Dr. Michael Burry saw the mortgage crisis coming from miles away. He was featured in Michael Lewis’ “The Big Short”, along with others who also saw the debacle coming. This year, Dr. Burry was keynote speaker at the 2012 UCLA Dept of Economics Commencement. It’s a speech well worth listening to. Dr. Burry is quite pessimistic about the future of U.S. as the debt-to-GDP ratio rises to levels higher than that of Greece. And the problems are no longer in the future, he says, but they have already begun to manifest themselves throughout society.

Perhaps most shocking to some (unless you’ve already gotten used to the TSA groping children)… he describes what happened to him after he wrote a New York Times op-ed criticizing the actions of the government and the Federal Reserve ( I Saw the Crisis Coming. Why Didn’t the Fed? – NY Times ). Within weeks all 6 of his funds were audited, he was compelled to provide Congress with every email he wrote since 2003, and the FBI showed up at his door. He wasted thousands of hours and over $1 million in legal/audit fees defending himself against a frivolous witch hunt against someone with clout who dared stand up and say “I saw it, why didn’t you?”

While not one bankster has ended up in jail, banks have collectively been given $$ TRILLIONS more of our money. And instead of consulting with truly smart and insightful people like Burry (instead of the crooked bankers themselves) as to how such events can be avoided in the future, our government offensively attacks those who predicted the crisis well in advance.  Instead of seeing people like Burry as able to offer true wisdom and insight, they treat him as if he had somehow played a part in masterminding all the pervasive and massively over-leveraged mortgage fraud that went on.

Another great quote from his speech: “As it turns out, information is not perfect, volatility does not define risk, markets are not efficient, the individual is adaptable.”

As a final note, here’s another great bit of Burry’s insights I’ve kept on hand since reading “The Big Short“:

‘ In Dr. Mike Burry’s first year in business, he grappled briefly with the social dimension of running money. “Generally you don’t raise any money unless you have a good meeting with people,” he said, “and generally I don’t want to be around people. And people who are with me generally figure that out.” He went to a conference thrown by Bank of America to introduce new fund managers to wealthy investors, and those who attended figured that out. He gave a talk in which he argued that the way they measured risk was completely idiotic. They measured risk by volatility: how much a stock or bond happened to have jumped around in the past few years. Real risk was not volatility; real risk was stupid investment decisions. “By and large,” he later put it, “the wealthiest of the wealthy and their representatives have accepted that most managers are average, and the better ones are able to achieve average returns while exhibiting below-average volatility. By this logic a dollar selling for fifty cents one day, sixty cents the next day, and forty cents the next somehow becomes worth less than a dollar selling for fifty cents all three days. I would argue that the ability to buy at forty cents presents opportunity, not risk, and that the dollar is still worth a dollar.” He was greeted by silence and ate lunch alone. He sat at one of the big round tables just watching the people at the other tables happily jabber away. ‘

In late 2011, once the market bounced off its early October lows, there was increasing chatter over how it’s probably too early for a real full-blown European debt crisis at that point in time, and how the “powers that be” would likely run the market higher into the new year.  But, the real “tell” would be how the markets behaved come the new year, and that’s when all hell would likely break loose all over again.  I too began to think that while the rest of 2011 may lead to a good bounce in the markets, early 2012 could bring back some real turmoil.

Then a thought struck me.  Between all the blog posts, newspapers, and television media pundits calling for a “let’s see how January goes” moment – hey, even I myself was thinking the same thing…  What if, with all of us worrying over that same possibility, January turned out just fine – a perfect “non-event”?  And heck, even Ben Bernanke was probably worried about the new year, and we all know what that leads to: more cheap money and credit would likely be dumped right back into the markets at the first hint of trouble.

So as 2011 came to a close, while I did sell a few positions just in case, I decided to leave most of my longer-term positions as is.  And, while hindsight is always 20/20, that did turn out to be a great decision.  Of course, we never know for sure, and that’s why traders and investors must consistently practice sound risk management.  One must always protect against the times we miss.  And it not only serves to protect and preserve your bankroll, but it also helps provide the clarity and peace of mind necessary – an edge in itself – to properly consider and evaluate the information available to you. Worrying if your over-leveraged position might blow up in your face is not going to help you make a smart decision.

Traders and investors alike must always be open to taking every piece of relevant information into consideration, including our own preconceived notions and biases.  As Ray Dalio of Bridgewater Associates once said “I constantly want to know what I don’t know.  I want to know when I am wrong.  And it helps when someone points it out.”  While it certainly helps if someone else points it out, we can also objectively look at our own thought process, feelings, and emotions and consider how they too may be wrong or dangerously biased.  This in itself becomes part of a valid trading edge.  Everything counts, and we are often our own worst enemy in most endeavors we pursue.  As in playing chess or poker, those players who patiently take a step back in order to “see the bigger picture” and contemplate the best moves will, in the long-run, always triumph over those less savvy players just itching to make a move.

We should always ask ourselves what do other traders think they know.  What are they worried about or afraid of and to what extent?  Am I starting to feel worried or nervous myself, and are these thoughts rational and based on sound reasoning?  There was a great line in the movie Margin Call when CEO Tuld (played by Jeremy Irons) says “It’s not panicking if you’re the first one out the door.”  Granted, no one (and no firm) should ever be leveraged to that extent in the first place, but from his “clear” perspective the mortgage game was up.  And you certainly don’t want to be the one panicking out at the bottom of a move, with or without margin calls over your head.

Am I afraid that if don’t buy some stock tanking like a “falling knife” right now, I’ll miss the huge bounce coming right around the corner?  Is it possible many other traders are thinking the same way?  The reality is that it’s rarely “too late” to get a better price when buying into a crashing stock.  When the price action settles down, stabilizes, and starts to rebound, the stock will probably still be priced below your initial entry.  Sometimes our own feelings can give us strong clues as to what the “crowd” is thinking as well.  There was no need to predict ahead of time that October 4^th, 2011 would be the low of the last crisis and panic.  However, through awareness of our own feelings, astute observation into the collective thoughts of others, and by watching the price action in relation to the current headlines, we are continually provided with clues as to what is more likely to happen next.  For example, each time new headlines appeared about Greece and its debt problems, the chatter they generated seemed to lead to increasingly complacent market action and behavior.  There would be short-lived dips that would quickly recover, as if no one really cared any more.

And more recently, how has the market reacted as we’re hitting new multi-year highs?  Ironically, the VIX (fear) index (and even more so, the publicly traded VXX index based on the VIX futures) has been acting more fearful of a potential coming crash the higher the market goes.  Markets don’t generally crash right after making new highs, unless they’ve just gone through a high-volume blow-off top.  I recently read a study analyzing future market behavior when there are strong upward moves in both the VIX/VXX and the overall market in the same day.  The study showed that it has lead to even stronger upward price action in the near future.  And so far in 2012, that’s exactly how things have played out in the market.  But human behavior is not rational, and memory of the recent volatile past is still imprinted in traders’ minds.  So with each new high in the market, traders buy the VIX products expecting a crash that never materializes, and are then hit over the head with some of the highest levels of contango (the huge cost of rolling over current futures and options contracts to the next month) the VIX market has ever experienced.  And of course, traders are also greeted with another leg up in the market as well.  Never has it been easier for me to explain or visualize the term “climbing a wall of worry”.

In reality, it is the unexpected shocks that lead to the most “real” fear.  Especially where credit and leverage is concerned, it is these quick shocks that are most likely to catch firms (such as MF Global) unprepared and caught with their pants down.  But the more time that goes by with an event in the forefront, the longer the world has to deal with it, adjust by preparing for the worst, and “get used to” the new norm.  Just remember back to the Japanese nuclear crisis, the BP oil spill, or even more recently, the fears over a massively understated Greek CDS credit event once the ISDA declared the Greek bond “re-pricing” a credit event.  Banks, governments, and central banks have now had upwards of eight months to deal with the possibility of messy CDS defaults.  While there were some pundits calling for the possibility of three trillion dollars worth of losses versus the three or so billion claimed, it was likely that “the powers that be” had all the time they needed to deal with these issues.  And, believe it or not, the ISDA CDS auction also came to pass without incident.  That’s not to say there aren’t plenty of roaches crawling around everywhere.  But just as Countrywide Financial and Morgan Stanley were rolled into Bank of America to perhaps conceal a much worst debacle in the sub-prime mortgage market, the “powers that be” have likely had enough time to take similar measures to deal with any more potential blow-ups in the Greek bond market (well, at least for the time being).

In conclusion, always consider all the information available to you, be aware of what you don’t know, and consider where you might be flat-out wrong.  Seek to develop the focus and patience to position yourself in the best possible way, as opposed to merely trying to capture the next small wiggle.  Instead of missing out or being incorrectly positioned, you may provide yourself a much better chance to capture a nice chunk of the real move about to appear just around the bend.

Interview with Trends Research founder Gerald Celente, who had his own six figure gold investment account completely looted by MF Global‘s chapter 11 trustees, and he is fighting to get it back. Also interesting is how certain higher-profile clients such as the Koch brothers and others clearly must have known of the cratering positions and imminent collapse of MF Global, as $$billions of dollars of accounts were “coincidentally” withdrawn just before the MF “house of cards” collapsed.

I don’t believe that people truly understand the ramifications of what has happened over at MF Global.  People still seem to believe that clients who had money with MF were basically gamblers and “should have known better” by placing their money with “more secure” entities such as Interactive Brokers.  That’s not to say Interactive Brokers is not secure (especially as they “seem” to practice extremely sound risk management). But what happens when one of their banks or counterparties also decides to “waive” their account holders’ rights? And what exactly would have given customers of MF any less reason to believe that MF Global would be any less secure, especially since the Federal Reserve granted them “Primary Dealer” status last year? Regulations are very strict on “segregated funds”.  Those funds “should” actually be “SAFER” than a straight-up bank account (because the funds should generally be locked away at either the CME as margin or sitting in Treasury Bills so the banks can’t even lend that money out in REPO markets).  If an Occupy Wall Street protester stole a sandwich, they’d probably be thrown in jail for 5 years.  Jon Corzine recks New Jersey, and a year later, wrecks MF Global and steals HUNDREDS of MILLIONS from 150,000+ client accounts to cover more reckless gambling debts, and he’ll probably end up being the next secretary of the treasury.  This guy should be hanged and held up to the standards of the Hammurabi Code (If a builder build a house for some one, and does not construct it properly, and the house which he built fall in and kill its owner, then that builder shall be put to death). If such a “code” were implemented, I’d bet such horrendous thefts and shenanigans would all but disappear. Instead, we have banks stealing $$BILLIONS from clients through cockamamie schemes, then paying $100 MILLION to the SEC without admitting or denying guilt while they pocket the rest, still leaving the clients/investors out most if not all of their losses. This is likely the tip of the iceberg, as there is no way to know how many other firms may have also made similarly reckless bets with client funds (or are unknowingly directly connected to others that do).

To help clarify what this really means, here is the “Safety of Funds” assertions by two reputable futures clearing firms:

(DormanTrading) “The funds in your account with Dorman are held as “Customer Segregated” funds. Our principal bank is Harris, NA, a subsidiary of BMO Financial Group of Toronto Canada. The segregated funds that Dorman holds at Harris, are primarily invested in US Treasury Bills, with the remainder in cash or deposited with the Chicago Mercantile Exchange as margin deposits. The Treasury Bills at Harris are specifically identified to Dorman and on Dorman’s books they are specifically identified to those accounts that have asked us to invest their funds.

The segregated account structure of your futures trading account protects you from suffering a loss, should your broker, your clearing firm, Dorman, or Harris file for bankruptcy. This segregated structure means that your funds on deposit are not subject to any offset, indebtedness, obligation, or the liabilities of any entity besides the customers themselves. These regulations are in place so that neither your clearing firm, Dorman, nor their bank Harris can dip into the customer segregated funds to offset losses elsewhere.” – Dorman Trading Safety of Funds

(RCG-Direct) “Pursuant to the Commodity Exchange Act and Commodity Futures Trading Commission (CFTC) regulations, Rosenthal Collins Group LLC (RCG), a Futures Commission Merchant (FCM), is required to treat all customers’ money, securities and other property received to margin, guarantee or secure futures or options on futures trades, as customer property. With regard to futures and options on futures accounts, RCG is required to account separately for and segregate customer money, securities and property and not to commingle those assets with RCG’s own operating assets. Customers’ segregated assets cannot be used to margin any other person’s trades. These segregation requirements apply to futures and options trades on exchanges located in the United States.” – Rosenthal Collins Group Customer Protection

Understanding Big Money, Banks, and the REPO Market…

(MartinArmstrong) “When you deal in REAL money, there is a problem. How do you store it? You can’t just put a billion on deposit at a bank. They will sell it every night and don’t have to tell you. If the REPO market blows up and you go to the bank and say I want my billion, they lost it, and so you turn to FDIC to collect your $100,000. Right! The ONLY way to park serious money is in treasuries.” – Will a Downgrade of USA FROM AAA Really Mean Anything? (MartinArmstrong)

(PeterBrandt) “According to the Commodity Exchange Act (the overarching law governing futures trading) customer funds at futures commission merchants ‘shall not be commingled with the funds of such commission merchant or be used to margin or guarantee the trades or contracts…of any customer or person other than the one for whom the same are held.’ CFTC Regulation 1.25 provides that:

‘No futures commission merchant and no clearing organization shall invest customer funds except in obligations of the United States, in general obligations of any State or of any political subdivision thereof, or in obligations fully guaranteed as to principal and interest by the United States. Such investments shall be made through an account or accounts used for the deposit of customer funds and proceeds from any sale of such obligations shall be re-deposited in such account or accounts.’ ” – MF Global: Proof that the U.S. government is not able or willing to protect investors (PeterBrandt)

(Barnhardt.biz) “I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.”

“I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. ..  I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.” – from Ann Barnhardt’s Client Letter (BCM HAS CEASED OPERATIONS), complete letter follows below…

(TheMarketTicker) “The reason they got caught is the same reason I would have gotten caught if I had been clearing through MF Global: Despite being around the markets since well before the 2000 crash and having successfully negotiated that and the 2008 mess everyone has believed, right up until MF blew up, that customer funds were in fact segregated and thus this risk would never occur. Simply put everyone has now discovered that this assumption is wrong. .. Nothing that has come out of the CME, the SEC or Washington DC that has restored my confidence that MF Global is, in fact, a one-off situation.  In point of fact The Fed is now requiring margin on certain repo transactions where they never did before, implying that there may well be additional snakes in the grass and additional unrecognized and intentionally hidden risks of this sort.”

Full Story: Oh Oh. “Regulated” Derivative Markets About To Blow Up? (TheMarketTicker)

______________________________________________________________________

Entire Letter from Ann Barnhardt to her IBB / Commercial Hedging Clients  (source: http://barnhardt.biz):

BCM HAS CEASED OPERATIONS

Posted by Ann Barnhardt – November 17, AD 2011 10:27 AM MST

Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

The futures markets are very highly-leveraged and thus require an exceptionally firm base upon which to function. That base was the sacrosanct segregation of customer funds from clearing firm capital, with additional emergency financial backing provided by the exchanges themselves. Up until a few weeks ago, that base existed, and had worked flawlessly. Firms came and went, with some imploding in spectacular fashion. Whenever a firm failure happened, the customer funds were intact and the exchanges would step in to backstop everything and keep customers 100% liquid – even as their clearing firm collapsed and was quickly replaced by another firm within the system.

Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem “complex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.

I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses. I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.

Perhaps the most ominous dynamic that I have yet heard of in regards to this mess is that of the risk of potential CLAWBACK actions. For those who do not know, “clawback” is the process by which a bankruptcy trustee is legally permitted to re-seize assets that left a bankrupt entity in the time period immediately preceding the entity’s collapse. So, using the MF Global customers as an example, any funds that were withdrawn from MFG accounts in the run-up to the collapse, either because of suspicions the customer may have had about MFG from, say, watching the company’s bond yields rise sharply, or from purely organic day-to-day withdrawls, the bankruptcy trustee COULD initiate action to “clawback” those funds. As a hedge broker, this makes my blood run cold. Generally, as the markets move in favor of a hedge position and equity builds in a client’s account, that excess equity is sent back to the customer who then uses that equity to offset cash market transactions OR to pay down a revolving line of credit. Even the possibility that a customer could be penalized and additionally raped AGAIN via a clawback action after already having their customer funds stolen is simply villainous. While there has been no open indication of clawback actions being initiated by the MF Global trustee, I have been told that it is a possibility.

And so, to the very unpleasant crux of the matter. The futures and options markets are no longer viable. It is my recommendation that ALL customers withdraw from all of the markets as soon as possible so that they have the best chance of protecting themselves and their equity. The system is no longer functioning with integrity and is suicidally risk-laden. The rule of law is non-existent, instead replaced with godless, criminal political cronyism.

Remember, derivatives contracts are NOT NECESSARY in the commodities markets. The cash commodity itself is the underlying reality and is not dependent on the futures or options markets. Many people seem to have gotten that backwards over the past decades. From Abel the animal husbandman up until the year 1964, there were no cattle futures contracts at all, and no options contracts until 1984, and yet the cash cattle markets got along just fine.

Finally, I will not, under any circumstance, consider reforming and re-opening Barnhardt Capital Management, or any other iteration of a brokerage business, until Barack Obama has been removed from office AND the government of the United States has been sufficiently reformed and repopulated so as to engender my total and complete confidence in the government, its adherence to and enforcement of the rule of law, and in its competent and just regulatory oversight of any commodities markets that may reform. So long as the government remains criminal, it would serve no purpose whatsoever to attempt to rebuild the futures industry or my firm, because in a lawless environment, the same thievery and fraud would simply happen again, and the criminals would go unpunished, sheltered by the criminal oligarchy.

To my clients, who literally TO THE MAN agreed with my assessment of the situation, and were relieved to be exiting the markets, and many whom I now suspect stayed in the markets as long as they did only out of personal loyalty to me, I can only say thank you for the honor and pleasure of serving you over these last years, with some of my clients having been with me for over twelve years. I will continue to blog at Barnhardt.biz, which will be subtly re-skinned soon, and will continue my cattle marketing consultation business. I will still be here in the office, answering my phones, with the same phone numbers. Alas, my retirement came a few years earlier than I had anticipated, but there was no possible way to continue given the inevitability of the collapse of the global financial markets, the overthrow of our government, and the resulting collapse in the rule of law.

As for me, I can only echo the words of David:

“This is the Lord’s doing; and it is wonderful in our eyes.”

With Best Regards-
Ann Barnhardt

Source: http://barnhardt.biz/

Ann Barnhardt addendum: “There is some confusion as to what I (formerly) did for a living via BCM. I am not a ‘hedge fund’ or a ‘money manager’. I am an old-school commercial hedge broker specializing in CATTLE and GRAIN. Farmers, ranchers, etc. Actual hedging of actual cattle and grain using futures and options. Very old-school original.”

(JonStewart) “Politician Jon Corzine saw Lehman Brothers as a cautionary tale; financial firm honcho Jon Corzine saw it as a dare.”

I don’t always agree with Jon Stewart, but he’s pretty much got it right on the money on this one…

(TheMarketTicker) “Let us remember that MF Global was just added to the primary dealer list in 2010! The bankruptcy does raise questions, however, about how the Fed picks the primary dealers — especially since MF Global was one of four firms added to the ranks after new, more stringent requirements were put in effect in 2010.”

Full Story: MF Global – Trillions in Bailouts, Loads of New Regulations, yet nothing has changed (vlogolution)

(PeterBrandt) “The media is missing the real story in the sad saga of MF Global. The story is not the big bet in Europe by MF Global that went south. The story is not the risk-taking ways of Jon Corzine.

The real story is the ineptness of federal regulators (so, what’s new). The real story is that speculators may end up holding an empty bag right under the noses of the U.S. government regulators responsible for their protection. The present administration appears unwilling to step up to the plate. The Obama administration bailed out AIG, Deutsche Bank, Fannie, Freddie and a whole bunch of other crooks along the way. But when it comes to protecting the integrity of futures markets, the powers that be (or should be) are MIA.

If segregated account holders of MF Global are stiffed it will be the end of market integrity as we know it. Free market lovers everywhere, do NOT under-emphasize the importance of this matter. The MF Global situation could be the leak in the dike that will flood the financial system as we know it. If segregated account holders in a federally regulated market are not protected, what is next?”

Full Story: Futures traders: Be concerned, be very concerned (PeterBrandt)

(PeterBrandt) “Futures markets and futures commission merchants (FCMs) are supposed to be highly regulated by the Commodity Futures Trading Commission (CFTC). If MF Global’s seg customers are not fully protected, it would be the equivalent of, let’s say, depositors of Chase bank or customers of Fidelity not being protected.

The failure of MF Global’s segregated account to be made whole would be the biggest financial disaster since 1929 and would spell the end of the futures industry as we know it. Folks in the financial industry should take this matter seriously — very seriously. Do not underestimate the importance of this matter.”

Full Story: MF Global — 2011′s version of 1929 (PeterBrandt)

(TheHippo) “The reality of the matter and one that I have believed in is that during crisis there is NO SAFE HAVEN! It is a figment of your imagination and the collective mind of the market. As a friend of the family who was a trader said, ‘when markets drop the correlation becomes 1′. What he was saying is that when a crisis occurs there is no safe haven and there is no place to hide.”

“So then the question becomes what does one do? Outside of the obvious, which is short the market. Go back and look at the charts and look at what happened EACH AND EVERY TIME. The market went back up. This should not be a surprise to you, and should be rather obvious. Yet nobody during those times says, ‘buy equities, bonds, though they did say buy gold’. All you hear are about Safe Haven plays (which don’t work) and how you need to step back and wait.”

“I am a numbers guy. I focus on the statistics and let it define my plays. So when you see these charts a dropped market is a screaming buy! It does not matter what, but everything is a screaming buy. So why don’t people buy? .. Easy answer it’s about the psychology. Buying in times of market turmoil is very very difficult. I have read this Contrarian book that said people would rather be wrong with the crowd than be right in the individual.”

Full Story: Understanding Safe Haven Plays and Market Turmoil $AGG, $PCY, $GLD, $BTI (Haah-TheHippo)

In times of turmoil, your only real safe haven is holding straight CASH in your home currency. Your greatest defense against future crisis and turmoil is proper position sizing (keep your positions small and manageable), stay clear of leverage (especially overnight), and always keep a chunk of cash on hand to take advantage of any great opportunities that may arise. From the article, $PCY (PowerShares Emerging Mkts Sovereign Debt ETF) looked mighty interesting around those October 2008 lows. Historically speaking, many great fortunes have been some of the greatest fortunes made have been in times of crisis. Find opportunity when others panic, and keep your position size small and manageable so that you can always consider adding a bit more if the opportunity becomes even juicier.

(TheMarketTicker) Great article by Karl Denninger sums up our greatest financial problem perfectly… “ is the process by which something very ordinary (say, a TV set) becomes financed. In doing so there is inherently created the use (and usually the abuse) of leverage. .. Leverage is simply the ability to act as though you have much more of something than you really do. ”

“See, in economics there is this thing called ‘supply and demand’. The more demand there is for something with a given supply, the higher the price tends to be. In ordinary times a gallon jug of drinking water in a store is a dollar, and from the tap it costs so little we don’t ordinarily put a price on it. Yet if there was just a hurricane, and there is no fresh water available, what would the price of that same gallon be? Ah, now we have much demand and very short supply, and as such the price will be quite dear. Perhaps the price of that water might be several gallons of gasoline (for the seller’s generator, of course.) So what has happened to our economy over the last three decades? In short, things that never should have been became financialized. And as the goods and services became financialized, demand was shifted upward – people were made “able” to allegedly “buy” things they could not otherwise afford. The expected response in the marketplace to such a thing, predicted by basic economics, was that prices would rise.”

“If you’re wondering why you can’t afford to pay for college by flipping burgers or pizzas in your off hours, this is the reason.  It was precisely the distortion of the government making student loan debt non-dischargeable, which made it available to almost everyone at a “low interest rate”, that drove up the price of college educations to the moon.  And to the moon they went – up 450% since the 1980s, more than five times as much as average salaries increased.

How about houses?  A middle-class house in 1960 sold for $12,000. .. That wasn’t so hard to do when you could buy a house at twice the average income.

What happened when we financialized houses?  Prices went up.  A lot.  They went up much faster than did incomes.  First to 3x incomes, and in some parts of the nation in the 2000s they went to utterly ridiculous multiples, like 5, 6 even 10x.  How?  Nobody ever really actually owned the damn house; the bank owned it and you were turned into a financial slave!“

“How about medical care?  In the 1960s your parents wrote a check to the doctor.  If it was really serious they probably had insurance; they got billed and then filed a claim.  Bankruptcy due to medical costs was extremely rare, and you could almost always afford whatever you needed medical attention for by paying with the money in your wallet.“

“Where do you think that money went? Why, right in the pockets of JP Morgan, Goldman Sachs, Morgan Stanley, Citibank, Bank of America and yes, the bank on the corner.  I’m sure you’ve noticed that bank buildings tend to be quite nice.  Grand exteriors, high-rise buildings in the middle of cities (very, very expensive real estate), fabulous lobbies with marble floors and other similar visible elements of opulence.  Where do you think all the money came from to buy that stuff?  Why, from you – the rube standing there in the lobby!  Never mind the bankster’s bonuses!”

“Was this all the “free market” at work?  Absolutely not! Student loan debt was given “special status” and cannot be discharged in bankruptcy.  Fannie Mae and Freddie Mac massively distorted the housing market.  Medical insurance companies are exempt from anti-trust laws, and drug makers were given the ability to legally prohibit you from doing what you’d like with what you own (specifically, reselling things you purchased and paid for.)

All of this distortion in the market occurred due to the direct acts of government acting at the behest of fat cat banksters and industry insiders, using the threat of force to strip your wealth.

Every morning in the financial media we hear about how horrible it will be if we put a stop to this financial rape and the financial system’s size and influence shrink dramatically!“

THE SOLUTION

“But what happens if tomorrow all the ‘free money’ loans stop?  Now the college has empty classrooms because nobody comes any more.  Students can’t afford to attend, so they don’t.  What happens the next morning at that college?  Oh that’s simple: See, it doesn’t cost much to provide a few desks, chairs, and a roof over head along with a calculus book, does it?  Nor does an instructor cost that much when spread across a student body.  Let’s see how cheaply a college can educate you, if they’re unable to extract from you promises from the future and must instead talk you into providing them with economic surplus from your current efforts.”

“The important point here is that if we cut off the financialization of college you will still get an education.  The schools will scream and many will go bankrupt, but soon on the same ground where there was a bankrupt college there will be a new one, and this one will charge $2,000 a semester to attend instead of $10,000 or $20,000.  The difference?  You’ll have to pay cash, but you’ll be able to work a part-time job for the two grand and thus you’ll have no debt!”

“Houses are no different and neither is medical care.  The screaming about how “nobody will be able to go to the doctor” or “nobody will be able to buy a house” is a lie.  The doctor can set his fee at $100,000 for his services if he wants but if nobody can or will pay him $100,000 then he sells no service.  That doctor goes bankrupt immediately, soon there will be a different doctor (or maybe the same one after he goes through bankruptcy) and suddenly medical care will be much-more reasonably priced! After all, if nobody can buy then the seller can’t make a living either, can he?  Prices will be forced down to what the ordinary person can afford to pay.”

“There is no way that such a price disparity would hold for more than 10 minutes were these laws to be dropped.  You get screwed on your prescriptions and devices you buy intentionally by our government through their protection of these industries.  You get financially raped so that everyone in the world can enjoy our medical technology at the mere reproduction cost and the banksters and drug companies can get rich.  It’s an outrage and again, it happens due to financialization of the medical industry and the force of government coercion, NOT the free market.”

“You can bet the banksters, universities, medical societies and housing industry insiders know this, and they’re scared. They know that if you figure it out their income is cut in half or more.  They are returned to middle-class working people rather than the fat cat status they enjoy today.  Doctors, college professors, home builders, bankers and Realtors used to be middle-class citizens, not gold-clad elites driving around in Lamborghinis and living in mansions!

What’s worse (to them) is that if you succeed in breaking the back of financialization these people will lose the ability to enslave you.  You will have returned to yourself the power to choose when you work, how hard you work, and what you do with your own economic surplus, instead of having pledged it to the bank to buy the car, the bank to buy the house, and the insurance company in the event you get sick.”

“We did not find ourselves here because of the “free market.”  We are here because the rich and powerful demanded special protections from government that allowed them to enslave you, they enticed you into taking that first hit off the crack pipe of cheap money, and then once you were hooked good they used the jackboot of the government to screw you through changes in the law and special protections for themselves so that you could not easily escape. The solution is not to demand “free stuff” or “fairness.”  The only solution is to remove the excess leverage from the economy – to get rid of the debt that has been accumulated and force recognition of the fact that not only are many people bankrupt but the financial institutions are as well.  Only when the balance sheets on both sides are cleared can the economy.”

Full Story: OWS: Want To Turn The Tide? (TheMarketTicker)

If the “bad rich” always find manage to find ways to control and manipulate the government, why do so many want to empower them further with addition tax revenue, regulatory power, and more spending, … For all the calls to “more heavily tax the rich”, let’s finally go after the real controlling, manipulative, and politically-connected “rich” people / politicians / banksters / special interest groups, and stop empowering those who are the greatest benefactors of people’s rage and “wealth redistribution” agenda. Let’s also call for a return to a fair and balanced “Rule of Law“.

And for the record, I don’t consider myself a Republican, a Democrat, or a Libertarian, so much as a “Classical Liberal“.

(TheMarketTicker) “.. there’s really nothing more-serious than grabbing client funds internally, and it appears to have happened in the case of MF Global…  It’s black-letter wrong, and The ‘mainstream media’ outlets this morning are talking about this being a “risk management” issue. Nonsense. This is a trust issue and Corzine is a former Goldman guy and the former governor of New Jersey.”

“But this much we do know: This is not an issue of a firm that allegedly broke every rule in the book when it comes to the sanctity of customer funds. Rather it is a story of utterly failed regulation and oversight that continues four years after the collapse that initiated in 2007. It is the story of willful and intentional blindness by our government and the instrumentalities within it that are supposed to prevent this sort of crap from happening.”

“Let us remember that MF Global was just added to the primary dealer list in 2010! The bankruptcy does raise questions, however, about how the Fed picks the primary dealers — especially since MF Global was one of four firms added to the ranks after new, more stringent requirements were put in effect in 2010.”

“I have to ask: Was that a political addition and where in the hell were the examiners that are supposed to be paying attention to what these firms are doing? If this is the result of “more-stringent” requirements can someone tell me why I should believe that any of the other Primary Dealers are in fact solvent and why I should not believe that they’re all doing the same thing?”

“This is the continuing story, as I lay out in Leverage, of “two worlds” where one has the rule of law (you and I) enforced, where robbing a bank gets you a nice long prison sentence and some cops looking for bank robbers to stop them while in the other, inhabited by politically-connected and powerful men and women you can pretty much do anything you damn well please and nothing happens to you — in fact, you get rewarded with calls from The President of the United States and pick the pockets of the public with essential impunity.”

“There are no checks and balances and the banksters wield their briefcases like John Dillinger wielded his tommy gun.  There has been no reform since 2008.  Dodd-Frank was a joke, Glass-Steagall was not put back in place, and there was no prosecution of those who did wrong.

SEVENTEEN PAGES IN GLASS-STEAGALL – 17 PAGES – KEPT THE BANKING SYSTEM SAFE FOR FIFTY YEARS.

And now we have another collapse that appears to show that there is no regulation, there is no oversight and nobody in the government gives a damn when one of the primary dealers that the government charges with making an orderly market in Treasuries appears to have co-mingled more than half a billion in customer funds with their own trading book.”

Full Story: Can You Survive It Being Over? (TheMarketTicker)

Amazingly, the media has been parroting as to how MF Global proves that the Frank-Dodd bill actually worked!

(Mish) “In spite of that background, (or do I mean because of it), MF Global thought Corzine was a perfect fit. Indeed, those looking for reckless behavior, massive risk taking, and willingness to bet the farm on marriage, in politics, and in life, Corzine represented rare ‘impossible to pass up’ talent.”

Full Story: Regulators Investigate MF Global for Missing Customer Money; MF Global Goes Bankrupt Before Making 1st Interest Payment; Corzine’s Achievement Sheet (Mish)

(Bloomberg) “The Volcker rule, as written in the Dodd Frank Act, had ‘so many different exemptions and exceptions and loopholes that it almost became nearly impossible for the regulators to fashion a rule that can live up to its original intent,’ said Barofsky, a Bloomberg Television contributing editor.”

Full Story: MF Exposes Risk Volcker Wants to Curb (Bloomberg)

Great interview on Charlie Rose with Ray Dalio, where they discuss his thoughts on government spending, debt / deleveraging, Occupy Wall Street, Greece, along with how people should objectively come to logical conclusions.  It’s more valuable to know what you don’t know, and if we recognize and worry about being wrong, then we can then have a thoughtful dialog and truly learn and grow.  For example, before politicians propose policies that have no foundation in common sense economics, they should first come together and agree as to how the economy actually “works”.  He also believes Europe will likely employ a combination of printing and writing-down to deal with the Greek debt crisis.

“The great fallacy of all mankind is that people know more than what they do, and it’s a discovery process.  The process for learning is to say I don’t know.” (18 minutes in)

]]> http://www.vlogolution.com/hot/2011-10-21-ray-dalio-interview-on-charlie-rose/feed/ 0 http://www.vlogolution.com/hot/2010-12-15-insights-to-identifying-potentially-lasting-market-bottoms/ http://www.vlogolution.com/hot/2010-12-15-insights-to-identifying-potentially-lasting-market-bottoms/#comments Thu, 16 Dec 2010 00:40:39 +0000 http://www.vlogolution.com/hot/?p=864

Back in February 2009, with the markets plunging relentlessly day after day, after day…  I still recall how many traders were waiting in anticipation for some sort of crazy, panicky, high volume day to mark a capitulation bottom.  This latest market downswing took the DOW down nearly 30% in just over two months from 9,088 to a low of 6,470 on March 6^th, 2009.

Many traders whose market analysis and insights I respect seemed to be waiting for some massive “fireworks”-type event that would all but shout “THE LOW IS HERE”;   a sign that all the weak hands have most likely thrown in the towel, and that it was now time to BUY BUY BUY hand over fist.

Of course, Mr. Market will never make it quite that easy, even for its smartest participants to figure out what its current “jig” will be.  The DOW closed below 6,700 for several days before breaking out higher and closing above 6,900 on March 10^th, 2009 on a bit higher average volume.  It also marked the first day since this leg of selling began in early February that the DOW was able to close above its downward-sloping trend-line.  However, that super-charged high volume capitulation day we were all looking for and expecting to occur never materialized.  While in September and October 2008 the VIX volatility index hit highs just over 80, in February and March 2009 the VIX topped out in the low 50’s.  This peak was 35% lower than its earlier spikes, even though the market was now trading at lower price levels.

(read more...)]]> http://www.vlogolution.com/hot/2010-12-15-insights-to-identifying-potentially-lasting-market-bottoms/feed/ 0 http://www.vlogolution.com/hot/2010-05-19-the-perfect-storm-lessons-learned-from-the-dow%e2%80%99s-1000-point-flash-crash/ http://www.vlogolution.com/hot/2010-05-19-the-perfect-storm-lessons-learned-from-the-dow%e2%80%99s-1000-point-flash-crash/#comments Wed, 19 May 2010 22:02:53 +0000 http://www.vlogolution.com/hot/?p=622

Was the May 6^th, 2010 intraday crash and recovery just another one of those once-in-a-lifetime rare anomalies -– a rare confluence of events coming together to form the “Perfect Storm”?  And if a “Perfect Storm” generally occurs so infrequently, why does it seem that we are presented with a newsworthy “Perfect Storm” in the markets on an almost regular basis?  With all the misinformation and outrageous reasons the media and its “pundits” offer, perhaps it’s time to revisit exactly how markets work, and what (or who) may be to blame.  It’s a lot easier to blame a “fat finger” or some naughty short-sellers for a huge market-selloff, than to accept that markets do not always have a buyer for every seller.  Very simply, when a large number of market participants decide they all must sell (or buy) at the exact same time, an “air pocket” of price action will form.  Anyone who has traded a market knows that this type of single-sided liquidity “crisis” occurs every day in the markets to various extents, especially after significant news events are released.  While these relatively smaller moves may not be nearly as significant as a 1000 point intraday drop and overall market selloff, the dynamics are more or less the same.  The setup develops with a large number of market participants all thinking the same way (ie. very strong bullish or bearish sentiment), generally due to a strong extended trend in a market.  When the market finally turns, the large group of participants on the wrong side of the trade all decide to reverse course at the same time, at similar stop levels, just to save their leveraged hides.  Does the trading term “slippage” ring a bell?

(read more...)]]> http://www.vlogolution.com/hot/2010-05-19-the-perfect-storm-lessons-learned-from-the-dow%e2%80%99s-1000-point-flash-crash/feed/ 1 http://www.vlogolution.com/hot/2009-07-24-trading-for-control-and-avoiding-the-confidence-trap/ http://www.vlogolution.com/hot/2009-07-24-trading-for-control-and-avoiding-the-confidence-trap/#comments Fri, 24 Jul 2009 23:23:20 +0000 http://www.vlogolution.com/hot/2009-07-24-trading-for-control-and-avoiding-the-confidence-trap/

Most traders and investors at one time or another have fallen into the “confidence” trap. Sometimes it’s a result of believing in the infallibility of their research. Other times it’s due to having a presumed “hot” hand — they’ve finally got the game figured out and can do no wrong. Maybe they’ve gotten caught up with some hot new money-minting trading system with a great historical track record. Or perhaps they’ve been drawn in by someone else’s hot streak, in a chat room for instance (novice traders, trying to skip a few steps, are notorious for succumbing to this). All the calls turn out great, and even the fundamental and technical research that’s shared always seems right on the money. However, up to that point they’ve just watched –- and they’re kicking themselves for missing out on yet another huge gain. Let’s take our fictional trader and call him Bernie.

Bernie decides he’s not going to miss out on the next opportunity that comes up. When the next “hot stock” is revealed, it happens to be a stock that he himself already had on his radar. The additional research backs up his conviction. Everything seems right, and the stock appears perfectly poised for a huge move. Bernie’s confidence level for the trade is higher than ever. Forget about what he can afford to lose, this is the trade that’ll make his year!

Bernie decides to accumulate a position much larger than normal — 3 times as large in fact, equating to about a quarter of his total account size. At first, all seems to be working out great and the trade has even moved a nice 5% in his favor. Two days later however, he wakes up to find the stock down 25%, blowing right through any stop levels he may have considered. The company out of the blue announced a dilutive secondary offering to “better take advantage of opportunities that may become available” or some other similar mumbo-jumbo.

Bernie feels caught, but he figures the big picture still hasn’t really changed, and that prices should find support around the offering price. In fact, he decides to double his position around the offering price if he can. The company’s valuation seems cheaper than ever, and the company will now have even more cash to materialize its goals.

However, as the price continues to drop, Bernie starts to wonder… More investors, increasingly disgusted by the management’s apparent lack of regard for their investing well-being, decide to throw in the towel. By the end of the week, the stock is down another 38% just from the offering price! The same stock that traders and investors all loved at $9 just a few days earlier, they now hate at $5. Even those investors who bought into the secondary are feeling completely betrayed.

Ironically, if the research and valuations are accurate, the stock should be more attractive than ever at these levels. Of course, it doesn’t matter anymore, as most traders (including our newbie trader Bernie) decided to throw in the towel as the stock sells off in a panic around $4/share leaving Bernie with a whopping 44% account loss (requiring a 125% increase in account value just to reach breakeven). Several days later, the stock is trading back around its offering price. How’s that for the perfect reaming. Bernie feels crushed, blames the guy in the chat room for putting out such a horrible call, and calls him a fraud despite the fact that all his other picks turned out pretty well.

(read more...)]]> http://www.vlogolution.com/hot/2009-07-24-trading-for-control-and-avoiding-the-confidence-trap/feed/ 0 http://www.vlogolution.com/hot/2009-05-25-join-ron-pauls-drive-to-audit-the-fed-and-shut-it-down-with-hr-1207/ http://www.vlogolution.com/hot/2009-05-25-join-ron-pauls-drive-to-audit-the-fed-and-shut-it-down-with-hr-1207/#comments Tue, 26 May 2009 03:54:23 +0000 http://www.vlogolution.com/hot/?p=485

With many Americans slowly waking up to the reality that our government and banking system are entirely under the control of a criminal elite of private bankster crooks, Ron Paul has once again taken it upon himself to push for an audit of the Federal Reserve, the outcome of which would likely be so incomprehensibly shocking that the Fed may finally be forced to shut down for the greater good of our country and its citizens.

The Federal Reserve was originally created under the guise of being an “impartial” entity separate from the government that could be called upon to stabilize our economy in times of panic, while protecting and maintaining free market principles.  The sick twisted irony is that the Fed is the precise antithesis of what free markets are really about.  And since the Fed’s inception, it has done nothing but DESTABILIZE our economy with increased volatility by manipulating interest rates, along with leverage ratios used by the banks (in cahoots with those who control the Fed and the SEC).

It still boggles my mind that the SEC implemented the “Pattern Day Trader” rule to “protect the little guy” by forcing more active traders and investors to maintain at least $25,000 in a trading account or face severe trading restrictions.  I guess the SEC also forgot that they came into power largely because a big part of the 1929 crash was caused by the extension of 10:1 credit to investors (which couldn’t have happened without the Fed’s easy money policies).  So to make amends, the SEC goes on to serve and protect “the little guy” some more by allowing ONLY the largest (and most politically-connected) “too big to fail” investment banks pump up their balance sheets with over 40:1 leverage.

(read more...)]]> http://www.vlogolution.com/hot/2009-05-25-join-ron-pauls-drive-to-audit-the-fed-and-shut-it-down-with-hr-1207/feed/ 3 http://www.vlogolution.com/hot/2007-09-27-protecting-yourself-from-inflation-and-the-credit-bubble-with-daryl-montgomery-of-the-ny-investing-meetup/ http://www.vlogolution.com/hot/2007-09-27-protecting-yourself-from-inflation-and-the-credit-bubble-with-daryl-montgomery-of-the-ny-investing-meetup/#comments Wed, 26 Sep 2007 22:00:00 +0000 http://www.vlogolution.com/hot/?page_id=131

]]> http://www.vlogolution.com/hot/2007-02-27-learn-the-reasons-why-the-dow-dropped-250-points-in-one-minute/feed/ 0 http://www.vlogolution.com/hot/2006-12-12-m3-money-supply-figures-are-back-well-unofficially-and-the-fed-credit-cycle/ http://www.vlogolution.com/hot/2006-12-12-m3-money-supply-figures-are-back-well-unofficially-and-the-fed-credit-cycle/#comments Mon, 11 Dec 2006 22:00:00 +0000 http://www.vlogolution.com/hot/?page_id=56

Apparently it’s possible to extrapolate the current rate of the M3 money supply figures pretty accurately after all, even after the Fed decided to “de-emphasize” its role. Let’s see what the current rates would have been expected to be, and what they suggest for the economy and the stock market… I also discuss the credit cycle and the effects of easy credit and leverage on the transfer of wealth.
]]> http://www.vlogolution.com/hot/2006-12-12-m3-money-supply-figures-are-back-well-unofficially-and-the-fed-credit-cycle/feed/ 2