December 18, 2014

Why it's easier to invade Ukraine than defend the Rouble!

Posted in Irish Independent · 64 comments ·
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The global financial markets are going through a spasm. Emerging markets, long the flavour of the month as poor countries got richer, have seen money flow out of their economies at historical rates.

Russia’s currency is in free-fall and there’s very little that the Russian authorities can do about it, proving that these days it is easier to invade Ukraine than to defend the Rouble.

The price of oil is collapsing, so too is the price of coal, steel and copper.

But what is happening in global financial markets right now, and how will it affect you? Is it something far away that you need not worry about? Or is it something that will affect all of us in 2015?

To understand what is happening, you have to appreciate the extent to which financial markets panic, regularly. Once there is leverage, once traders borrow someone else’s money to buy stuff, there will always be the potential for panic.

This panic can become self-propelling where the panic itself makes the panic legitimate. As things get more fragile, good assets are sold to pay for the losses incurred in bad assets and the selling can become widespread.

The contagious nature of financial markets became clear to me many years ago – in 1997 to be precise – when I worked in the financial markets.

In October 1997, I pulled up a chair in the enormous foyer of the Grand Hyatt overlooking the harbour in Hong Kong.

There was a good view of the Star ferry as it shuttled thousands of workers to and from Kowloon.

The investor I was meeting explained that he was busy selling his assets in Russia and Eastern Europe because of the events in Asia. This puzzled me. I’d thought Russia did little trade with the Asian Tigers. Why would the crisis in Asia affect it?

The answer lay in the dynamics of financial globalisation, which I, an economist in a global bank, had not yet fully grasped.

Many investment banks have proprietary trading desks. These desks use bank depositors’ money to gamble on the markets. Their objective is to dramatically increase the return on the bank’s money.

In order to have some level of security, each bank sets a limit on the trading desk: the amount of the bank’s capital that can be put at risk. The bank I was working for, BNP, was using French deposits to speculate in Asia and Russia. Many traders, who believe themselves to be infallible, view such limits as a nuisance that restricts their genius and become adept at finding ways to circumvent them.

Trading desks can also leverage the bank’s reputation to get additional credit facilities from other banks.

The trader using other banks’ money in this way will normally be required to lodge a deposit of perhaps 10pc of the value of the investment with the bank from which he’s borrowing. This deposit is known as the ‘margin’. So let’s say the bank lends him €1,000: this gives him €900 of a stock, over which the bank has a charge; and he deposits €100 at the bank. As long as the end-day position equals the €1,000 lent, everything is fine.

What happens if the value of the stock falls to €800? This triggers a margin call: the margin between the value of the shares and the value of the loan has grown, and the trader now has to make up the difference by adding another €100 in cash to the €100 already on deposit.

The trader now probably has to sell something in his portfolio to get the cash to pay the margin call. This, in microcosm, is contagion: it illustrates the way a crisis in one market can provoke selling in another, perhaps entirely unconnected, market. One trader selling one asset to make one margin call is no big deal; but when a crisis causes heavy falls in asset prices in a certain area, and when the markets are dominated by heavily leveraged traders operating in a wide range of sectors, it’s not hard to see how a panic in Thailand can spread across Asia and thence to faraway places like Russia.

This is what causes small crises to blow up into much bigger ones – and it is why the financial world has become less stable in the era of globalisation and easy credit.

When asset prices are rising, everything is fine. But when asset prices are falling, everyone suddenly needs cash to pay for the margin calls coming at them from all angles. Banks find themselves forced into the interbank market by the need to borrow from each other, in the hope of shoring up their balance sheets.

If central banks don’t step in and inject as much liquidity as possible, a short-term cash-flow problem rapidly becomes a credit crunch.

In the foyer of the Hong Kong hotel that day, the trader’s position had nothing to do with economics, trade, investment, the stuff you learn in textbooks.

The arithmetic of the trader’s position was simple: he had just lost money in Indonesia, so he had to raise it elsewhere to cover his losses.

This was a classic ‘Minsky moment’ – the moment when investors must sell assets to cover their obligations – and it was being played out here in the vertiginous lobby of the Grand Hyatt in Hong Kong.

The same thing is happening now in various corners of the globe, in banks, hotels and other financial institutions.

Billions of euros, dollars or sterling of borrowed money has been used to gamble on assets in the past five years. As central banks cut interest rates and made cheap money available to boost growth, the financial markets used this money to place bets on oil, commodities and IOUs from governments.

As these leveraged bets turn sour, the traders have to sell good assets to shore up cash losses on bad assets.

Already developed markets in Europe and the United Kingdom are wobbling. If this goes on it will have a material impact on our economy.

Also, the impact of a deeply unstable Russia for both the Ukraine and for European business confidence is obvious.

That’s the nature of contagion; you never know where it will stop.


  1. Good morning all in wind and rain swept.

    Yes margin calls are in the billions and trillions. Leverage is in the 100′s not tens to one and the markets are all deranged and not working anymore.
    Cental banks create all the extra reserves all right but every bit is an added debt thus adding to the “contagion”. We are going down big time and most economists will “not see it coming”

  2. Swanie

    Perhaps it’s a good time to put our pensions into cash for a few months, just until it blows over.

  3. Buy land and solid assets with no debt. Interest rates will spike as the currencies fail> See Russia at 17%.

  4. McGoo

    This article is a statement of the bleedin’ obvious. The disturbing bit is that David got a degree in economics and a job with a global bank without understanding all this. No wonder economists get things wrong so often – they’re not taught the basics!

    • they are in fact mis-educated that they then perpetuate the problems. Most economists lead us astray. They all arrive at Kilkenomics and spoil a good party giving erroneous opinions and no solutions.

    • McGoo,

      At least this one tells you he didn’t understand it at one stage. Regarding the obvious, I defy you to find an article written in the Irish press that explains the financial contagion like this to.

      Send it onto me if you have it.

      Best

      D

      • Expand the contagion to explain the central banking ponzi scheme of ever increasing debt at ever increasing interest that stifles the economy.

        Explain the exploitation and control over the stat and thus all people. Go the full mile david!!

      • michaelcoughlan

        Hi David,

        I’ll explain what’s happening much better than this article although this article, whilst it states the obvious, is very good and an excellent demonstration of a good guy self aware enough to admit openly he doesn’t have all the answers.

        Lets start with two observations which are now generally accepted to be accurate;

        1) All hedge funds fail,

        2) Jamie Diamon is still in charge of JP Morgan even though a world record 14bn fine was levied on the bank during his own tenure after which his salary ROSE to 20m Pa.

        It was only when I analysed these two points I came to understand the underlying dynamic. I asked my self the following question; Why does JP Morgan and various hedge funds STILL have customers even though its open knowledge they shaft their own customers?

        Ans; JP Morgan’s customers and that of the various hedge funds are so Narcissistic they believe that Jamie will make them as rich as himself EVEN THOUGH it’s at their expense he is getting his bonus. In other words he is exploiting the narcissistic tendency of his own customers. (The phrase “there is an end to peoples intelligence but no end to their stupidity or greed” comes to mind.)

        Now let me tell you my own experience from the building industry which can be applied to what’s happening. I know a family of developer/builders (lets call them the Bros Grim) who don’t even have their leaving certificates who were involved in development and construction who operate in the following manner;

        They set up a limited company and quote for a large contract by offering the cheapest price. The accountants on the other side of the table award the contract to the lowest price to secure their bonus by driving the price down. The Bros Grim know their price is below cost. The pay themselves a salary of 200k pa and when the job grinds to a halt as it runs out of money they turn around to the subcontracts, suppliers, and workers and say “Sorry lads the company has gone into liquidation” and walk away from the mess HAVING CONSUMED THE CAPITAL INSTEAD OF ENHANCING IT.

        JP Morgan consume their customer’s capital instead of enhancing it.

        The brothers grim consume their customer’s capital instead of enhancing it.

        Hedge funds consume their customer’s capital instead of enhancing it.

        Now with our new found insight lets apply this logic to Russia assuming the following;

        Russia has a trade surplus with the rest of the world,
        Russia has a budget surplus,
        Russia is hoarding gold AND STILL it’s economy is collapsing and why is this?

        The Feds policy of zero interest rates has allowed companies in the US run by corporate sociopaths and psychopaths trained to consume their customers capital, countries capital, and every other countries capital (like Russia for example) to invest in financially un viable fracking based oil exploration since they don’t care whether the enterprise is viable or not just like the brothers Grim.

        They subsequently flood the market with this extra oil the consequences of which brings down a country like Russia with its ledger in much better shape than that of the US. And of course since these corporate psychopaths control the US Government and by extension the US Armed farces sure you can take up your beef with ACME door gunner;

        https://www.youtube.com/watch?v=S06nIz4scvI

        Hope this helps,

        Michael.

      • I thought this article was very interesting – It also reminds us that there needs to be a radical overhaul of how traders across the globe conduct their business to ensure more stability, a mammoth task which will probably be one of the biggest challenges in this century.
        I remember reading in a college economics book that the South African Rand dropped in value because a trader thought he overheard someone saying that Nelson Mandela was sick but it was actually someone saying ‘Yeltsin is sick’ (Boris Yeltsin) – a reminder that there will always be a level of ignorance in the markets.

      • cooldude

        David this is a very clear and accurate description on financial contagion.

        I like the way you use the word ‘gambling” instead of the usual word of “trading because that is exactly what these guys are doing with depositor’s money in all the major banks. This now also extends to the $900 trillion derivative market in which any losses will be borne by the depositors as per the new bail in legislation that is now law.

        The only question I have is how any of this can be seen as “normal” banking practice. Surely the safety of depositor’s money should be sacrosanct and any gambling should be done with the bank’s own money.

        The British MP Doug Carsdale introduced a bill last year to prevent this gambling but he got nowhere with it.

        I think an article on modern banking practices and the bail in legislation is called for. This would definitely be an article no one else in the Irish media will go near.

        Happy Christmas to everyone on the blog. I’m afraid I think Tony might be right and there will be serious ructions soon.

        • michaelcoughlan

          “The only question I have is how any of this can be seen as “normal” banking practice. Surely the safety of depositor’s money should be sacrosanct and any gambling should be done with the bank’s own money”

          It’s very niave.

          Michael.

          • cooldude

            Unfortunately most people are of this view that bank deposits are safe. I understand completely the legal status of bank depositors have if the gambling debts of the bank cause it to crash. They are unsecured creditors and will come last in the queue in the case of trouble.

            Banking should simply be another service industry and should not be the parasite it has become feeding on the real economy. That is why I want an article dealing with this subject.

      • McGoo

        >At least this one tells you..
        Yes, your honesty is appreciated. I was not attacking you personally, just shocked that such a simple market dynamic was not taught as part of economics 101.

        As for articles in the Irish press, the list of potential writers who are (1) qualified to write about the subject and (2) not in the pocket of the government or a financial institution, is very short. Without looking very hard, a good candidate is Morgan Kelly’s 2006 explanation of why house prices would not have a soft landing. It’s essentially the same dynamic as you describe – excessive leverage causes a small blip to snowball into a market collapse, dragging down the price of all properties, good and bad. http://www.irishtimes.com/business/how-the-housing-corner-stones-of-our-economy-could-gointo-a-rapid-freefall-1.1042463

  5. StephenKenny

    What’s interesting is that this broad fall in asset prices implies that there’s been a significant fall in demand for the the assets, which implies that there is already a very significant global slowdown in demand for the goods that the assets are used for.

    This seems to contradict the ‘recovery’ and ‘interest rate tightening’ stories.

    • I puzzled over the interest rate thingy too. IIn an ordinary slowdown then all prices and interest rates drop. In extraordinary monetary collapse there is also hyper inflation and interest rates sore in the middle of the calamity.
      Ask 1930′s Germany and lately Zimbabwe.

      • patricia03

        But both those countries have/had sanctions imposed on them. The aim of sanctions is to collapse an economy. Shortage of goods was the problem. Any Country that has sanctions imposed on them will suffer hyperinflation and or a collapse of their money system. See Russia. No money in no money out. The SWIFT system is cancelled for them. Although I understand Russia is now using another system. An example of that right now here in New Zealand was when onions were exported to Cuba. The exporter had a devil of a time getting paid and the actual payment was delayed for months. No American Banks would accept the payment and in the end the money went through London.

    • StephenKenny

      The only argument might be that the financial services sector no longer has any real relation to the real economy, so while the financial commodity markets are crashing, the ‘real’ commodity markets are doing just fine.
      So, buying a copper contract from a bank says that copper is cheap, whereas actually trying to buy a 100 tons of real metal copper is very expensive. This might well be the case.
      This of course would beg the question of why we pay any attention at all to ‘copper contracts’ – ‘fiat copper’ – rather than to copper metal?

      • You are correct. The financial services sector has become a huge casino with bets on everything. Everything betted on is hedged by a counterparty who then hedges their position in turn and so it goes with a pyramid of bets stacked one on the other.

        One failure leads to the deck of cards collapsing. In rushes a central bank to hold it all together with huge injections of “reserves”. It will collapse and the longer it goes the bigger the mess.

        • The tragedy is that this financial mess so distorts the messages to the real economy that huge misallocations are made and the real economy fails too.

          also the people are now made to pay the debts of the gamblers as Ireland well knows as the national debt doubled over night.

      • michaelcoughlan

        “The only argument might be that the financial services sector no longer has any real relation to the real economy”

        Spot on Stephen. Max Keiser calls it market failure;

        https://www.youtube.com/watch?v=jhsk61x7z-o

        McWilliams himself wrote an article some time ago about how the European bond industry was decoupling from the underlying fundamentals of the european economy.

        Michael.

  6. Adelaide

    The consensus across the handful of credible and independent commentators that I subscribe to is 2015 will be the year of the ‘great collapse’. Which particular ‘snowflake’ causes that inevitable ‘avalanche’ is the remaining question open to speculation.

  7. My stamp collection

    I am holding WW2 Postal Stamp marked Deutschland Reich DM 5million

    Part of my hoard collected when I was 7/8 years old .

    Cigarette buts were more valuable then

  8. CAD is a commodity currency and is currently falling

    • To some degree but it is more rounded than just oil. (the largest exporter to the US) but also mining and forestry (could fail there too)
      including uranium, wheat, canola. All in all we are wealthy. In the 50′s and 60′s Canada’s central bank was fully owned by the government.Funds were issued without debt and interest and were used to pay for the St Lawrence seaway etc. The Canada Action Party would like to reactivate that finance scenario but few listen.

      Victoria is continually invaded by wealthy retirees and so prices are the 3rd highest in the nation and nary a commodity in sight. Nothing but consumption here. Well not quite. There is aviation,aircraft manufacturing, ship building, structural steel manufacturing, recycling, building and a lot more going on. Oh Tourism I nearly forgot. You must try some whale watching while here.

      Oh yes, we are told the Canadian banks are the soundest in the world. It is hard to know who to believe these days. Canadian insurance is big business too.

  9. michaelcoughlan

    Hi all,

    Since we are approaching Christmas and especially with all that has been happening in Russia there has never been a better time to revisit the story of the Nativity.

    No one has ever asked the obvious; Why was Mary when so heavily pregnant wandering around in the middle of the desert in the middle of the night in the middle of winter on the back of a donkey?

    Ans; Joseph was talking the two of them to complete a census call by the casear who needed to catch more citizens in his tax net after blowing a whole pile of money on circuses and property in Rome.

    So when the 3 wise men paid Hay-sous a visit what did the wisest of them bring? gold, frankincense and myrrh. Gold to use as currency for trade and Frankincense and myrrh which are hard assets. They are resins of various trees used to produce ointments which were valuable and can be traded.

    The moral; of the story is; Even if the head cases in charge go balubas so long as you have the skills to add value to valuable commodities and other assets and gold to trade with you will prosper monetary crises or not.

    The 3 wise men knew what they were doing all right.

  10. dwalsh

    Disappointing to see David goes along with the fiction or lie that Russia is invading Ukraine. If Russia was invading Ukraine there would be no Ukraine today. This myth is so clearly an illogical and impossible fiction and a lie that I am appalled David has swallowed it.

    In fact it is the USA and the EU and NATO that is invading Ukraine; and is tearing that country apart as a consequence.

    The USA and the EU and NATO have determined to take Ukraine away from the Russian sphere and have designated any Ukrainians who do not want or accept that decision as terrorists or pro-Russian insurgents, or even as Russian invaders.

    In other situations where it suited the geopolitical interests of the Washington Regime and its allies, the peoples of Crimea and East Ukraine would be considered pro-democracy freedom fighters.

    The fact that the peoples of East Ukraine and the Crimea have shown overwhelmingly and democratically that they do not accept the Western invasion and annexation of Ukraine is completely distorted and demonised by the Washington Regime and its allies and their corporate media cartel propaganda system.

    Who gives the USA and the EU and NATO the right to enforce their will in Ukraine?

    How would it be if Russia was investing billions in promoting anti-USA fascist groups in Mexico. What if Russia organised a fascist coup in Mexico and was sending in arms and supplies and planning to install missiles aimed at the USA?

    Europe is making a geopolitical strategic error of major historical scale in going along with the Washington Regime and its geopolitical aims of full spectrum domination of the planet (official Pentagon policy stated in their own documentation which can be downloaded from their own sites).

    Europe is in a pathetic state today. There is no leadership of integrity or vision. Not a single one. We are being ruled by corporate shills and bankers boys & girls. Capital has utterly usurped the political and the social order.

    The fact that so many have swallowed the lie and the myth of a Russian invasion of Ukraine is clear proof that we are presently living in Orwell’s 1984 dystopia.

    • michaelcoughlan

      ‘What if Russia organised a fascist coup in Mexico and was sending in arms and supplies and planning to install missiles aimed at the USA’

      No wonder Blather Obarasement is kissing cuban ass.

      Michael.

      • dwalsh

        Hello Michael
        what do you make of the USA/Cuba rapprochement?
        I must say I am cautious. I want to know why the Washington Regime is making this move at this particular time. I dont believe Mr Hope & Change’s rhetoric.

        • michaelcoughlan

          Blather Obarrasement is just covering his ass by denying putin an opportunity to put his missiles in Cuba to up the ante like in the 60′s. It cuts off putin’s opportunity to strengthen his hand when it comes to negotiations.

    • corkie

      I think the annexation of the Crimean peninsular qualifies as an invasion. Russia did that. Sending a few hoods out to cause trouble in street demonstrations is pretty low level in the invasion stakes but I suppose it qualifies. The US did that (or something similar). So maybe David point is correct. He didn’t say who was invading Ukraine, he just said it was easier to do that than defending the rouble.

      • dwalsh

        The Crimea at the time of the Western backed Kiev coup was an autonomous republic within a federal Ukraine with its own parliament. The Crimean people voted overwhelmingly (90%+) to join the Russian Federation. No Russian troops invaded. Crimea had/has been part of Russia for hundreds of years.

        David made it absolutely clear he is refering to Putin; who else would want to defend the ruble?

      • StephenKenny

        “Sending a few hoods out to cause trouble in street”. What a very peculiar thing to say.
        Just think about it. The idea that the US government would “send out a few hoods to cause trouble in the street” is in fact such an incredibly peculiar idea that it verges on being nearer ‘propaganda’ than anything else.

        The US & UK sponsored coup in the Ukraine is an established fact. The fact that the previous Ukrainian government didn’t use much force in countering the coup was interesting. There were continual blanket assurances from US & Western European governments & the media, that this was a popular ‘uprising’ against a violent and hated government, who were doing terrible things to the poor, innocent, protestors.

        The US installed government in Ukraine has since shown us how to use massive military force and a completely obedient western media, when dealing with any protesting part of the country.

        Had the previous Ukrainian government used this sort of force against the US & UK coup, they would probably still be in power.

  11. gcy_1980

    For me, the interesting thing with the financial markets is that it seems to be full of people who try to make money by understanding the real economy. They get this wrong and then the effect is that they damage the real economy. There is a couple of things about primary commodity prices that are accepted by economists. One is that exporters of these commodities are faced with issues around the terms of trade. These are usually the developing countries. Low relative income elasticity of demand against manufactured goods is a problem. Also a low price elasticity of demand. So any shift in demand or supply leads to volatile price swings. This leads to huge BOP problems, can be self-reinforcing through huge capital flows and is usually a disaster waiting to happen. happened in the 1970′s, 1980′s and 1990′s, especially when banks and investors started pumping money into these economies. Everything looks OK on paper but in reality, it is all a mess waiting to explode. Lately, here has been a belief that primary commodities are a good way for emerging markets and developing economies to go. the price can only go up. Chinese and Indian demand will see to that. But people forget history. Oil could only increase in value…all the nonsense about peak oil…another example of falling into the Malthusian trap of forgetting about technology…all doom and gloom…price going to go up forever….What happens?? The whole lot is based on nonsense ideas and all falls apart again….OK rant over…:)

  12. “”Look at it this way, the U.S. (the West) is facing the greatest potential margin call of all time. The entire system is a margin call waiting to happen. Less than 50% of the population supports a majority of the population. Some ungodly number of people in the U.S. live paycheck to paycheck and have no savings whatsoever. Real estate is completely levered, banks and brokers levered with all sorts of derivatives. State and local government finances are in disarray while the federal government is in debt beyond 100% of GDP …with admitted debt, 10 times over with future obligations. The Fed, for their part has become the biggest hedge fund in the world and have quintupled their balance sheet over 5 years …like I said, we await the biggest margin call of all time. Never forget this, the dollar has value ONLY because the debt underlying has “value,” a margin call will erase this in a panicked heartbeat!”" Bill Holter

    http://blog.milesfranklin.com/out-of-ammo-velocity-and-confidence-are-inverse

  13. http://www.alt-market.com/articles/2444-imf-now-ready-to-slam-the-door-on-the-us-and-the-dollar

    MF Now Ready To Slam The Door On The U.S. And The Dollar
    Wednesday, 17 December 2014 06:29 Brandon Smith

  14. May the housing boom continue!!!!

    Ireland:

    Irish central bank urged to ease mortgage restrictions: The FT reported that think-tank Economic and Social Research Institute was the latest and most influential critic of the central bank’s move to curb a mini house price bubble. It noted that the central bank said in October it would introduce macroprudential measures to cap the size of a mortgage to 3.5 times a borrowers’ income and up to 80% of the value of the property. The results are due to take effect from 1-Jan, but the central bank had indicated that it may delay the plans as it studies nearly 160 submissions urging a rethink on the measures.

    • michaelcoughlan

      from the link;

      “With regards to velocity, it is worth pointing out what is happening in Russia to illustrate a fallacy of main stream thought. As Jim Sinclair has tried to explain to anyone willing to listen, what comes our way in “dollar land” is a hyperinflation as a result of confidence breaking … a monetary event so to speak but one which results from human emotion. Western economists have incorrectly brainwashed the public into believing a hyperinflation can only be caused by “over printing”. This is ONLY one way, another way is when the currency itself loses confidence or credibility. Or, in the case of the ruble, loses its perceived “funding” (via energy revenues). Russia is in the midst of an early hyperinflation if the ruble continues to decline”

      Why don’t you read the link McWilliams and nmay be you will be one of the economists they are refering to who will stop talking through your arse about deflation.

      ichael.

  15. Pat Flannery

    David is right in that margin calls act as a brake on the markets but it only applies to a small section of the market. Most of the activity now takes place in the derivatives market where the concept of margin call does not apply. This is why Warren Buffet called them weapons of mass destruction. Until the markets find a way of reining in derivatives we will remain in the shadow of a financial mushroom cloud.

  16. Deco

    David,

    I remember once before when you told us that you do not write the headline for the article. That is provided by the newspaper editorial team.

    In this particular situation, the headline is completely in contradiction to the article.

    I am losing any remaining confidence in the Irish media, as I write this.

    Money makes the instructions in our world. And this has been particularly the since sine Reagan and Thatcher ponzified the economic system in their countries.

  17. Deco

    Surely the central bankers in Tokyo must be looking on this with massive envy. The BoJ has been trying for years to depreciate the value of the Japanese currency, and cannot do it. Even Venezuela can do something that seems to be beyond the capability of the Japanese authorities.

    [ written with a plentiful supply of irony ].

  18. Here is the defense of the Ruble.
    Best form of defense is to attack.
    Russia can destroy NATO without firing a shot.

    http://kingworldnews.com/paul-craig-roberts-russia-unleash-ultimate-black-swan-west/

  19. DB4545

    Tony check out Nassim Nicholas Taleb a Quant and former Wall Street trader. His risk management strategy is to hedge against a “black swan event” which is a totally unpredictable event(to rational minds) like 9/11 or the oil price collapsing. Anyone who has sold oil options without balanced hedging is facing wipeout. It’s this simple. You’re in a lottery syndicate that pools 100 Euro every week. You trust one person in the group to buy the tickets for each draw and hand over the cash. They calculate the odds and decide to trouser the cash instead of buying the ticket. 5200 a year income with the odd minor payout they calculate. The lottery numbers for the syndicate are drawn but no winning ticket has been bought to hedge the bet. That’s the position of some hedge funds now and the banks who have lent to them. Oil drives the Global economy. This will make the gold issue look like small change.

  20. DB4545

    Tony check out Nassim Nicholas Taleb a Quant and former Wall Street trader. His risk management strategy is to hedge against a “black swan event” which is a totally unpredictable event(to rational minds) like 9/11 or the oil price collapsing. Anyone who has sold oil options without balanced hedging is facing wipeout. It’s this simple. You’re in a lottery syndicate that pools 100 Euro every week. You trust one person in the group to buy the tickets for each draw and hand over the cash. They calculate the odds and decide to trouser the cash instead of buying the ticket. 5200 a year income with the odd minor payout they calculate. The lottery numbers for the syndicate are drawn but no winning ticket has been bought to hedge the bet. That’s the position of some hedge funds now and the banks who have lent to them. Oil drives the Global economy. This will make the gold issue look like small change. Interesting times.

    • I am not sure how one hedges against a black swan event as by definition it is an unknown that is suddenly manifest.

      A hedge is an insurance policy against a series of known possible events. Acts of god, war, civil insurrection etc are excluded from insurance policies.

      I read several entries on Taleb but am left with the impression he promotes himself and makes a pot of money doing it. I do not know enough about him to make a judgement.

      There are no set rules in place and so even if the hedge is properly placed there is no guarantee the counterparty will or can deliver. Therefore each counterparty in turn hedges its position and so it goes. Derivatives piled higher and higher upon each other until the original transaction is minuscule by comparison. Lunacy!!

      • DB4545

        He wasn’t claiming to be a genius he was just pointing out that most hedge funds aim to make money on small fluctuations in stock market prices. This works well most of the time and fund managers begin to think they’re infallible. Large fluctuations which occur with “black swan events” throw their algorithms and modelling sometimes with catastrophic results. In essence their models predict rational behaviour and a degree of certainty but unfortunately the real world isn’t always rational as we know.

    • As consistently stated, there is no such thing as a free market.

      The lower oil price (or the previous higher ones)is an example of a manipulated market. Likewise the stock market. Also the gold and precious metal markets as gold is the yard stick all else is measured against. This in particular regarding the manipulated currency values.

      The price of gold as measured in currencies is forced lower in order to fool all the people that inflation is not a problem. Inflation is defined as the devaluation of the currencies. (that is it takes more currency to purchase goods than it did a short while ago. ) Using a currency to measure the value of another currency is a false statistic as the standard (the US dollar) is constantly being debased.

      The value of gold is that it signals the market place that changes are afoot. However if the currencies are not showing the full inflation because of the manipulation then decisions are made that do not reflect reality. They reflect the image portrayed by the manipulators which is the image wanted.

      Oil is a factor in the economy but gold is the only real money. Oil is not money.

      “Aristotle says that money, as a common measure of everything, makes things commensurable and makes it possible to equalize them. He states that it is in the form of money, a substance that has a telos (purpose), that individuals have devised a unit that supplies a measure on the basis of which just exchange can take place. Aristotle thus maintains that everything can be expressed in the universal equivalent of money. He explains that money was introduced to satisfy the requirement that all items exchanged must be comparable in some way.

      Within such frame work, Aristotle defined the characteristics of a good form of money:

      1.) It must be durable. Money must stand the test of time and the elements. It must not fade, corrode, or change through time.

      2.) It must be portable. Money hold a high amount of ‘worth’ relative to its weight and size.

      3.) It must be divisible. Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics. An extension of this idea is that the item should be ‘fungible’. Dictionary.com describes fungible as:

      “(esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.”

      4.) It must have intrinsic value. This value of money should be independent of any other object and contained in the money itself.”
      —John Lee

      By this measurement gold will never look like small change.

  21. EU destroys personal choice and insists you have no rights to do as you wish.
    Food cannot be labeled as GM. Local government cannot stop GM food production.

    All gm crops are sprayed with herbicide. That is the reason they are modified, to resist the herbicide. That means all food will contain residue of the herbicide. Crops eaten by animals will contaminate the flesh. In turn the eaters of that flesh will be contaminated, or poisoned.

    Glycophate is the poison and known as Roundup. The diseases and illnesses attributed to Roundup are legion. Humanity is being steadily poisoned, disabled and deformed.

    Take your fill of the many articles here
    http://scholar.google.ca/scholar?q=mercola+and+glyphosate&hl=en&as_sdt=0&as_vis=1&oi=scholart&sa=X&ei=cEOXVKyJDIvlUrCrg6AL&ved=0CB0QgQMwAA

  22. DB4545

    I appreciate the symbolic value of gold but it doesn’t heat homes, or fuel planes trains and cars. In relation to markets being manipulated something is definitely amiss. Governments would normally use the fall in fuel prices as an opportunity to ramp up taxation levels on petrol and diesel and they haven’t. The price of gold and oil is usually the canary in the coalmine in relation to world events and it’s heading South. Given the tensions in the world the normal reaction would be for gold and oil to spike upwards.Strange times.

  23. joe hack

    “Why it’s easier to invade Ukraine than defend the Rouble!”

    Since it’s unlikely that the USA would want to defend the Rouble e -easy or otherwise -you then must mean that Russia intends to invade “the Ukraine“instead of saving the Rouble.

    I just can’t see Russia invading “the Ukraine” – easy or otherwise…I expect they will “defend” the Rouble against this economic war perpetrated by “the west”

  24. hmehedi860

    Hello! Thank you for your article. I’d like to try to compare it to my previous experience of learning Ukrainian through Skype on online classes. I did around ten conversations over Skype with a native speaker from http://preply.com/en/ukrainian-by-skype. And I was pretty satisfied with their Quality. I think they have a strong teaching quality, practicing their course curriculum now I can speak Ukrainian easily like a native they also provide personal tutors, but I Want to try another option.

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