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VIX remains elevated, but relatively low in the current range for the kind of rhetoric the financial press was putting out today.
Let's see if the SP will break down further.
Credit Agricole was lowered by Fitch after the bell but the outlook remains 'stable.'
Perhaps Europe will collapse and the SP will roll over. But I am highly suspicious of this low volume trade. Still it is better not to get in front of it.
This is the reason for the ferocity of this sell off in my judgement, coupled of course with a general liquidation in stocks and other 'risk assets.' I cannot help but notice that despite the message of panic, the SP futures remain in a fairly well defined trading range that goes back to late October. The lower bound of its triangle is around 1180.
Maybe things will fall out of bed, and Europe will topple, but right now I smell a skunk. And it is likely the offspring of BB and TG.
Central Banks were leasing gold for record low rates to the bullion banks like JP Morgan and HSBC. Silver lease rates also fell in sympathy.
As you may recall, LIBOR - GOFO (Gold Forward Offered Rates) = Lease Rate.
As can be seen from the last two charts showing the LIBOR GOFO spread, the lease rates reported in the press are a derived rate and actually represent the amount that can be earned from the gold carry trade.
I do not like to look at just the Lease Rate which is really just a calculated derivative like the 'spot price' based on the present value of the futures front month, but at the two major components that constitute it. Which one is driving the change in the spread, and why?
As an aside, I do not think that the major bullion banks finance their gold leases through LIBOR anymore in these days of excess reserves and quantitative easing, but it is a useful reference for most others. This tends to put a little more emphasis on the nominal level of the Gold Forwards Offered Rate. But this is just my opinion and I could be wrong.
There is an obvious 'chicken and egg' argument embedded in this phenomenon. For example, some might say that the high spread between GOFO and LIBOR makes it difficult for those who wish to short gold to obtain it since the price one pays to finance the deal is quite high. I think this is Tom McClellan's hypothesis as well as some others.
This is an interesting theory, because it seems to suggest that without the ability to borrow gold from central bank holdings and perhaps those others who can lease in large numbers like ETFs and not the spot market, shorting gold is not possible at these prices and the natural tendency of the clearing price is to stay the same or to increase. This suggests more manipulation than market demand and supply.
I tend to think that the spreads widen as the bullion banks must borrow more heavily to support their short positions with some sort of physical backing. When the pain of the spread becomes too great, they have the incentive to throw contracts at the paper price in a desperate effort to break the price and relieve the short term pressures.
The 'informational campaign' by the bankers demimonde that surround these bear raids seems to support this hypothesis of a 'market operation.' The central banks are notorious for rescuing Primary Dealers who are in trouble.
I would tend to categorize this latter theory of mine as the LIBOR-Gold Forwards Pain Index.
But unfortunately I can see both sides of these theories. I would just like to know who is motivated by leasing their gold in order to knock the price for some reason. I know of only two groups like that: the fiat central banks in order to help the bullion banks, and perhaps unallocated ETFs that do not particularly care what the price of gold may be as long as they can collect their fees.
"Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise."
Alan Greenspan, Congressional Testimony on Regulation of OTC Derivatives, 24 July 1998
The bullion banks use this leased gold as collateral for more fractional paper short sales, breaking the price trend and forcing liquidation. Their sales are done in the so-called Dr. Evil manner, of dumping large numbers of contracts on light markets.
There is also the liquidation factor from the collapse of MF Global, and the reluctance of small specs to engage in the futures markets at all because of capital risk and lack of confidence.
This allows the bullion banks to arrange for a big price swing that allows them to cover their short positions and also obtain other assets on the cheap such as mining companies.
Since the leased gold must be returned after a short term period, this is almost always a trading gambit, as opposed to outright net gold sales by the central banks which have virtually stopped in the past couple of years.
This at least is my take on what is happening. If this is correct we could see a repeat of the big market bottom and deep lows with a spring back as we have seen several times before. And the magnitude of these swings may continue to increase as the sorcerer's apprentices continue to meddle with the real economy.
If the CFTC were to do their jobs, as the Europeans had done with banks like Citigroup who employed their 'Dr. Evil' trading strategy there, we would not have this type of harmful volatility in key commodity markets.
On these dips one would imagine that long term buyers are taking advantage of the low prices to acquire bullion and store it as a future hedge. As the bullion banks seek to return the borrowed gold, their demand attracts the momentum trading hedge funds that are now selling, so we see a big rally in the metals. The big rally in the metals causes the LIBOR - Gold Forwards pain to increase, and so the banks cry to be rescued. And so on it goes on, until something breaks.
The obvious artificiality of these price swings obscures the efficient allocation of capital, and the orderly operation of markets, not only in metals but in key commodities significant to the real economy. The CFTC and SEC apparently have the tools to correct this, but they choose not to do anything constructive for whatever reasons. Cronyism and Congressional opposition are two possible motives.
This is not dissimilar from the gaming of the energy markets that Enron made infamous before its collapse. Financial structures based on this sort of artificial con game always collapse, given time and the latitude for their greed made possible by regulatory capture.
That is why the public should have no patience with the commodity market makers like MF Global, a TBTF bank, and even an exchange when they fail because of reckless gambling and market manipulation.
As for any complicit central bankers, regulators, and politicians, justice must be restored and prosecutions made in order to halt the growth of the moral hazard of complicity in fraud and insider trading that is now endemic, if not epidemic.
Bloomberg
Gold Lease Rate Slides to Lowest on Record as European Banks Seek Dollars
By Nicholas Larkin
Dec 8, 2011 10:55 AM ET
The interest rate for lending gold in exchange for dollars plunged to the lowest on record this week as European banks sought ways to secure the U.S. currency amid the region’s debt crisis.
The one-month lease rate on gold fell to minus 0.57 percent on Dec. 6, the lowest according to Bloomberg data going back to January 1998. The rate, derived by subtracting the gold forward offered rate from the London Interbank Offered Rate, was at minus 0.56 percent today and compares with minus 0.23 percent at the start of this year. A negative reading means banks have to pay to have their gold deposits lent.
The rate at which London-based banks say they can borrow for three months in dollars rose to the highest level in almost 2 1/2 years yesterday, even after the Federal Reserve and five other central banks agreed on Nov. 30 to cut the cost of providing dollar funding. Gold has climbed 21 percent in London this year and reached a record $1,921.15 an ounce on Sept. 6 as investors and central banks boosted holdings to protect wealth.
“European banks especially are having liquidity funding problems, which does see a lot of lending of gold and that’s putting downward pressure on lease rates,” Walter de Wet, head of commodities research at Standard Bank Plc in London, said today by phone. “Funding problems will continue for a while.”
All figures in these charts are priced in US dollars and are from the LBMA. The cumulative gold price is the daily change between London PM fixes.
I wonder how the availability of physical bullion is at these prices today.
Stocks were rallying until the afternoon and the FOMC announcement which withheld the QE Christmas candy.
Stocks went down hard led by the banks. Gold was hit very hard by a bear raid sell off down to 1620, while silver maintained some strength.
The stock market rebounded into the close somewhat as did gold. Silver has not confirmed the breakdown by gold out of its symmetrical triangle.
Why is gold going lower, but silver, the metal with a higher industrial component, is proving stubborn? Perhaps it is because the Central Banks don't have any.
"Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise."
Alan Greenspan, Congressional Testimony on Regulation of OTC Derivatives, 24 July 1998
The bulls have their work cut out for them.
The MF Global scandal continues to rot and sicken. After the bell the testimony from CME Chairman Duffy to the Senate indicated that Jon Corzine was perjuring himself when he said he had no knowledge of the customer money transfers. Duffy testified that on Saturday lawyers notified him by phone and email that Corzine knew of the transfers of customer funds and that at all times the people doing the transfers were under the authority of MF Global management
Perhaps now would be a good time for Jonny to cut a deal and throw someone else under the bus and not 'take one for the team.'
As noted intraday, JPM and the Trustee are divvying up the MF Global cash account amongst themselves. The Trustee hopes to pay back the customers out of the company assets 'if possible.'
MF Global is more of a crime scene than a simple bankruptcy. What puzzles me is how MF Global was able to transfer all these customers funds and assets without records in the banking system? What happened to all those anti-money-laundering rules on fund transfers? Are they just for the 'little people' too?
And why is the Trustee Giddens, a private attorney whose firm has long ties to the bank, seem to be calling the shots on the investigation of JPM and their involvement?
And is the judge in the bankruptcy really one of the lawyers for the banks in the Martin Armstrong case?
The interests of the customers seem largely under-represented. Where is the CFTC and the Justice Department in all this again?
If Jon Corleone does cut a deal, and then disappears like the missing billion, will Max Keiser put up a documentary titled Where's Jonny for funding?
There was a big intra-day reversal in stocks as Benny failed to provide any QE Christmas Candy in the FOMC stocking today.
The index fell out of its triangle. The bulls have their work before them to save the day and get the Zynga IPO out the door.
So what is MF Global going to do with that $25 million in cash held in their account at JPM?
Presumably it will be used to pay the Bankruptcy Trustees and lawyers who decided that it belongs to MF Global and not the cheated customers whose accounts have been looted.
JPM apparently cut a deal with the Trustee saying they could have the cash if MFG granted JPM a lien on ALL the company's assets.
So much for the superior claim of the customers as asserted by the CFTC.
This whole notion of the 'missing money' is puzzling because with the new banking laws it seems almost impossible that there is not an electronic trail of bank transfer in any size, much less over a billion. What happened to the anti-moneylaundering provisions?
This is not a routine bankruptcy. This is a crime scene.
P.S. After the bell the CME witness contradicted Corzine's testimony saying that an employee told him he knew of the transfers. This will be interesting.
Bloomberg
MF Global Cash at JPMorgan Presumed Its Own, Freeh Says
By Tiffany Kary
Dec 12, 2011 8:39 PM ET
MF Global Holdings Ltd.’s $25.3 million in cash held at JPMorgan Chase & Co. (JPM) is presumed to be its own, the bankrupt company’s Chapter 11 trustee said in response to customer objections to its bid to use the money.
MF Global Holdings should be allowed to use the cash collateral of JPMorgan, trustee Louis J. Freeh said in papers filed today in U.S. Bankruptcy Court in Manhattan. Customers of the company’s failed brokerage, MF Global Inc., had asserted that the money may have been part of the $1.2 billion believed to be missing from their segregated accounts.
“The customers have failed to provide this court with any actual evidence in support of their position,” Freeh said in court papers. MF Global Holdings owns the New York-based bank account with JPMorgan, and under New York law, it is presumed that funds deposited in an account belong to the account holder, the trustee said.
The company has been in talks with JPMorgan, its largest lender, on the use of cash collateral to pay the costs of its bankruptcy, a lawyer for Freeh said last week. U.S. Bankruptcy Judge Martin Glenn said Dec. 9 that he would reconsider the use of cash at a hearing Dec. 14 after customers objected.
JP Morgan, agent to a $1.2 billion loan, agreed at the outset of MF Global Holdings’ bankruptcy to let it use $26 million, subject to an agreement that gives the bank a lien on all of the company’s assets...
On the other hand they can always queue up with the general creditors.
Bloomberg
MF Global Trustee Seeks Creditors’ Money for Customers
By Tiffany Kary
December 13, 2011, 2:11 PM EST
Dec. 13 (Bloomberg) -- MF Global Inc.’s customers will be refunded from the failed brokerage’s general creditors’ estate if necessary, said James Giddens, trustee for the liquidating brokerage, in a prepared statement to the U.S. Senate.
“If commodity customer claims are not satisfied from the segregated commodity account estate, the remaining claim will automatically go against the general creditors’ estate,” Giddens said in the statement. A spokesman for Kent Jarrell, a spokesman for Giddens, said that the general creditors’ estate is the estate of MF Global Inc. only, and not that of parent company MF Global Holdings Ltd. He couldn’t immediately confirm whether the customers would have recourse to any money from the general estate of the parent company.
Giddens has said he intends to return 100 percent of customer funds if possible...
The MF Global Management: I Know Nothing, NOTHING!
Why WERE all these jokers being paid so much?
What did they actually do to earn it?
They weren't involved with the trades, and they weren't involved with the management of billions of cash, and the customer accounts, their most sacred trust.
Have a Futures Account on the CME? Sleep well.
Your money is in the hands of those who know nothing.
Although organic growth in the real economy is slack, the Fed has managed to maintain about 10 percent growth rate in M2, and around 8.5 percent in MZM.
As you might expect with money growth this high and real economic activity hovering at recession levels, the velocity of money is at record lows.
This is not yet stagflation, but it is the setup for such a condition to develop. The question is 'how pernicious' will it be.
I suspect that without reform, the extraction process of the financial sector and the perverse global trade regime will continue to dampen real economic activity despite the Fed's money supply expansion.
