Wednesday, February 9, 2011

K2, Portlandia, and Nothing Natural about the Global OTC Derivatives Market

2/9/2011 Portland, Oregon – Pop in your mints…
We are taking a break for the technicalities of our current hypothesis and are popping in a ligher Mint today.  

Last night we enjoyed viewing clips of Portlandia, a short format comedy which is dedicated to exposing and affectionately poking fun at our beloved Portland.  As with all good comedy, at least in our humble opinion, small quirks are taken to extremes for comedic effect.  Take the following "Is it Local?" clip:

While you are not likely to see this scene actually take place in a restaurant, you can almost feel many of Portland's restaurateurs cringing as lighter versions of this conversation crop up at nearly every restaurant in Portland on a nightly basis.
Yes, comedic extremes can be hilarious.  Take the current world banking system.  At last count, the actual monetary base for the entire world was a whopping $50 trillion.  That seems like a lot of money until you consider that as of the end of 2010, these $50 trillion were indirectly obligated to pay not only normal debts and bank deposits but also a global derivatives market that clocked in at a nearly unimaginable $1.2 QUADRILLION!!!  This market has nearly doubled in the tiny space of ONE YEAR!!!  

People, this is true insanity and would be hilarious if it were not true.  All of these seemingly harmless derivatives have the ability to bring the world's banking system including every Central Bank to its knees if interest rates rise.  You will have to trust us on this one.  The details confuse even us but it is sufficient to say that the current global banking system cannot withstand an upwards short term interest rate shock.  This is why, as long as the US Dollar continues to exist (which may not be much longer), the FED target rate (see our Key Indicators below) will not move very much higher.
K2's North Face, like current FED Monetary Policy, has never before been attempted!
The FED will be content to watch the yield curve begin to resemble the north face of K2 as inflation expectations take their toll on long bond rates. 

Did someone say "inflation expectations?"  The FED is still feigning ignorance but evidence that inflation is coming on strong is cropping up everywhere.
Glancing first at Morningstar:
Inflation Expectations May Be Heating Up 
then Yahoo! Finance: 
Sara Lee to raise prices to cope with cost squeeze  
another example from the Financial Times: 
Treasuries yields continue to push higher 
As usual, the Federal Reserve is too late.  They will begin to talk about the need to raise interest rates to avoid inflation but only after millions have been pushed deeper into poverty.  The Federal Reserve is now approximately one year late in removing monetary stimulus and they are too late to shield anyone, not even their member banks, from the Tsunami of inflation that is coming ashore all over the world.
We came across a comment today that would be amusing if it were not so infuriating.  Jeffery Lacker, President of the Richmond Federal Reserve, had the nerve to say that the FED was not to blame for rapidly increasing inflation in commodity prices.  What planet does this guy live on?  He went on to state the obvious, which is that the FED does not produce oil, grow grain, or do anything remotely productive.  However, by virtue of legal tender law, which obligates everyone to play in the US dollar system, and as a producer of cheap, counterfeit money substitutes, blame for inflation lies squarely on the shoulders of the Federal Reserve.  Anyone who says otherwise is severely deluded.  We offer Mr. Lacker as living evidence.
As the US Dollar, the Euro, and all paper currencies continue to lose credibility, there is one obvious monetary alternative which each day gains more visibility:

JP Morgan to Start Accepting Physical Gold as Collateral
Yes, something big must be a foot if JP Morgan, the 800 pound gorilla in the banking world is offering to accept gold as collateral for repo transactions.  Our guess is that JP Morgan is short as much gold as they are silver and copper and is looking for some way to feign solvency or, in more colloquial terminology, "save their shorts."
Will they succeed?  In the long run, no.  They will get crushed along with the rest of the current banking and currency system.  But in the short run, anything is possible!
Stay Fresh!
P.S.  If you enjoy or at least tolerate The Mint please share us with your friends, family, and associates!
Key Indicators for Wednesday, February 9th, 2011

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.