locals.  Of those buyers who did come from outside of the Greater Vancouver area, about 15% come from outside of the Lower Mainland. And a little more than half of those from outside the Lower Mainland came from outside the country.

So... only 7.5% of buyers of Vancouver real estate are wealthy foreigners from outside of Canada.

That means 92.5% of the buyers are Canadians. And it means the concerns about the gigantic level of debt being assumed by Canadians combined with the concerns from Carney and Flaherty about the impact of a bursting bubble on our citizens are more than justified.


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Peter Schiff talking about Greece and the form that QE 3 will take

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Saturday, June 18, 2011

More on Sovereign Debt: Russia to continue dumping US Treasuries

The ticking time bomb continues.

Yesterday we brought you a clip of Jim Rogers talking about the looming spectre of sovereign debt and getting ready.

Today comes confirmation that the rush out of the US dollar is intensifying, this time courtesy of Russia.

Over the past 6 months Russia has dumped 30% of it's Treasury holdings. Now the Wall Street Journal reports that "Russia will likely continue lowering its U.S. debt holdings"

"The share of our portfolio in U.S. instruments has gone down and probably will go down further," said Arkady Dvorkovich, chief economic aide to the Russian president, told Dow Jones in an interview on the sidelines of the St. Petersburg International Economic Forum.

Faithful readers will recall that China has already publicly announced they are considering dumping 2/3's of their US Treasury holdings.

This also follows Japan's public pension fund announcement that they are planning to begin asset liquidations (which means they won't continue buying US Treasuries).

Russia, China, Japan are the three countries with the largest financial reserves in the world to be able to buy US Treasuries and continue funding America's deficit spending.  Now all three are either dumping, or threatening to begin dumping, US Treasuries

And it is all coming just before Quantitative Easing 2 (aka the US printing money to buy it's own debt) is supposed to end.

Can you see why Jim Rogers is so concerned?


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Flaherty joins Carney with more interest rate/debt warnings

Yesterday we posted yet another warning from Bank of Canada Governor Mark Carney about debt and interest rates.

Well it wasn't only Carney issuing warnings in the Land of the Maple Leaf. Finance Minister Jim Flaherty also chimed in his concerns.
  • "We have very low interest rates in Canada. We need to remind Canadians that historically low interest rates will not be there forever, that interest rates really only have one way to go and that’s up. So Canadians in terms of their most important – their largest debts, residential mortgages, need to be aware that their monthly payments are going to go up when interest rates go up."
These guys are starting to sound like regular bloggers with all their doom and gloom, aren't they?

What is most interesting is that a survey by the Certified General Accountants Association suggests 58% of indebted respondents are taking on more debt just to pay for daily living expenses like food, housing and transportation.

And if consumers are taking on more debt just to pay for daily living expenses, it deprives them of resources for other purchases, like cars, TVs, appliances, clothes slowing economic activity.

Which means the economy doesn't grow.  Which means income doesn't grow. Throw in rising interest rates and the problems compound.

Can you see it? There is a growing perfect storm here.  And when it breaks, the fallout is going to be wicked.

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Friday, June 17, 2011

Jim Rogers on Sovereign Debt and getting ready

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Yet another warning from Carney

Ahhh.... our own central banker is issuing warnings again. 

Dropping by the Village on the Edge of the Rainforest on Wednesday, Mark Carney chose Vancouver for a speech on housing.

How appropriate.

And what did he have to say?

The latest blatherings were a sharp warning that the housing market may be overheating. Seems his ultra-low interest rates, combined with too much optimism on the part of buyers, has been jacking up prices in places like Vancouver. 

With investment in residential properties nationwide now near peak levels, Carney left little doubt that he is concerned.
  • “The risk is that expectations become extrapolative, prompting the classic market emotions of fear and greed – greed among speculators and investors, and fear among households that getting a foot on the property ladder is a now-or-never proposition.”
Carney even singled out Vancouver saying that Asian wealth is fuelling valuations that in some cases are “extreme.”

Carney’s speech comes a day after a report from the Certified General Accountants Association of Canada showed household debt has hit $1.5-trillion.

If household debt were distributed evenly across all Canadians, the report said, a two-child household would owe an estimated $176,461, including mortgage costs.

Topping it all off was a report, that also came out on Wednesday, from Statistics Canada that showed Canadian families’ income from earnings, investments and private pensions fell 3.2% in 2009 to $63,000 – the first “significant” drop in market income since the early 1990s.

In the end it came down to Carney repeating the warnings he has been uttering for more than 18 months now as Canadian borrowers continue to binge on cheap credit,

Carney said the share of households “highly vulnerable to an adverse economic shock” has risen to its highest level in nine years.

He says borrowers and banks should "be careful."

Carney knows what the blogosphere has been saying for almost two years now: we are sitting on a powderkeg ready to implode.

In his speech Carney noted that real estate loans now make up more than 40% of Canadian banks’ assets, compared with 30%.

Our Nero-ish central banker called this “unprecedented exposure.”
  • “The central position of housing assets and liabilities on the balance sheets of both households and financial institutions means that any housing excesses could generate important vulnerabilities in the financial system. Historically low policy rates, even if appropriate to achieve the inflation target, create their own risks.”
Vancouver, of course,  is Ground Zero for this looming disaster with prices up an astounding 25.7% to $831,555 – more than 11 times the city’s average family income – from $661,745.

But there is no economic recovery and Carney can't raise interest rates yet.

He knows what's coming.  But after so many warnings, all the children in the Land of the Maple Leaf hear is the muffled "whaa, whaa, whaa" sound of the adults talking on the Peanuts cartoons and it becomes background noise to the oblivious.

The Financial Post had an interesting take on it, though.
  • "With the Bank of Canada’s hands tied in so many ways when it comes to cooling off a housing bubble, the message for Canadians is simple: Homeowners you’re on your own on this one. Get sucked into the housing hype if you must, but be prepared for interest rates to rise — and with all that mortgage debt you’re carrying on your fancy new houses, be prepared for those rates hikes to bite."

Indeed. The Post even had this little tidbit:
  • "Cut through the bankspeak and Mr. Carney also said some parts of the housing market may be acting like a classic financial bubble, with expectations of rising prices and ever higher returns driving dynamics rather than supply and demand."
No one knows when our bubble will burst, but Robert Kavcic, an economist at BMO Capital Markets, came out with an apt comparison given the events of this week in the NHL.
  • “By pure coincidence of course, the last time the Canucks suffered a heartbreak game 7 of the Stanley Cup final (1994) was just before red-hot Vancouver house prices tumbled more than 26%.”
And just as the heartbreak of a Canucks loss this time around was more intense than in 1994 because the expectations were higher (we were the league's best team)... so the bursting of this bubble will be more intense than it was in 1994 because that bubble is so much bigger.

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Thursday, June 16, 2011

Excellent piece by NBC on Vancouver's angry reaction to the hockey aftermath

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COMEX phyisical silver hits new low

On June 7th we posted about how the COMEX had hit fresh all time lows for physical silver reserves.

On April 20th the physical ("Registered") silver held in COMEX warehouses was just over 41 million ounces. By June 7th that total had dropped to 28,773,375 ounces.


The COMEX is now down to 27,924,074 ounces as the Brink's warehouse reports that they have suffered a 9% draw down in both registered and eligible silver (click above image to enlarge).

The COMEX's  supply of physical silver has now dropped 32% from where it was 2 months ago. 

And while the COMEX insisted during the first month that the 'reclassification' of phyisical silver was simply a 'very temporary' condition, it is proving to be anything but very temporary.

The fact of the matter is that registered silver at the COMEX has not posted an uptick in over 3 months. And all the while the price of spot and futures silver continues to trend lower as the cartel continues to short the paper price of silver.

Why is physical silver being snapped up at alarming rates while the price is supposedly 'overvalued'?

Is it overvalued or is it simply 'on sale'?

You know our thoughts on the matter. And the dwindling supply seems to reinforce it.

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Stanley Cup Final Game 7: Boston 4, Vancouver 0

Boston Bruins win the 2011 Stanley Cup.  Congratulations Boston!

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