We are about to Witness the Death of the EU – Hold on to your Hats!
This is my first post on Kipper Central so I am not going to hold back.
I gave NF my vocal support in around 2005 through personal emails and joined the party the day that David Cameron called a 3-line whip during a debate on EU (2011) where Jacob Rees-Mogg first shone a bright light on the threat to democracy from Europe. Things have played out as many UKIP and Old Tories have predicted. My families (Conservative) political connections go back some 500 years when Hoblyn’s occupied The Stannary & latterly Westminster ; a forebear, Robert Hoblyn MP Bristol (Con) was once described as the most insignificant MP in the House by a Liberal for warning about the dangers of scaling back defence. Within a few years, he was proved right. One thing I have learned from school (I’m afraid I did no work whatsoever) and working on the Stock Exchange is that history has a habit of repeating itself. During this great debt-fuelled bull market where borrowers are lauded at the expense of investors & savers and speculators are applauded and worshipped by the MSM and themselves I am reminded of that old Stock Exchange maxim that has been handed down to me through generations. There is NO SUCH THING AS AN EXPERT. Yet today thinkers and doers are ignored and speculators and celebrities are feted everywhere for doing very little and getting just about everything wrong. Of course in a truly democratic free & fair market everything should balance out equally in the end but the Federal Reserve and the banksters who thrive and suckle from this uncontrolled monetary heaven have created a monster that shortly surely will hit the buffers.
I predicted the 2007-2008 crisis like a few others but the next crisis will dwarf the horrors of Bear Stearns, Lehman Bros and the other forgotten casualties. Going into that last crisis the globe had around $25-30 trillion of debt, today it is around a staggering $60 trillion. The MSM & financial journos shrug this off with growth targets and examples of corporate brilliance. The hunger at board level is perhaps personified by Wells Fargo; it’s not the only bank with a robber baron culture sad to say. No, the elephant in the room is my old chestnut. I refer to it often as the ‘D’ word on Twitter. Usually, people respond by thinking I am referring to DEBT but the ‘D’ I am referring is DERIVATIVES.
For those who followed my previous blog on Blogspot – Hoblyn & King (replicated on the Enterprise Britain blog too) the reader may have read the following in June 2007;-
Trading bullion or cash as I once did or even shares as I do now is real whereas trading a basket of derivatives surrounding aesthetic instruments that don’t exist is tantamount to disaster. But then a global $370 trillion exposure in derivatives is proof indeed that I may be out of touch as indeed Warren Buffett might be…
That derivative figure has doubled to around $700-750 trillion. For those who are unaware of what a derivative is think a option warrant, contango, CDS, CDO…..oh yes Goldman Sachs and JP Morgan have created a whole new language in synthetics that often baffles their own boffins. What chance do regulators or ordinary investors have in a world of derivatives and HFT (High-Frequency Trading) where nano-seconds makes all the difference ? On 5th November 2008 I wrote;-
There are many observers who have felt that the billions of $, £’s, Yen & Euros that have been raised would have been better deployed to stimulating core industries/sectors rather than bailing out the very banks who often or not catalysed this crisis of confidence. With balance sheets remaining questionable with off-balance sheet positions (debts?) remaining unquantifiable (the derivatives tail is now estimated at US$500 trillion) some market commentators have suggested that these banks didn’t need saving. Arguably new stock banks should have been created but instead, governments have suggested that regulations were weak and have demanded more regulation thus making life more difficult for themselves, the banks and broking houses as well as investors going forward. I would argue that less regulation is needed allowing for new organisations to be formulated by entrepreneurs from any ongoing fallout but I fear that the opposite will happen (Sarkozy has called for more regulation along with other more socialist powermongers).
On 5th October 2011 I wrote;-
Of course, no-one knows if a Lehman mark II is imminent but my feeling is that the derivatives timebomb is ticking louder. How much is the global exposure in derivatives? Well it’s estimated at $500-600 trillion via the clearing process but so much is synthetic (socially and financially useless in my opinion) and it doesn’t help that the Bank for Int’l Settlements based in Basle is not exactly transparent with the state of global derivatives against a backdrop of friction amongst the global clearers which is coming to a head according to the FT. So it would appear that the problems now surfacing in the global clearance of derivatives is not that different to the frictions appearing in the EU doctrine as millions are being asked to pay for bailouts. The transaction tax (“tobin”) imposed by the Eurozone can only damage markets and investors hopes in the medium to long term. What perhaps is more alarming is that there are clear divisions between politicians, regulators, central bankers and economists who all appear to be acting in a cartel against the wisdom of markets. This does not bode well.
So we arrive today as Deutsche Bank’s derivatives book is coming under scrutiny. Billions of losses are mounting and the global banking system and the German Government have simply nowhere to go. The ECB is paralysed, as is the IMF, and those at Goldman’s & JP Morgan must be wondering how they can alleviate the drill down that will occur. When a derivative goes wrong it has UNLIMITED downside in many instances. Since nobody knows the exact nature of the portfolio risk it’s impossible to calculate so I’ll leave you with this thought.
Deutsche Bank is at the heart of the German economy. It is the dominant bank within the EU. It has the biggest derivatives position in the world. Around $70 TRILLION at the last count but this figure could already be rising as losses accelerate and morph across global markets. Deutsche Bank is the engine room of the EU project.
I had a colleague in 1987 who wrote options on what was then the LTOM (London Traded Options Market). Entering October he & his clients had a £250,000 commitment or exposure. When the market corrected (around 20%) on 19th Oct the margin calls and losses amounted to £2.5million, roughly 10:1. He and his clients were lucky. Gain and loss ratios in derivatives can sometimes be in multiples of 100.
The City of London is at the epicentre of global derivatives. GMT means that London can trade for Tokyo, Beijing, Hong Kong, Singapore, Dubai, Moscow during the same day as New York. If Deutsche blows the City will take a lot of the flak as well as the brokerage as the remaining 90% of global derivatives use London to adjust positions. Some losses will be in TRILLIONS, especially if markets correct around 30-70% as some quiet commentators predict.
We are about to witness the death of the EU. Europe will need resuscitation once more but it will be too late for the failed Central Bank QE experiment that has spiralled under a failed REGULATORY doctrine. Hold on to your hats !
More on REGULATION in later blogs if the internet is still operational.