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Like a chess
game, the bankers called ‘checkmate’ against the EU political
leaders on Friday May 5th, 2010. Two days later in an urgently
called weekend meeting the EU finance ministers hurriedly announced the
biggest bailout in history.
Most people take
more than two days to buy a car, but the frightened EU officials were
pressured into reacting before the Asian markets opened Sunday evening. This
is eerily the same scenario we saw on the eve of the US $700B TARP
ratification, the Bear Stearns takeover, Fannie /Freddie Conservatorship, AIG
Bailout etc.. A coincidence – Yeh right!
How was this
pressure applied? Who has such power? Who won and who lost? As I
explained in “Extend & Pretend:
Shifting Risk to the Innocent”, it is
all part of the dynamic new market strategy of Regulatory Arbitrage. You had
better learn how the game is played or you will be toast.
For a complete
unabridged version of this article with slide presentation see: Tipping Points – Commentary
"Look at
what Soros did to the Bank of England in 1992 - he went after them, they had
a finite amount of dollars, he was selling sterling and taking the dollars,
and they were buying the sterling and selling the dollars to defend the peg.
All he had to do was sell more than they had and he wins. But he needed real
money to do that.
Today you can break a country, you don't need money you just need synthetic
euroshorts or CDS. A trillion dollar bailout: Goldman can
create 10 trillion of euroshorts. So it just dominates whatever governments
can do.
So
basically Goldman can create shorts faster than Europe
can create money."
Jim Rickards CNBC
05-10-10
Former LTCM
General Council
Prior to the May
5th, 2010 Flash Crash where the DOW dropped a record 1000 points
in a matter of minutes, I wrote in “Extend & Pretend:
Shifting Risk to the Innocent” why this
was going to happen. The market reacted in a perfectly predicted fashion and
was the result of the same parameters that caused the 1987 record one day
market drop. In 1987 it was caused by Portfolio Insurance and today it is
about Dynamic Hedging (son of Portfolio Insurance). Yes, High Frequency
Trading (HFT), and Dark Pools are involved, but only to the extent that they
are part of the continuous refinement of the Dynamic Hedging process.
Dynamic Hedging
is a key tool in applying political pressure, which is critical to the
success of the three step process I will refer overall to as Regulatory
Arbitrage.
The Flash Crash
came on a day when the Dow was already down nearly 300 points, Greek rioting
pictures were on all TV channels and the markets over the previous week had
given up all the year-to-date gains. At the May 7th EU summit
meeting however; it did not escape EU leaders that the sell-off the day
before came with the early polls from UK
elections that signaled a potential minority party win by the Conservatives.
The poll results spooked the market since this and critical German elections
in North Rhine-Westphalia on Sunday could potentially make EU leadership a
lame duck and further spook financial markets. The EU leaders felt so
forced to take action that they arguably violated (expect it to be
challenged in German courts) the EU constitutional agreement.
“The EU has invoked the
"exceptional circumstances" clause of Article 122 of the Lisbon
Treaty to beef up the EU's balance of payments fund from €50bn to €110bn.
The money can be used to bail-out countries within the eurozone for the first
time. This is a "Euro Bond" by any other name, evoking the German
nightmare of an EU debt union.” (1)
“
… a battle of the politicians against the markets. I am determined to
win”
German Chancellor
Angela Merkel
“…unfounded
off-the-wall suggestions and speculation”
EC President Jose
Manuel Barroso
“…confront
speculators mercilessly … know once and for all what lies in store fro
them”
French President Nicolas Zarkozy
It is pretty
scary that EU leaders felt they had to go to such an extent to demonstrate
action. They were running scared due to a well crafted international banking
strategy.
The pattern has
become so consistent and predictable that I am able to flowchart the steps.
Let me briefly
outline how the Regulatory Arbitrage strategy works. For those that may argue
that international banks are not that well coordinated to implement such a
strategy, then you might want to view this process in a bigger context of
what modern day international banking has evolved towards, by the simple
imperative of the pursuit of profit maximization and the advancement of
technology. It is today’s version of Adam Smith’s
‘invisible hand’.
THE INSIDIOUS
PROCESS OF APPLYING PRESSURE
I detailed in
‘Extend & Pretend: Shifting Risk to the Innocent’ the central
elements of Dynamic Hedging, Capital and Regulatory Arbitrage. Each has a
specific role to play in the process of applying pressure towards the
ultimate goal of shifting risk from private hands to public hands. This risk
is assumed as part of a “Risk-On” strategy via high levels of
leverage to generate trading profits and investment fees. These high risk
speculations which would be classified in previous years as pure speculation
need to be turned into investments. The way you turn a speculation into an
investment is to remove the risk.
When you gamble
in a casino you are speculating. The risk is high and against you. To make
gambling an investment is about reducing the risk. If you could ‘card
count’ which the casinos ban, you decrease your risk. But it is still
speculative. If you had weighted dice on the craps table you could also
reduce risk, but there would still be an element of speculation. If you fixed
the roulette wheel so you knew where it would stop, you are no longer
gambling – you are ‘investing’. To have a high probability
outcome that is known in advance is investing. The international banks are
turning gambles into investments by the following process of guaranteeing an
outcome. In less polite circles and street parlance it is referred to as
‘rigging the game’.
“Chess
players think 3-4 moves ahead. Chess Masters not only anticipate their
opponent’s moves but force them to make specific moves that guarantee a
checkmate”
 
See Slide
Presentation: Tipping Points: Commentary
THE CLASSIC TELL
TALES OF PRESSURE
David DeGraw
reports at Amped Content:
In the aftermath of Goldman Sachs’
public flogging before the world in Congress, and while under investigation,
on the very day that Congress was voting on the “break up the too big
to fail banks” amendment and cutting behind the scenes deals to gut the
audit of the Federal Reserve, the stock market had its greatest sudden drop
in history, plummeting 700 points in ten minutes - shades of September 29,
2008 all over again.
If you recall, back in
September ‘08, as Congress was voting down the first bailout, the big
banks made the market plunge a record 778 points in
one day. Fear and panic then led Congress to pass the bailout. Trillions of
our tax dollars, the money that we desperately need to keep our society
functioning over the long run, then went out the window and into the pockets
of the very people who caused the crash.
What happened on September 29,
2008 will go down in history as one of the greatest acts of terrorism ever.
9/29/08 proved that when you have so much
power concentrated in the hands of a few, you can manipulate a computer
algorithm and make the market and economy go whichever way you want it to go.
So on 5/6/10, just as the power of the big banks was again threatened on the
floor of the Senate and a deal on auditing the Federal Reserve was being
negotiated, in came a sudden and unprecedented ten-minute 700 point market
drop, a precision-guided High Frequency Trading (HFT) attack to show Congress
who’s boss.
If you think the massive
sudden drop happened because one lowly trader hit one wrong button, if you
actually believe that the entire stock market can plunge because of one
mistaken key stroke by a low-level trader, you are stunningly naïve. I
hate to burst your bubble,
but this was a direct attack.
In a market where 70% of all
trades are executed by computer algorithms via High Frequency Trading (HFT),
Goldman Sachs has the power to make the market crash or rise at will. (2)
Tyler
Durden reports at Zero Hedge:
“Goldman’s
dominance of the NYSE’s Program Trading platform, where in addition to
recent entrant GETCO, it has been to date an explicit monopolist of the
so-called Supplementary Liquidity Provider program, a role which affords the
company greater liquidity rebates for, well providing liquidity, and
generating who knows what other possible front market-looking, flow-prop
integration benefits. Yesterday [5/6/10], Goldman’s SLP function was
non-existent. One wonders - was the Goldman SLP team in fact liquidity
taking, or to put it bluntly, among the main reasons for the market
collapse….
… here is the most
recently disclosed NYSE program trading data….
What is notable here is that
of the 1.4 billion in principal shares, or shares traded for the firm’s
own account, Goldman was the top trader by a margin of over 100% compared to
the second biggest program trader.
We have long claimed that
Goldman is the de facto monopolist of the NYSE’s program trading
platform. As such, it is certainly the case that Goldman was instrumental in
either a) precipitating yesterday’s crash or b) not providing the
critical liquidity which it is required to do, when the time came. There are
no other options.” (3)
Max
Keiser who has written and authored Program Trading and HFT computer
algorithms states:
“May
6th was an unequivocal act of domestic financial terrorism in America. A day
that will live in infamy.
To
scare the lawmakers, themselves large owners of the very banks and stocks
that they are supposed to be regulating, a financial Weapon of Mass
Destruction was put to their head and they acquiesced.
As
the inventor of the continuous double-auction, market-making technology (VST
tech. US pat. no. 5950176) that is referenced 132 times by program trading
and HFT patents since 1996, I can tell you that Goldman, JP Morgan and the
gang simply pulled the ‘buys’ from their computer trading
programs and manufactured a crash. And when the coast was clear, and it was
clear the politicians were not going to vote for anything that would break up
the ‘too big to fail’ banks; all the ’sells’ were
pulled from the computers and the market roared back.
This
is a Manchurian Candidate market where program trading bots start the ball
rolling in whatever direction Wall St. wants the market to go - and then
hundreds of thousands of day-traders watching Cramer on CNBC jump on the
momentum bandwagon and commit the crime for the Wall St. financial
terrorists, who then say, ‘It wasn’t us, it was ‘the
market!’” (4)
David
DeGraw reports at Amped Content:
On Friday, the next day, after
the “break up the too big to fail banks” amendment was soundly
defeated by a 61 to 33 margin in Senate and a deal was struck to eliminate
key provisions from the audit of the Federal Reserve bill, Goldman was
meeting with the SEC to work out a settlement in their case against them.
Once again, Goldman proves that crime pays. Welcome to the New Mafia World Order.
Other than the two major
operations carried out on 9/29/08 and 5/6/10, we must also recall a smaller
attack on January 21st and 22nd of 2010, when Obama had a press conference
and came out in favor of the Volcker Rule,
which would have limited these HFT and “proprietary trading”
schemes. At that time, the market dropped 430 points. Soon after this attack,
all follow-up talk on the Volcker Rule faded away and this reform has not
been seriously addressed by Obama since then.
The bottom line: the United
States has been taken over by a financial terrorism network. Let’s face
it, we are all hostages of these financial terrorists and their puppet
politicians would rather be in on the scam than defend our interests. If
these terrorists don’t get their way at all times, they have the power
to throw their tremendous weight around and turn millions of lives upside
down in a matter of minutes and, as they have shown, they have no hesitation
in executing that power, no matter how many millions of lives they destroy.
They set off this crisis with
a wave of bombings in their initial Economic Shock and Awe
campaign two years ago, resulting in massive devastation (2)
THE
EURO BANK BONANZA
The
“Speculators” made huge profits on the CDS run up, followed by
horrendous profits on the plummeting Sovereign Debt Rates. If this
isn’t enough, they then profited on financing the whole bailout
including getting the ECB to accept repos on questionable assets from the
banks. (5) Alarming?
Portugal...
Spain...Greece...these are all last week's news based on CDS trading
patterns. Indeed, this week (Wednesday 05-05-10 ) saw the biggest
trade unwinds of all top 1000 CDS entities (including all corporates)
precisely in these three names. As the PIIGS implosion is finally being
appreciated by everyone and their grandmother, the "speculators"
are booking massive profits: the net cover/rerisking in Portugal and Spain
was a massive $500 million net notional unwinds in each in the week ended
April 30. Also known as taking profits. Greece and Ireland were also in the
top 5, so as we have repeatedly claimed, the market will no longer make the
news in Club Med. So where will it? No surprise there - the UK, France and
Germany. The smartest money in the world is now actively betting the core of
the eurozone is where the next CDS blow up will take place. With a stunning $630 million,
$558 million and $370 million in net notional derisking, France, UK and
Germany are the top three most active recipients in negative bets in the
prior week, not just in sovereigns but in all names. The
greatest non-sovereign
derisker in the last week? Goldman Sachs, with $175 million.
Nuff said. Yet a tangent on the UK: last week the UK saw $443 million in net
notional derisking. This week the number is even
higher: $558 million. There is now over $1 billion in net risky bets made
that the UK may not last. And Zero Hedge's outside bet to be the first core
country to blow up, thanks to its massive PIIGS exposure, France, finally
made the top spot in net derisking, with $629 million in net notional, or 189
contracts. The smart money is now massively betting that Europe's core is
done for; as the PIIGS have demonstrated, the blow out in spreads for the
core trifecta can not be far behind. (6)
A less publicized but crucial part
of the deal is the move by the European Central Bank to start buying not only
government bonds of hard-pressed countries like Greece, but private assets as
well. This move--a total reversal of longstanding policy--mirrors the
action of the U.S. Federal Reserve. Since the crash of 2008, the Fed has
purchased more than $1 trillion in mortgage-backed securities--aka: toxic
assets--as part of its endless transfusion of cash to U.S. banks. Now the
European Central Bank is doing the same to keep European banks afloat. (And
not just European banks: U.S. banks are deeply tied to their European
counterparts). (7)
If this
hasn’t alarmed you, add the fact there is strong evidence that the international
banks have been short the Euro throughout this whole process and
continue to be short. If recapitalizing the International banks was an
objective, the European Crisis has answered those prayers.
IT MAKES NO SENSE
After the $146B
Greek Bailout was announced and prior to the nearly $1T EU bailout the NY
Times reported:
“This is not a bailout of
Greece,” said Eric Fine, who manages Van Eck G-175 Strategies, a hedge
fund specializing in currencies and emerging market debt. “This is a
bailout of the euro system.” Solutions are also not easily
forthcoming. “In the end, we’re all saying we don’t know
how to deal with it,” said Dirk Hoffmann-Becking, a bank analyst with Alliance Bernstein in London. “We don’t know how the channels work, or
where the problems will pop up next.” (8)
CONCLUSION
The above
activities are as much a shift in modern Capitalism as a strategy of
the global banks. When you make capital cheap and ubiquitous as we have over
the last fifteen years, it changes investment strategy and behavior. It is
more profitable today to speculate than make long term wealth generating
investments such as factories and production which would create jobs. Long
Term investments come with delayed profits and on-going risk. Speculation can
be shifted to Investment by reducing the risk of the speculation. There are a
number of ways of doing this. Risk is reduced by ‘stacking the
deck’ or as in a carefully strategized chess game, by forcing your
opponent to make specific moves that delivers the banks the game winning
checkmate.
The only way to
protect yourself from this money printing ‘speculative’ game is
through the purchase of the only asset that is not someone else’s
liability – Physical Gold and Silver. It however should be seen as an
insurance play versus an investment since it protects your wealth versus
realistically increasing it. In today’s Kondratieff winter,
protection should
be considered the goal.
To those who have had the foresight
to realize that in the currency devaluation race to the bottom, the only
winners will be non-dilutable precious metals (and not industrial gimmickry
and bets on China's excess capacity like copper...well, maybe with the reverse
alchemy exception of lead), we salute you. In fact, so does the market: the S&P is now down 8% year to
date when expressed in ounces of gold. Because while central
banks can monetize, sterilize (whatever that means), and dilutize that last
remnant of the dying Keynesian religion, the FRN and its equivalents around
the world, gold is untouchable, and increases in value with each desperate
attempt to save a failed economic system. (9)
The Cover pages
of all German newspapers – “there (10)
SOURCES:
(1) 05-11-10 ECB risks its reputation and a German backlash over mass bond
purchases Telegraph.co.uk
(2) 05-10-10 High Frequency Terrorism: How the Big Banks and Federal Reserve
Maintained Their Death Grip Over the United States
Amped Status
(3) 05-07-10 Where Was Goldman's Supplementary Liquidity Provider Team
Yesterday? A Recap Of Goldman's Program Trading Monopoly
Zero Hedge
(4) 05-10-10 maxkeiser.com
(5) 05-06-10 Numerous European Banks And Re/Insurers Identified With Tens Of
Billions In Greek Failed Repo Exposure Zero Hedge
(6) 05-06-10 The CDS Traders' Verdict Is In - UK In Deep Shit... As Are France
And Deutschland Zero Hedge
(7) 05-11-10 Rescuing Greece or the banks?
Socialistworker.org
(8) 05-04-10 In and Out of Each Other’s European Wallets
NY Times
(9) 05-11-10 It Is Getting Ugly Quick In Fiat Land:
S&P Now Down 8% YTD In Non-Dilutable Terms
Zero Hedge
(10) 05-04-10 Greek Rescue Package Insufficient Will Need More Money
Zero Hedge
For the complete
research report go to: Tipping Points – Commentary
Sign Up for the
next release in the Euro Experiment series: Euro Experiment
The previous Euro
Experiment article: 8 Financial Fault Lines Appear In the Euro Experiment!
Gordon T. Long
Tipping
Points
Mr. Long is a former senior group
executive with IBM & Motorola, a principle in a high tech public start-up
and founder of a private venture capital fund. He is presently involved in
private equity placements internationally along with proprietary trading
involving the development & application of Chaos Theory and Mandelbrot
Generator algorithms.
Gordon T Long is not a
registered advisor and does not give investment advice. His comments are an
expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes
his statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
you are encouraged to confirm the facts on your own before making important
investment commitments.
© Copyright 2010 Gordon T Long. The information herein was
obtained from sources which Mr. Long believes reliable, but he does not
guarantee its accuracy. None of the information, advertisements, website
links, or any opinions expressed constitutes a solicitation of the purchase
or sale of any securities or commodities. Please note that Mr. Long may
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before investing in any security based upon statements and information
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