-- Published: Tuesday, 30 September 2014 | Print | Disqus
By Bill Holter
I read an article penned by Michael Snyder and posted on ZeroHedge last week and could only shake my head. In fact, the more I thought about it the more I started laughing. Yes, I laughed until tears came to my eyes. This is really not normal for me to break up laughing so hard at anything and certainly when it's not even close to a laughing matter. Why did I laugh? Because it struck me as so funny that the "side bets" are so much larger than the system itself yet people expect the system to survive?
Snyder dug into the OCC's latest quarterly report to find that the U.S. now has a 5th bank with derivatives held surpassing the $40 trillion mark, yes, TRILLION! JP Morgan of course has the largest U.S. position with $68 trillion while DeutschBank leads globally with $75 trillion. If you recall, some 4 years back the BIS changed the "way they count" derivatives and what "was" globally $1.4 quadrillion (with a "Q") was magically recounted and restated at $700 trillion. Maybe they figured any number starting with a "Q" was just too scary to allow out to the public? I personally believe the "Q" number but for this exercise let's assume the $700 trillion figure is correct
How much is $700 trillion? We can make a comparison and get some perspective by looking at a few other benchmarks. If we add up total global public debt we get a number of $54 trillion. If we include ALL global debt it is about $230 trillion. Looking at global stock market capitalization we get a number a little over $60 trillion. So, adding the values of ALL debt and ALL stocks on the planet together we come up short of $300 trillion. In case you were wondering, global GDP for 2012 was just shy of $72 trillion and the value of all gold ever mined we get a number of a puny $6 trillion.
If you take "only" the derivative holding of just the five biggest banks in the U.S., it dwarfs everything else. How is this really possible? How is it that the "bets" made and "insurance" purchased can be bigger than the system itself? I think the best way to look at this is the house has become far too large for the foundation. The house has grown far outside of the footings and grown multiple stories high. The "growth" of this financial house has been caused by the overuse of debt and the ease of financial derivatives. They were "good" once upon a time and did serve a purpose of hedging and protection. This all changed as they became used to "force" pricing, negate unwanted market moves and to paint whatever picture was desired. The problem is this, these derivatives are already in place and have already been used (spent) to paint "pretty prices", it will take exponentially more derivatives to keep the picture painted correctly. The "bullets" have already been spent so to speak. This is a problem, there is not enough equity (collateral) left to create more derivatives from but they are needed to keep the game going... a serious problem.
Why did I make these comparisons? I wanted to show you just how BIG the derivatives market really is. The derivatives market is so big (even after the BIS lowered their total estimate by half) it is truly a "tail that wags the dog itself"! Just the top 5 U.S. banks control $280 trillion worth of derivatives notional value, this is about equal to all debt and all stock values combined ...for the entire planet! When this manmade chain of financial instruments breaks, there is no entity on the planet big enough who can ride in on a white horse to save the situation. The Fed has blown their balance sheet up fivefold to get to where they are now. This was in response to the last crack up. They cannot go another fivefold from here, even if they could it would still not be enough to stop the pyramid from crumbling.
I wrote yesterday about how the public has become "comfortably numb", a break in derivatives will change ALL of this. The banks have bet their assets at least 30 times and their capital 100's of times over ...and with it "your" savings. The pyramid will come down and when it does you have to ask yourself "what will have value"? The answer of course is and always has been "money". Gold and silver have been real "money" for thousands of years, paper monies which have been "legislated" into having value will be broken as badly as the derivatives, the banks and most all markets.
Do not try to time this event because being even 1 second too late will affect you for your entire lifetime. You must also take into consideration where and how you store your "money". As I have said many times before, having at least a portion of your "savings" out of the country and stored in a non bank vault is a wise idea. Miles Franklin offers storage at the Brink's facility in Montreal and can offer storage solutions in Zurich, Singapore and also Hong Kong. I cannot stress how important it is now to have capital out of the way of the oncoming financial freight train barreling down the tracks. Mathematically the derivatives monster will derail as it is manmade and run on manmade "assumptions". No one knows the timing but as I said earlier, being just one second late will last and ruin many a lifetimes.
P.S. on a completely side note, my amigo Principe' is "forecasting" a hard winter here in South Texas. He started growing "pelito's" (little hairs) about 3 weeks ago which is very early and much earlier than last year which was the hardest winter I can ever remember.