READER THOUGHTS ON “THE FED & SDR DENOMINATED DERIVATIVES”
Matt McBride (@MattMhmmcbride) JANUARY 15, 2015 AT 9:59 PM Hi JC, Do you see a “controlled” derivatives explosion as the only way of clearing out the old to make way for the new SDR and SDR based derivatives?
I cannot fathom a way of unwinding the trillions in unstable USD based derivatives that does not cause some major pain for at least 2-3 TBTFs (Citigroup?)
JC Collins JANUARY 15, 2015 AT 10:15 PM Like QE was a liquidity exchange, this could look something like a derivative exchange, with the contracts fragmented into high risk and low risk segments. The process could involve clearing the low risk and consolidating the high risk.
Matt McBride (@MattMhmmcbride) JANUARY 15, 2015 AT 10:52 PM Great point!
A USD and derivatives substitution. With the acceleration of current problems popping up, lets hope these systems are ready to implement sooner than later.
If this could be achieved without major confidence loss it would save a lot of destruction (and bloodshed) and allow for a faster resurgence from the ashes. Thanks again for the work you are doing on this uncovered topic. Your foresight and ability to connect the dots it astounding.
Matt McBride (@MattMhmmcbride) JANUARY 15, 2015 AT 10:01 PM
Citi seems to be taking on weight while the others are lightening up
matt (@speedspirit42) JANUARY 15, 2015 AT 10:49 PM Can you explain the potential derivative bomb associated with the new lows in oil prices and how switching to SDR as an international unit of account eliminates this wild west risk taking and loss.
I do not pretend to understand the derivative market except that it seems like it was a ponzi scheme and those who got in first did really well and now it can destroy the financial markets of the world unless they delay the fuse???
Peaknikmicki JANUARY 16, 2015 AT 1:22 AM With a risk of having missed something, with FDIC now guaranteeing derivatives doesn’t that dramatically increase the risk of a total USD collapse?
If even a few percentages of the total nominal values need to be covered then it will lead to unprecedented money printing to cover. No?
Or is the bet that somehow the derivatives can be cancelled out or defaulted on? I don’t see how SDR’s can change this situation as surely IMF/SDR cannot take on the liabilities of other parties.
JC Collins JANUARY 16, 2015 AT 1:29 AM The high risk unclearable segments of the derivatives could be guaranteed. The derivatives being denominated in SDR doesn’t necessarily mean a transfer of liability to the IMF. The actual clearing would be the responsibility of the clearing house, such as the Fed.
The “uncleared” liabilities could be transferred to the FDIC. Howe much that liability would be depends on the derivative contract.
Bullion Baron (@BullionBaron) JANUARY 16, 2015 AT 1:26 AM I’d be interested in your take on Christine Lagarde being left in the dark when the SNB unpegged their currency:
It really doesn’t seem like the sort of thing that would happen (head of the IMF not informed of significant changes) if we are about to see the IMF reimagining and taking control of the international monetary system…
JC Collins JANUARY 16, 2015 AT 1:31 AM She couldn’t very well admit forehand knowledge as the institution needs to remain impartial.
Peaknikmicki JANUARY 16, 2015 AT 2:00 AM Pretending to not have foreknowledge doesn’t make you impartial. Admitting foreknowledge can also mean impartiality. Perhaps even more so if IMF is seen to allow the nations to make their own decision. It is hard to give a proper answer this early though.
Daneackerman JANUARY 16, 2015 AT 10:34 AM She may not have had to pretend at all. Perhaps those who are really calling the shots just never informed her or anyone for that matter. The element of surprise can be used as a great allie.
Bullion Baron (@BullionBaron) JANUARY 16, 2015 AT 10:58 AM She didn’t need to admit forehand knowledge, you’d just think she’d have presented a more united front.
She basically threw Governor Jordan under the bus, suggesting he hadn’t communicated with other central banks or the IMF (comments that were not needed, she volunteered them).
Just doesn’t smell like the level of co-operation you’d expect with the huge changes you are suggesting start over the next 12 months, but I’ll watch with interest.
Len Holliday JANUARY 16, 2015 AT 6:51 AM I think what happened today once again proves that nature will take it’s course no matter what! Point is, the financial markets going up or down have always been and always will be driven by supply and demand, period!
If you do not believe that, then just try by putting your money in front of a freight train(supply) when there is no buying(demand) and let’s see what happens to it!
If you do not believe that, just ask the Hunt Brother’s about their 1981 silver trade! They thought they had enough money to control the silver market so they got in front of the train!
How did that work out for them? NOT TO GOOD! I am a 54-year old retired stockbroker of 20+ years and over the years I have watched person after person have to learn this concept over again and again as they would continue to loss their money as the markets(supply) took it from them!
And that is what happened today once again in the currency markets around the world in reaction to the Swiss situation! The true reality of supply and demand in that market took over!
Over the years I have even watched the Fed go in and buy or sell a certain market in order to stop or start a certain move up or down and it would only last for a very short while before supply and demand would then take the market to where it was going to start with, even with their money and power getting themselves in front of the train did not work! Nature once again, took it’s course!
And with regard to the U.S. Dollar; Nature once again will take it’s course! The U.S. Dollar is a Fiat Currency backed by our word that a pay day will come while the rest of the world for the past 12-years or so has been doing something to back-up their on currency!
And in case you do not know what that is, just take a look at the price of gold 12-years ago vs. now;
Then, it becomes real clear what they have been doing to back their currency and if you think for one minute the U.S. Dollar will continue to be strong(buying) with all the world going to sell(supply) to equal up all the gold that has been purchased over the past 12-years, then you are badly mistaken! DO NOT GET IN FRONT OF THAT TRAIN!
George JANUARY 16, 2015 AT 11:00 AM How does this new system protect Japan from collapse? The numbers aren’t looking good these days and if it goes down, surely others are to follow?
Michael MacDonald JANUARY 16, 2015 AT 3:02 PM What does this tell you about Mr. Greenspan? He was very close friends with Rand… Hmmm… Could he really be covert? Remember his recent comments about gold? And now this… Blast from the long past…
Gold and Economic Freedom by Alan Greenspan
Published in Ayn Rand’s “Objectivist” newsletter in 1966, and reprinted in her book, Capitalism: The Unknown Ideal, in 1967. http://www.constitution.org/mon/greenspan_gold.htm Thoughts anyone???
mag51 JANUARY 16, 2015 AT 5:20 PM Thank you for the link M.M. The last two paragraphs of the article sum it all up. In ‘Atlas Shrugged’ the character Midas conducts business in their secret town in gold only. Seems so simple……….
casmar5503 JANUARY 16, 2015 AT 6:26 PM So are you still thinking a 30-50% drop in the dollars value???
JC Collins JANUARY 16, 2015 AT 6:48 PM In the 30% range. Keep in mind that the dollar is appreciating right now, which is causing the systemic imbalances which are spreading internationally.
How the depreciation will look against other currencies is hard to fully determine.
Factor in inflation/deflation and import tariffs, and the average American may not even notice that much of a change. With an increase in domestic investment, the US could see a new industrialization on par with the post war infrastructure development.
It’s not all the doom and gloom that others predict. There are always winner and losers, and there will be in this transition as well. Like Y2K, people will wake up one day and realize it wasn’t as bad as they had feared.
nanook73 JANUARY 16, 2015 AT 7:17 PM JC, Just curious as to your thoughts on the future of oil prices in amongst this chaos? Lots of theories out there – I’m an outsider looking in so just wondering what your perspective is? Cheers, Nanook
JC Collins JANUARY 16, 2015 AT 7:30 PM It will be in the $75 range. Of course, we are likely to see it denominated in SDR, so however many SDR that turns out to be. The range is beneficial for both producers and consumers.
nanook73 JANUARY 16, 2015 AT 7:39 PM Is this enough to make tar/oil sands profitable? Just wondering because if it isn’t this would greatly influence the value of our dollar in an SDR basket if part of its weighting is in our ability to move raw resources to market…. the trouble with being a one trick pony type of economy….
JC Collins JANUARY 16, 2015 AT 7:53 PM The cost reductions taking place right now in the oil sands will reduce the cost per barrel to produce.
The large oil companies, like Suncor, CNRL, etc.., are laying off thousands of workers and reducing the capex budgets by billions and the operating budgets by hundreds of millions.
The deflation will push costs down across the board and service providers to the mines and refineries are being mandated to reduce their own costs to reflect this reality. All of this reduces the cost per barrel.
When you add in the Keystone XL Pipeline, it will reduce transportation costs by another $10 per barrel, from the higher transport costs associated with rail.
This is the reason for the Keystone push right out of the gate with the new House. Oil sands will be sustainable and profitable with this arrangement.
As a foot note to the pre-planning on this transition, the large oil companies in the oil sands, such as Suncor and Shell, held strategy sessions a year ago and began implementing their cost reduction programs at that time. They have been preparing for this downturn in oil for the last year. What does that tell you?
nanook73 JANUARY 16, 2015 AT 9:03 PM JC write: “What does this tell you?”
Plenty – but nothing really shocks me these days – sadly. Nanook
Lorne Spence JANUARY 16, 2015 AT 7:58 PM Would a depreciation of the USD not correspond to a relative increase in the value of gold? Given the movements in the Juniors lately I would suspect this could be the case.
JC Collins JANUARY 16, 2015 AT 8:15 PM The dollar is appreciating lately and so is gold. The value of gold could very will be fixed and included in the SDR basket for stability. There is not enough information available to determine how this would look though.
Joe Russo (@ElliottWaveTech) JANUARY 16, 2015 AT 11:37 PM I just can’t fathom how shifting concentrations of centralized power to an unaccountable global body to oversee the world’s monetary system can be a net positive over the long haul. I am in full agreement however that the dollar as a unit of account shall remain vital in several regards.