03 May 2012

ETFs and Derivatives Will Be the Next Trigger Event for a Major Financial Crisis

ETFs and derivatives may be fine for a trade or a hedge to a trade, but by no means are most of them that I have looked at worthy of a long term hold.  I distinguish them by their opacity, leverage, and lack of transparent audits from legitimate physical trusts.

And some of the ETFs, especially in commodities and on the short equity side, appear to be almost fraudulent both in construction and representation, and are often more instruments of manipulation and raw speculation for extracting wealth from the less sophisticated than investment vehicles. 

The great story of this financial era is the same of all the control frauds that have preceded it: leverage founded on paper claims, asymmetrical information, and the calculated mispricing of risk.

And when the ETFs fail it will be an echo of the market failure of 1929 when firms like Goldman Sachs enjoyed spectacular growth, promoting investment trusts, that blossomed late in the paper speculation of the 1920's, and became a major source of kindling for the flames.  Enough so that John Kenneth Galbraith devoted a chapter to Goldman and the Trusts in The Great Crash of 1929.

"For a long the the New York Stock Exchange looked with suspicion on the investment trusts; only in 1929 was listing permitted. Even then the Committee on the Stock List required an investment trust to post with the Exchange the book and market value of the securities held at the time of listing and once a year thereafter to provide an inventory of its holdings...

It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity. If there must be madness something may be said for having it on a heroic scale."

John Kenneth Galbraith, 'In Goldman Sachs We Trust,' The Great Crash of 1929

I do not know if we are done with bubbles. We might see another yet again. It almost seems likely given the reckless apathy of the public and the passionate resistance against reform fostered by the powerful few. 

And do not presume that these monied interests will shy away from their possible self-destruction in precipitating another financial crisis and collapse.  They are emboldened by their recent brushes with disaster in the manner of the moral and emotional sickness which they share with psychopaths.  They will not respond to reason, because their motivations are not rational, not based in reason.  Was Madoff rational?  I do not think so.  He was intensely deluded and self-destructive.

Even in the ashes of another Great Depression, the powerful see the opportunity to take command and overturn the democratic republic that so inflames their swollen pride and sparks their fears, that a government of the people, by the people, and for the people has endured despite their best efforts to subvert it for themselves.  As they so proudly imagine, they are not like 'us.'  The greed to keep their ill gotten gains, and the will to power to gain more control over others, their inferiors, knows no bounds.

ETFs – The Next Accident Waiting to Happen?
By Golem XIV
May 3, 2012

Where will the next point of instability be? Not what will trigger the next liquidity and credit crunch and cause the next landslide of panic selling and losses. We can already see many candidates for the trigger. But what will be the mechanism by which it is amplified and spread?

I think that in a couple of years, unless something alters the current trends in money flows, we will come to know ETFs the way we already know the securitization and packaging of sub-prime mortgages into CDOs. I think the signs are already there to suggest ETFs are where the instability and risk is accumulating. If I am in any way correct then ETFs will be to the next stage in our on-going state of siege-mentality crisis what CDOs were to the last...

Read the rest here.