Five Year Anniversary of the May 6, 2010 Flash Crash - May 12 '15
Did you, your friends, your family, and/or you financial advisor(s) discuss the history
surrounding the largest intraday move in the Dow on record last week? Did you know
there have been other flash crashes take place in the last 6 months to the largest
sovereign bond market in the world and the world's current reserve currency? Are you
expecting this to happen again to "all time high" markets in the future?
Look at the March 2015 posts and these pieces of information. Do not ignore
this 800 pound gorilla, especially in light of such long periods of herding investors in
the same direction in certain assets.
Film- Money & Speed: Inside the Black Box - a documentary on the May 6, 2010 flash
crash - released in Dec 2012.
SEC/CFTC Report - Findings Regarding The Market Events of May 6, 2010 - 9/30/10
Film - Wall Street: The Speed Traders, CBS 60 Minutes - June 5, 2011
Nanex Research - Einstein and The Great Fed Robbery - Sept 20, 2013
Expect Sudden Wide Swings In Prices; The New Norm, Beware at All Time Highs,
March 25 '15
High Frequency Trading: A Bibliography of Evidence-Based Research, March 2015
"In a 2010 study of the 2010 Flash Crash, the U.S. Securities and Exchange
Commission and the Commodities Futures Trading Commission found that high
frequency traders substantially increased volatility during the event and accelerated the
crash...The Australian Securities and Investments Commission, the stock regulator in
Australia, found in a 2012 study that during volatile markets high frequency traders
reduce their liquidity supply and increase their liquidity demands....The Bank of Int'l
Settlements looked at foreign exchange markets and concluded in a 2011 study that
high frequency traders exacerbate volatility in stressed markets... The UK Gov't Office
for Science published a large 2012 study of capital markets around the world and
concluded that 'HFT/AT may cause instabilities in financial markets in specific
Anyone seriously concerned about their investment business or their investments,
will see from the comments and sources on pages 1-5, that our global markets are
much more fragile today than ten years ago. The entire concept of markets having
plenty of liquidity is erroneous and impossible to attain with HFT and wider reaches
by central banks into the "free markets" than ever before in history.
U.S. Dollar Flash Crash, Nanex Research, March 18 '15
Since last October, we have seen a Treasury Flash Crash, and a US Dollar Flash Crash,
both first in history events. After already producing the sharpest one day stock drop in
US history on what is now known as the May 6, 2010 Flash Crash, why would anyone be
surprised with huge swings in any market at this stage, since it is becoming more and
more evidence, there is no such thing as "unlimited liquidity".
Liquidity Shortage, Not Abundance, March 7 '15
Liquidity Shortage: Houston We Have a Problem, Center for Financial Stability, Feb 25
"Cracks in financial markets from this phenomenon are already evident and sadly
present in a wide range of markets. Specific examples: US Treasury Market:
On October 15, the deepest and most liquid market in the world demonstrated a
six standard deviation move in less than two hours, a move that (in theory only)
happens once in 506,797,346 days!
To be sure, a sustained “flash crash” in the world’s leading fixed income market
could readily unleash a pronounced slowdown of the global economy, or worse."
Treasury Flash Crash, Nanex Research, Oct 15 ‘14
"On October 15, 2014 between 9:33 and 9:45, liquidity evaporated in Treasury futures
and prices skyrocketed (causing yields to plummet). Five minutes later, prices
returned to 9:33 levels.
Trading activity was enormous, sending trade counts for the entire day to record highs -
exceeding that of the Lehman collapse, the financial crisis and the August 2011
downgrade of U.S debt. Treasury futures were so active, they pushed over trade
counts on the CME to a new record high."
Global signs of systemic risks keep coming in, Oct 27 '14
IMF Global Financial Stability Report: Risk Taking, Liquidity, and Shadow Banking:
Curbing Excess While Promoting Growth, Oct 2014
The Dollar Reigns Supreme, by Default, IMF, Finance & Development, Professor
Eswar Prasad, Brookings Institute, March 2014
Chicago Mercantile Exchange Group, Central Bank Incentive Program Questions and
Answers & Modification Letter, January 2014
ECB stress tests vastly understate risk of deflation and leverage: Ignoring the deflation
danger for the banking systems of southern Europe has reduced the latest stress test
to another 'farce', says EU economist Philippe Legrain, UK Telegraph, Oct 27 ’14
Russians and Chinese are ditching the dollar as Europeans start using renminbi in
their reserves, Sovereign Man, Oct 17 '14
BIS 84th Annual Report, June 29, 2014, [posted on 8/12/14]
"Financial cycles differ from business cycles. They encapsulate the self-reinforcing
interactions between perception of value and risk, risk-taking and financing constraints
which translate into financial booms and busts. They tend to be much longer than
business cycles, and are best measured by a combination of credit aggregates and
property prices. Output and financial variables can move in different directions for long
periods of time, but the link tends to re-establish itself with a vengance when financial
booms turn into busts." [Chapter IV. Debt and the Financial Cycle:Domestic and Global,
Thinking has never been more critical. Facing reality never more challenged. Apathy
stronger the longer the boom holds on.
How Economies Collapes: Systemic Friction and Debt Are Self-Liquidating,
Charles Hugh Smith @ Of Two Minds Blog, Aug 5
The Media, the S&L Crisis, and the 2008 Financial Crisis, Mises Economics Blog, Aug 11
When Media Mergers Limit More Than Competition, New York Times, July 25
Federal Reserve's vice-chair warns of long-term damage from recession,
The Guardian, Aug 11
Hidden Financial Bombs: Margin Calls Hit Hedge Funds Speculating in Freddie/Fannie
Bonds With High Repo Leverage, David Stockman @ Contra Corner, Aug 11
"Everything seems expensive": Why today's valuations are worse than in 1999,
Yahoo Finance, Aug 11
Resolving Globally Active, Systemically Important, Financial Institutions, A
Joint Paper by the FDIC and the Bank of England, Dec 10 '12 [posted on 7/10/13]
Depositors Beware: Bail-In is Now Official EU Policy, Nation of Change, 7/6/13
Think You Money is Safe in a Bank Insured Account? Think Again, Global Research,
Japan To Become More Like Cyprus - bail-ins for Japan banks, Forex Live, 6/11/13
The Cyrpus Bank 'Bail-In' Is Another Crony Bankster Scam, Forbes, 5/3/13
Could the Banksters Grab Your Bank Deposits? Prof. Jonathan Turley blog, 3/31/13
For those who thought the the tiny nation of Cyprus was just a rare event in our daily
news, think again. The term "bail in" is found in this joint paper between the FDIC and
the Bank of England more than 3 months before Cyprus banks made world news. Now
3 months later, we see that the term "bail ins" is a GLOBAL issue. We should be
asking "Why now, when millions of investors have recently enjoyed 'all time highs' in
various global capital markets? Random or planning ahead?
Office of the Comptroller of the Currency, Quarterly Report on Bank Trading
and Derivatives Activities Q4 '11 [posted 5/25/12]
Look at the chart on page 13 of 38 in this report. Should this massive change be
something to concern every investor or bank depositor?
Federal Deposit Insurance Corporation, Quarterly Banking Profile, Q4 '11
Go to page 17 of 26. Compare the balances on 12/08 and 12/11 in the Deposit Insurance
Fund and the total amount on Deposit in the entire FDIC system. Does this look like a
step in the right direction, I mean, just in case there happens to be a rainy day again for
US banks like the fall of 2008.
Reserve Accumulation and International Monetary Stability, Apr 13, '10
Enhancing International Monetary Stability - A Role for the SDR?, Jan 7 '11
International Monetary Fund. --posted on March 23 '11
"From SDR to bancor - A limitation of the SDR (Special Drawing Rights) as discussed
previously is that it is not a currency....A more ambitious reform option would be to build
on the previous ideas and develop, over time, a global currency. Called, for example,
bancor in honor of Keynes, such a currency could be used as a medium of exchange--
an 'outside money' in contrast to the SDR which remains 'inside money'. [see pp 26 -
27 from the April '10 IMF report listed above.]
In case the term "bancor" is one you are unfamiliar with, let me share a piece of history
that I have presented with my own subscribers a few times in the last 5 years:
"In the postwar planning for economic affairs, the State Department was in charge of
commerical and trade policies, while the Treasury conducted the planning in the areas
of money and finance. In charge of postwar international financial planning for the
Treasury was the economist Harry Dexter White...While the White Plan envisioned a
substantial amount of inflation to provide greater currency liquidity, the British responded
with a Keynes Plan that was far more inflationary....The Keynes Plan, moreover, provided
for a new international monetary unit, the 'bancor', which would be issued by the ICU
[ a new international clearing house] in such large amounts as to provide almost
unchecked room for inflation, even in a country with a large deficit in its balance of
payments." [pp 480-481, The History of Money and Banking in the United States:
The Colonial Era to World War II, Dr. Murray Rothbard]
Known Unknowns: Unconventional Strategic Shocks in Defense Strategy
Development posted - Oct 7 '10
If the mammoth amount of intervention into our markets by the Federal Reserve and
their high frequency trading buddies has lulled you into complacency that "the worst is
behind us", you might want to read page 32 in this document. Even the military is
considering its role inside the United States, should such events as an "unforeseen
economic collapse" occur.
The link to the documents takes you directly to the website of the Strategic Studies
Institute, US Army War College. Are we looking for information that supports the way
we desire to see the world around us, or information we need to face?
Quarterly Banking Profile, Q2 '10 - FDIC - posted Sept 3 '10
How long can Wall Street manipulate prices to stay above 10,000? Consider these
factors in determining if the "recovery" [Orwellian doublespeak] is real. Industry assets
(loans) declined by $136 billion in the second quarter, the fifth quarterly decline in the
last six quarters. The number of FDIC institutions that stopped reporting financial
results was 104. This is the first time in ten years the number exceeded 100.
In all fairness, there was some good news. Quarterly profits from the banking sector
was the highest in 3 years, and the the Depository Insurance Fund climbed to a
negative balance of $15 billion.
Quarterly Derivatives Report, Q1 '10 - Office of the Comptroller of the Currency
If money is power, then who are the five most powerful companies in the USA?
How much political influence could this purchase? I would encourage you to have the
courage to download this report, scan the charts, then read Gretchen Morgenson's
piece in the NY Times, Strong Enough for Tough Stains?, released on June 25th.
The Trillion Dollar Gap: Underfunded State Retirement Systems
and the Roads
to Reform. The Pew Center on the States, Feb 2010
"A $1 trillion gap. That is what exists between the $3.35 trillion in pension, health care
and other retirement benefits states have promised their current and retired workers
as of fiscal year 2008 and the $2.35 trillion they have on hand to pay for them."
Now help me here. If you were told to fix a "$1 trillion gap", wouldn't you start by cutting
spending and lowering debt? If not, I guess we could always fix this "gap" by saving
$1 million a day for 2,740 years. (this example assumes that each year is comprised
of 365 days).
Clearly, billions are being spent on economic forecasting that will never come to pass.
For reality, try The Investor's Mind for six months of real time history and trading
Quarterly Banking Profile, Q4 '09
At the end of the third quarter, the FDIC report revealed a negative balance of $8.2 billion
in the Depository Insurance Fund (DIF). The FDIC reported that the 4th quarter balance
had fallen to a negative $20.9 billion.
The JOE: Joint Operating Environment, produced by the United States Joint Forces
Command, Released Feb 18 '10
While most investors never think to consider the military's view on the economy, the
following publication reveals that the military has strong concerns about security risks
that face the US because of our economic policies and current financial condition
as a nation. Consider the following, as found on page 21 in the JOE:
"The near collapse of financial markets and slow or negative economic activity has
seen U.S. Government outlays grow in order to support troubled banks and financial
institutions and to cushion the wider population from the worst effects of the slowdown.
...Rising debt and deficit financing of government operations will require ever-larger
portions of government outlays for interest payments to service the debt. ....interests
payments are projected to grow dramatically, further exacerbated by recent efforts to
stabilize and stimulate the economy, far outstripping the current tax base. Interest
payments when combined with the growth of Social Security and health care, will crowd
out spending for everything else the government does, including National Defense."
The Examiner's Report in the chapter 11 proceedings of Lehman Brothers
Need some reading material? Then why not start with the nine volumes found
in Anton Valukas Examiner's Report. For a shorten version, consider comments
about the report found at Zero Hedge.
Q4 '09 Flow of Funds Report, Federal Reserve
If someone has sold you on "the recovery", ask them to explain page 10, Total Net
Borrowing. Credit continues its massive contraction.
OCC's Quarterly Report on Bank Trading and Derivatives Activities
Third Quarter 2009
Credit Derivatives contracted during the third quarter of 2009, the 4th straight quarterly
contraction. At the same time, it is almost surreal to comprehend that JP Morgan and
Goldman Sachs, control 59% of the entire US derivatives markets. Who really runs
this country anyway?
SIGTARP Quarterly Report to Congress, January 30, 2010
"It is hard to see how any of the fundamental problems in the system have been
addressed to date: huge, interconnected, 'too big to fail' institutions contributed to the
crisis... those institutions are now even larger... institutions were previously incentivized to
take reckless risks through a 'heads, I win; tails, the Government will bail me out"
mentality...the markets are more convinced than ever that the Government will step in as
necessary to save systemically significant institutions."
Flow of Funds Accounts of the United States, Q3 '09
Federal debt expanded at an annual rate above 20% in the 3rd quarter, which is the
fifth consecutive quarter of growth above 20%, and household debt contracted at an
annual rate of 2 1/2%, its fifth quarter of decline and the largest on record. [pg 2]
Quarterly Banking Profile, Q3 '09
During the 3rd quarter, total deposits in FDIC banks increased by $79 billion. 100%
of this increase was due to foreign offices. The Deposit Insurance Fund has now
fallen below zero, with at a negative balance of $8.2 billion at the end of Q3 '09.
OCC's Quarterly Report on Bank Trading and Derivatives Activities,
Second Quarter 2009
The top 5 US banks hold 96.6 percent of all derivatives in the US. Since Wells Fargo
has a smaller percent of credit exposure to risk based capital than the rest, that leaves
the usual suspects: JPMorgan, Goldman Sachs, Bank of America, and Citibank. The
table on page 22 is particularly informative. It shows that JPMorgan has $1.6 Trillion in
total assets and $79.9 Trillion in derivatives contracts. The other top banks show similar
ratios. Derivatives concentrations of this magnitude merit our attention.
Next Phase of Government Financial Stabilization and Rehabilitation Policies,
US Treasury Department, September 2009
Now that we have seen a full blown mania in bank stocks over the last six months,
the boys at the Treasury have just released the "next phase" in the US governments
policy of "stabilization". Considering the price of ignorance when this bubble blows,
either read this piece, or better still, consider subscribing to our research.
FDIC Quarterly Banking Profile, Second Quarter 2009
"During the quarter, the number of institutions on the FDIC’s 'Problem List' increased
from 305 to 416, and the combined assets of 'problem' institutions rose from $220.0
billion to $299.8 billion. This is the largest number of “problem” institutions since June
30, 1994, and the largest amount of assets on the list since December 31,1993."
If you want to see something truly amazing, compare this FDIC report, with a report
produced by NY Attorney General Andrew Cuomo on July 30th titled,No Rhyme or Reason:
The 'Heads I Win, Tails Your Lose' Bank Bonus Culture. The mania continues.
The Tale of Two Depressions, by Professor Barry Eichengreen and Kevin O' Rourke
Recently I learned of this website through Bob Prechter's The Elliott Wave Theorist.
I would encourage each of you to review this website and its many economic
comparisons to the Great Depression.
FDIC Quarterly Banking Profile, First Quarter 2009
Non current loans and leases increased by 25.5%($59 bn).Total assets declined $301
billion during the quarter, the largest percentage decline in a single quarter in 25 years.
21 bank failures, the highest in a quarter since 1992.
Given the fact that these are FDIC numbers, are we really to believe that the worst is
behind us in the banking sector?
President Barack Hussein Obama's speech of outreach to the Muslim world in Cairo
Egypt, June 4, 2009. (Transcript-doc, pdf)
"Islam has a proud tradition of tolerance." - President Obama
"But when the forbidden months are past, then fight and slay the pagans wherever ye
find them, and seize them, beleaguer them, and lie in wait for them in every stratagem
(of war); but if they repent, and establish regular prayers and practise regular charity,
then open the way for them: for Allah is Oft-Forgiving, Most Merciful." - Yusaf Ali
translation of the Quran, Sura 9:5.
If you think this has nothing to do with the world of money, without even considering
the long history between Western financial institutions and Middle Eastern oil, check
out the long list of Sharia compliant companies on the Dow Jones Islamic Market. Our
world is changing rapidly.
Office of the Special Inspector General for the Troubled Asset Relief Program
Quarterly Report to Congress, April 21 '09
“Aspects of the PPIP (Public Private Investment Program, rolled out on March 23 ’09 by
Geithner) make it inherently vulnerable to fraud, waste, and abuse, including significant
issues relating to conflicts of interest facing fund managers, collusion between
participants, and vulnerabilities to money laundering.”
Should we expect anything else from a program that is a coordinated effort between the
FDIC and the Treasury.
Q4 - 2008 Derivatives Report, Office of the Comptroller of the Currency
Pay particular attention to the graphs starting after page 8. For more insight into the
documents and articles found on our website, and how to apply this information to
your own decision making processes, consider subscribing to our research newsletter,
The Investor's Mind.
FDIC, Dec '08, Quarterly Banking Profile
While we hear repeatedly that our national banking system is in trouble, the numbers
directly from the FDIC prove this beyond a shadow of doubt.
Financial Stability Plan, US Treasury, Feb10 '09
After waiting weeks for a plan from the highest levels of financial leadership in the US
government, it would appear that once again either Mr. Geithner and crew believe they
can create another couple of trillion out of thin air as the "positive" solution to the Ponzi
debt schemes that went full throttle once the world heard "credit crisis" in August 2007,
or they are trying to destroy the very foundation of our financial structure. Read and share
with as many individuals as possible. Once the market manipulating gets done at this
level, there will be hell to pay, and "stability" will be moved out even further.
Shariah Finance Film by ACT! for America, Posting on Dec5, '08, Joy Broghton,
Shariah Finance Expert
Ms. Brighton has experience as a Wall Street Trader and a finance professor. While
almost all of our attention has been focused on understanding the roots of the credit
crisis, very few have examined another alarming trend that has been growing for years.
To further your understanding of this trend visit the Islamic Index section of the Dow
Jones website, after you watch this film.
The Final Globalization of the US Banking System by the Federal
Reserve, July 9 '08, Joan Veon, The Women's International Media Group
For many of you, this will be your first contact with Mrs. Veon. With the "All eyes on
Washington" drama since mid September, her comments will most likely overwhelm
you. However, when you consider that she has attended more than 90 global political
conferences over the last 15 years as a member of the press, and has had the
opportunity to ask specific questions directly to world leaders, her journey in life is unlike
the vast majority of the public. No matter what country live in, you need to read her
comments about the US Treasury's Blueprint. She was the first individual to alert me of
this massive expansion of powers by the Federal Reserve.
If you will scroll down this page, you will find an entire copy of The Blueprint for a
Modernized Financial Regulatory Structure, presented by the US Department of the
Treasury to Congress this past March.
Bank of England, Financial Stability Report, April 2008
European Common Bank, Financial Stability Review, June 2008
"As confidence has fallen in the ability of credit ratings to capture all the risks
in complex structured credit products, some investors have been left without
readily available and reliable measures of asset quality." (pg45, BOE) "There are
fears that default rates have been held artificially low over the past couple of years
by an abundance of liquidity in markets for asset backed securities, easy credit
conditions and very low spreads on high-yield bonds." (pg14,ECB)
Whether one reads the Federal Reserve, or the ECB or the BOE, waning
confidence and rising fear all stem from the same root problems that were
ignored for years,"only now" beginning to be understood. But, ignoring the
latent risk of financial schemes for short term profits is nothing new.
Whether one studies the Dutch Tulip Bulb of the 1600s, or the Mississippi
Scheme of the 1700s, or America producing the first middle class
society to embrace consumer credit in the 1920s, a thorough study of history
would have revealed long before we arrived at the "credit crisis" of 07-08
that human nature had not changed. Once we begin to understand
what we never investigated before, the mood of the crowd regarding trust
begins to change.
FDIC, Q2 '08: Quarterly Banking Profile, Aug 29, 2008
“Total assets of insured institutions declined by $68.6 billion during the quarter,
the first time since the first quarter 2002 that industry assets have decreased,
and the largest quarterly decline since the first quarter 1991. Assets of “problem”
institutions increased from $26.3 billion $78.3 billion.”
Since the spring our subscribers have been presented with interviews from
national level managers regarding the safety of their cash reserves.
Q1 2008 Derivatives Report, Office of the Comptroller of the Currency
"Credit risk is a significant risk in bank derivatives trading activities." page 2
"Credit risk in derivatives differs from credit risk in loans due to the more
uncertain nature of potential credit exposure. Because the credit exposure
is a function of movements in market rates, banks do not know, and can only
estimate, how much the value of the derivative contract might be at various points
of time in the future." page 3
"From 2003 to 2007, credit derivative contracts grew at a 100% compounded
annual growth rate. Given current market turmoil, however, credit derivative
growth has eased." page 5
Click here to review a chart taken from page 6. Please note, the numbers you
are reviewing are in the billions.
The Dept of the Treasury: Blueprint for a Modernized Financial
Regulatory Structure, March 2008
If you know of the problems that arise from giving the government more power,
you have got to read this document. With all of the articles and comments in the
public domain warning of the moral hazard of the Fed constantly intervening to
"stabilize" the markets, this plan, from our highest financial government leaders,
can only be seen as a recipe for disaster. They note:
"The market stability regulator should be responsible for overall issues of
financial market stability. The Federal Reserve's market stability role would
be conducted through the implementation of monetary policy and the provision
of liquidity [a constant euphemism for perpetual debt creation] to the financial
system." page 15
Compare this with my March 10, 2007comments in Herb Greenberg's Wall Street
Journal Weekend column: .
"The reason we don't believe markets will crash, is because we do not want to.
Simply put, we enjoy the wealth that easy credit creates. And who wouldn't? With
easy credit, there's no need to work for years and save, no need for politicians to
ever say no, and no need to wait or do without. If the system has a problem,
liquidity is always the answer. If we encounter a slowdown, just add more
liquidity. After all, it has been working for years. And the long this arrangement
persists, the more this belief is reinforced."
David Walker on America's Financial Crisis, Post from Ross Perot's website,
April 29, 2008
"Tough choices are required. We will not be able to grow our way out of this
problem. Anybody who says that, suffers from two problems. Number one: they
have not studied economic history adequately. And number 2: they probably
wouldn't do real well at math, because the number just don't add up."
- Former Comptroller General of the United States, David Walker
A friend of mine, who started his life in Iraq under Saddam Hussein and fled to
America as a boy, notified me of this film.
Triennial and Semiannual survey of positions in Global OTC Derivatives
Bank of International Settlements, November 2007
The highest authority in global central banking notes that the outstanding
amount of OTC derivatives was $516 trillion as of June of 2007. While we agree
with the BIS's statement that, "a single comprehensive measure of risk does not
exists," an annualized growth rate of 33 percent since 2004 and 20 percent since
1995, is certainly disconcerting. We should not be surprised when markets
Quarterly Banking Profile, Fourth Quarter 2007, FDIC
Most investment trading models are designed with an "everything stays within
this range" mentality. But the statements found in this document reveal a banking
community that is experiencing historic extremes. The clustering continues to
signal that we have moved outside of the normal range." Understanding the
history of fiat money and the science of unstable systems has never been more
crucial. Click here to subscribe to our ongoing research.
Procyclicality in the Financial System: do we need a new macro
stabilization framework? Bank of International Settlements, William White,
Head of Monetary and Economic Development, January 2006
If you've read extensive amounts of history on events such as the 1929 crash,
the months prior to Pearl Harbor, or the Yom Kippur War during the 1973 -74 oil
crisis, you realize that the reason we don't see watershed events in history prior
to their occurrences, is that we have little knowledge of monetary history, and thus
do not understand that some voices carry further in determining the course of
history. White's position at the BIS, places him at the top of the central bankers'
bank. His comments on pages 5 and 20 should be read by every individual who
uses money, and by that I mean everyone. To examine our research on this
paper, and the history of the BIS, read our May 2006 newsletter: Between Two
Fitch Comments on US Operating Funds, January 14, 2007, Riskcenter.com
If you are with a local or state government agency or you do business with the
same, you need to consider the material discussed in this short report. Risks we
never even consider in our day-to-day business transactions, should now move
front and center.
"Fitch's survey of state investments has sought to identify exposure to credit -
impaired and illiquid assets, and the consequent risks to investment principle
should such investments fail to perform. To the extent that state operating funds
are invested in credit-impaired and illiquid instruments, these states face the risk
of delayed access to principal, if not losses of such principal."
Though this primarily addresses the US, individuals from other countries will
likely find this information helpful, as well.
OCC's Quarterly Report on Bank Derivatives Activities Third Quarter 2007
"U.S. commercial banks generated $2.3 billion in revenues trading cash and
derivative instruments in the third quarter of 2007, down 62% from the $6.2 billion
reported in the second quarter. This decline is attributed largely to the difficult
trading environment in credit markets." To see derivatives' exponential growth
and their heavy concentrations in "five large [U.S.] commercial banks," read on.
FDIC Quarterly Banking Profile, Third Quarter 2007, FDIC
"Loan-loss provisions totaled $16.6 billion, more than double the $7.5 billion
insured institutions set aside for credit losses in the third quarter of 2006 and the
largest quarterly loss provision for the industry since the second quarter of 1987.
Loan losses in the third quarter were $3.6 billion (49.9 percent) higher than a year
earlier. The largest increase occurred in loans to commercial and industrial (C&I)
borrowers, where charge-offs were $796 million (91.4 percent) higher than a year
earlier. Charge-offs of consumer loans other than credit cards had the second-
largest increase, rising by $702 million (46.1 percent). Net charge-offs of
residential mortgage loans were up by $676 million (164.8 percent)."
And, this is not just a U.S. problem..
The Risk Outlook for Mortgage Lenders, December 4, 2007,
Clive Briault - Financial Services Authority Managing Director of Retail Markets
"You need to consider contingency plans against the worst outcomes. These
plans might include the very practical issue of how you would cope with an
upsurge in retail deposit withdrawals, both from your branches and over the
internet; how you could access emergency funding; and the circumstances in
which you might need to curtail or wind down your business. Again, any such
plans need to be considered well before you are engulfed by a crisis since by
then it will almost certainly be too late to develop practical responses."
An Investor's Guide to Asset Backed Securities (2004),
The Bond Market Association
Asset Backed Securities will be remembered as one of the most unsound
investment structures of "modern finance." As you read this brochure, recall
what has transpired in the commercial paper markets, in which money market
mutual funds invest. Then you will understand why this brochure is one more
reflection of the credit mania. As more "surprises" surface, complacency
regarding due diligence will become more costly.
August 2nd, 2007 Updates:
First Quarter 2007 Derivatives Report, Office of the
Comptroller of the Currency
"What goes up, must not come down," has become the creed of our
largest banks. As you review these astronomical numbers, consider the
following definitions of risk from the Investment Planning textbook
developed for the College for Financial Planning.
1.Business Risk is the risk associated with the nature of the enterprise
2.The use of financial leverage is the source of financial risk.
3.Market risk refers to the tendency of security prices to move together.
4.Interest rate risk refers to the tendency of security prices, especially
fixed-income securities, to move inversely with changes in the rate of
Equipped with these simple definitions of risk, check out pages 12, 16,
22 and 26. Are our largest banks showing any concern for risk?
Personal Income & Outlays, June 2007, Bureau of Economic
After reviewing pages 4, 7, 8 and 9, look at pages 6 and 7 in the March
release from the same agency. What gives? Paul Kasriel gives accurately
assesses the damage the "wealth effect" has had on our nation.
Second Quarter 2007 Gross Domestic Product, Bureau of
Knowing that very few people ever read numbers outside of the current
financial headlines, our government seems given to excessive revisions
Compare this first quarter GDP report with the revisions made in the 2nd
quarter report. What will the revised 2nd quarter numbers look like in the
3rd quarter report? If you're losing confidence in the BEA, check out John
Williams, who recently notes, "GDP contracted 0.9% net of revisions for the
FDIC Quarterly Banking Profile, First Quarter 2007
If the year-over-year loan loss increases in our banking system continues it's
current trajectory, we may well have cause for concern. From the 1st quarter of
2006 credit card charge-offs have increased 29 percent, individual loan charge-
offs are up 60 percent, commercial and industrial loan charge-offs are up 78
percent, and residential mortgage loan charge-offs are up 93 percent. Noncurrent
loan rates are also trending higher.
SEC to End Short Sale Tick Test on July 6, 2007, SEC News Digest, Issue
2007-124, June 28, 2007
"On June 13, 2007, the Commission voted to remove the tick test of Rule 10a-1
and to amend Regulation SHO to provide that no short sale price test, including
any price test of any exchange or national securities association, shall apply to
short sales in any security." As we discuss in Riders on the Storm, excerpted
here, the tick test rule began in 1938, after the Crash of 1929 and a 47 percent
decline in 1937, and though it has always been ineffective, we have some
concerns about its removal at a market top, before a major decline occurs.
Conclusion to the 77th Annual Report, Bank of International Settlements,
June 24, 2007
"There seems to be a natural tendency in markets for past successes to lead
to more risk-taking, more leverage, more funding, higher prices, more collateral
and, in turn, more risk-taking. Should liquidity dry up and correlations among
assets rise, the concern would be that prices might also overshoot on the down-
side. Such cycles have been seen many times in the past. "
BIS Quarterly Review: International Banking and Financial Market
Developments, June 2007
When the Bank of International Settlements comments that "global issuance of
CDOs (Credit Default Obligations) in the first quarter of 2007, at $251 billion, was
the strongest on record," and that the "bust cycle" in the credit card market begins
with "the recognition of excessive indebtedness amid rising delinquencies" thus
resulting in "tighter lending standards, contractions of credit, and prolonged
balanced sheet adjustments, affecting the real side of the economy," can these
global officials claim surprise at the Bear Stearns debacle? "Strongest on record"
sounds a lot like 1999.
Global Financial Stability Report, Chapter 1, Assessing Global Financial
Risks, April 2007, International Monetary Fund, Washington DC
If you are making long-term investment or business decisions, this report
might alter your view of risk. While couched in the typical conditional phrases,
which act to negate that of which they warn, we find some disconcerting
comments. The following are just two examples.
"The benign external environment and accompanying rise in risk appetite -
reflected in the rapid rise in capital flows to some EM [Emerging Markets]
countries - pose challenges for those authorities and could threaten financial
and economic stability, especially if capital flow reversals were to occur." Or,
"ABX indices, which are indices on ABCDS [Asset Backed Credit Default
Swaps], started trading January 2006." As of April 2007, "Spreads on the BBB-
subindices of the three most recent ABX series have widened sharply since
November 2006, reflecting increasing defaults and stress in the lower quality
home equity loans." And, "the 06-02 series has experienced delinquencies 60
percent higher than those of the 06-01series at comparable seasoning."
I continue to be amazed at the total lack of explanation of how we got here in the
first place, and find it incredible that our own media never refers to this ongoing
commentary of global financial risk presented by one of the most influential
banks in the world.
Are High Foreign Exchange Reserves in Emerging Markets a
Blessing or a Burden? March 2007, Russell Green & Tom Torgerson,
Department of the Treasury, Office of International Affairs
"The practice of preventing upward real exchange rate adjustment can be
harmful by distorting the price signal for resource allocation. Reserve
accumulation may render a false sense of security, delaying necessary
reforms. Large fiscal deficits, for example, may crowd out private sector
investment or create debt overhang problems." These statement are true
for the U.S. as well as the intended audience. Once again, finger pointing
is preferred to addressing the root cause of the problem.
Capitalizing on Sustainable Development: Making Gold out of
Green, Spring 2007, Joan Veon, Women's International Media Group
To those who are new to such discussions, this missive will likely
make more sense after viewing "The Great Global Warming Swindle"
documentary below. As a member of the press who has covered more
90 global government meetings over the last 15 years, though Veon's
views may differ from one's own, they merit a great deal of respect.
The Great Global Warming Swindle, British TV Channel 4,
March 8, 2007
As you form an opinion on this issue, review this film and listen to these
comments of scientists from around the world. When we study various
global government agencies' trends, we begin to see a completely
different set of events developing.
Fiscal Stewardship: A Critical Challenge Facing Our Nation, January
2007, United States Government Accountability Office.
"As of September 30, 2006, the U.S. government reported that it owed
more than it owned by almost $9 trillion. In addition, the present value of
the federal government's major reported long-term "fiscal exposures" -
liabilities, contingencies, and social insurance and other commitments
and promises - rose from $20 trillion to about $50 trillion in the last 6
years ...These structural deficits - which are virtually certain given the
design of our current programs and policies - will mean escalating and
ultimately unsustainable federal deficits and debt levels. Based on
various measures - and using reasonable assumptions - the federal
government's current fiscal policy is unsustainable. Continuing on this
imprudent and unsustainable path will gradually erode, if not suddenly
damage, our economy, our standard of living, and ultimately our domestic
tranquility and national security. "
BIS Quarterly Review: International Banking and Financial Market
Developments, December 2006, Bank of International
Settlements, My Highlighted Version
"This general [optimistic] confidence could also be discerned in the
behaviour of a number of other market indicators. In mid-November,
implied volatilities in bond and stock markets reached their lowest levels
in years, while measures of risk appetite showed that the retrenchment
by investors after the sell-off in May and June had been largely reversed."
History has always shown, that when appetites for risky assets increase,
we're a long way from a market bottom. Review the constant proportion
debt obligations (CPDOs) on page 8, and then review the Moody's piece
we placed on the website in the fall. This will be one for the history books.
Who Predicted the Bubble? Who Predicted the Crash?
Summer 2004, Dr Mark Thornton, Ludwig Von Mises Institute
My Highlighted Version
As 2007 begins and the bullish buzz abounds, some think that, after the
strong equity returns of 2006, maintaining a bearish view is arbitrarily
pessimistic. Yet, Dr. Mark Thornton reminds us that these conditions
must exist in that they are indicative of a market top. On a pragmatic note,
it is also helpful to read the thoughts of those who were able to step
outside of the euphoria of 1999.
Financial Market Update, Monetary and Capital Markets
Department: Global Markets Monitoring and Analysis Division,
December 2006, International Monetary Fund
My Highlighted Version
"Investors continue to move out the risk spectrum in search for yield, and
risky assets continue to perform well. At the same time, volatility has fallen
to generational lows across a wide range of assets, and many investors
appear to have adopted similar trading strategies, in many cases ones
predicated on a continuation of the benign scenario."
Sounds like the IMF has read our research paper, Riders on the Storm:
Short Selling for Contrary Winds. Now may be a good time to do the
same. So, subscribe to The Investor's Mind and obtain access to our
entire 154 page paper. Click here to review samples of both.
How Active is Your Fund Manager? A New Measure that Predicts
Performance August 7, 2006, Martijn Cremers & Antti Petajisto,
Yale School of Management
"Nearly one third of the U.S. mutual fund industry is comprised of 'closet
indexers” – funds that claim to be actively managed but passively invest
most of their assets in the benchmark index – while truly active funds
account for only about a quarter of the market. Furthermore,only the most
active funds outperform their benchmark indexes while all other active
funds underperform after expenses."
FDIC Outlook: Summer 2006
This FDIC report discusses the effects of lending cycles on the business
cycle, provides a good explanation of why credit default swaps have
grown exponentially (page 11), and discusses commercial real estate
lending (page 14). Pages 24 and 25 show growth rates in non-traditional
mortgage loans, which are of particular interest. We have also provided a
non-hi-lighted version for those who would prefer it.
Operational Risk - US Treasury Requests Public Comment on
Securities Lending Facility - April 27, 2006, www.riskcenter.com
"An SLLR [Securities Lender of Last Resort], or repo facility, is a
mechanism for providing an additional, temporary supply of Treasury
securities used on rare occasions when market shortages threaten to
to impair the Treasury and financial markets' functioning."
Global Derivatives Explosion
A few years ago, I came across a 1994 Bank of International Settlements
paper voicing concern over the inherent risks in the derivatives industry
after the conclusion of Carry Trade 1(at that time). To make it easier to
digest, I have highlighted the issues I found alarming. With the plethora of
information available today, I welcome any reader's insights on
subsequent publications on this topic.
When we consider the unsustainable growth rate of the global futures and
options markets, evidenced in the January and February 2006 data,
the concerns addressed in the 1994 BIS paper become even more
pronounced. This May 22, 2006 Market Commentary shows that
these concerns are well founded.
This information was obtained from Risk Centers' Risk Alert services.
Lights out on M3
In our May 2004 newsletter, we discussed inflation and deflation using
historical M3 values from the Federal Reserve. Since March 16, 2006
marks the last public money supply report that contains M3 values,
and March 23, 2006 begins the new report format without M3 values,
you may want to save both of these reports as a reminder of this
period in our nations history.
Shadowing Reality - Welling@Weeden interviews John Williams,
February 21, 2006
"Real unemployment right now - figured the way that the average person
thinks of unemployment, meaning the way it was estimated back during
the Great Depression - is running about 12%. Real CPI right now is
running about 8%. And the real GDP probably is in contraction." To find out
just how distorted our government economic reporting numbers have
become, read on.
BIS Working Paper No 193, Procyclicality in the financial system:
do we need a new macrofinancial stabilisation framework?
William White, Economic Advisor, Head of the Monetary and Economic
Department for the Bank of International Settlements, January 2006
Now don't let the title of this paper fool you. This is not your typical dry
rhetorical economic jargon that leaves you clueless after reading it. It is
probably one of the most accurate pieces written by a central banker on
the current state of the world's economic environment, what central
bankers have learned over the last several decades, and possible
solutions for our current juncture. This is one for the history books.
The January 2006 working paper gives some specific solutions that are
not found in the April 2006 working paper. Let me also encourage you to
read the definition given by Merriam-Webster of inflation before and after
you read these working papers.
White refers to the "Austrian school of economics." If you are unfamiliar
with this school of thought, watch Money, Banking and
The Federal Reserve, by the Ludwig von Mises Institute. You can access
the streaming version of the video at http://mises.org:88/Fed or
download it from http://mises.org/multimedia/video/Fed.wmv.
Bear & Bull Cycles: A 102 Year Look At The Dow , January 31, 2006
The historic record, as displayed in this great chart, makes it painfully
clear that bear cycles have lasted, and therefore can last, for years. To
deny this fact by not altering your investment strategies accordingly, is to
invite the claws of the bear to shred your financial capital.
Same Play, Different Actors, Kevin Duffy and William Laggner,
Bearing Asset Management LLC, December 2005
As memories of the stock market bubble of the late 90s grow dim, we do
well to take the time to review it. These slides show that the same drama
is about to unfold again, only this time with different actors. Click here for
one more reality check.
Will a Bursting Bubble trouble Bernanke? Center for Economic and
Policy Research, November 2005
As Baker and Rosnick point out in this paper, one of the Federal
Reserve's mandate's is to seek price stability. This paper cogently argues
that the policies of the Federal Reserve have fostered price instability in
the housing sector.
A Speech at the Credit Risk Conference, John C. Dugan, Comptroller
of the Currency, October 27, 2005
"One of the striking findings in our 2005 survey was the breadth and extent
to which banks relaxed their lending standards. We readily understand
why these products [interest only loans, ARMS,etc.] have become fixtures
in the marketplace in such a short time. One reason is that they have
helped to sustain loan volume that would otherwise almost certainly be
falling, because rising interest rates have brought an end to the refinance