A Run on The Building & Loan

351
Fri, Jun 21, 2013 - 4:20pm

Before we study this week's Commitment of Traders report, we first need stop by Bedford Falls, circa 1933.

So your first assignment this weekend is to watch this clip. On one level, it's a wonderful explanation and indictment of fractional reserve banking. For this discussion, it's a great metaphor for the global paper charade, derivative leveraged and rehypothecated gold and silver markets.

What is the evil Mr. Potter doing in the clip? He instituted a bank run by calling the loans of the Bank of Bedford Falls and the Bailey Brothers Building & Loan. Once the cash on hand was gone (illiquidity), there was no money left over to pay out to depositors. Mr. Potter then offers "50¢ on the dollar" to anyone so frightened as to take whatever they can get. As Tom says after hearing that Randall has taken Potter's offer, "better to get half than nothing". Then, later in the clip, George Bailey offers the true explanation:

"Can't you understand what's happening here? Don't you see what's happening? Potter isn't selling, Potter's buying? And why? Because we're panicky and he's not, that's why."

As we relate this to the precious metals, what do we see? The collection of Bullion Banks, primarily JPMorgan, are today's "Mister Potter". (In fact, many cinema historians believe that Capra broadly based the character of Mr Potter on J.P. Morgan himself.)

When QE∞ was announced, the Bullion Banks were net short 737 metric tonnes of paper gold. As of today's CoT report, The Banks are now short 44,000 contracts or just 136 metric tonnes. That's a staggering drop of over 81%! I'll go one further for you...since the CoT-cutoff last Tuesday, total gold OI has risen by over 16,000 contracts while price has fallen by $75. Clearly, the vast majority of those new 16,000 contracts were fresh Large and Small Spec shorts. If that's the case, then right now...right this very instant...the total net short position of The Gold Cartel is around 30,000 contracts or just 93 metric tonnes. An incredible reduction 87%, all while price has fallen nearly $500.

Specs have sold, motivated by either fear or greed, and The Bullion Banks have bought. Just like Mr. Potter, The Banks aren't selling, they're buying. Using the fear and greed of the public at large to position themselves to dominate in the future.

The same is obviously true in silver, too. From a net short position last autumn that nearly exceeded 50,000 contracts, today's CoT showed a Silver Commercial net short position of just 6,000 contracts. This is a drop in excess of 90%! Just like gold, the total silver OI has increased since Tuesday, rising 4,000 contracts on a price drop of nearly $2. If The Silver Commercials absorbed all of this selling through buying longs and covering shorts, the total Silver Commercial net short position as we head into the weekend is likely under 2,000 contracts. That's incredible! While silver has fallen from $35 to $20, the Banks have been buying, not selling, and this has helped them to decrease their net short position from 7,800 metric tonnes down to just 311 metric tonnes.

Again, like Mister Potter, the Cartel Banks are using the public panic to BUY, not sell. They are positioning themselves for the next move up. So, are you Randall? Are you Ed? Are you Ms. Thompson? Or are you George Bailey, willing to stand against Mr. Potter and hold firm, keeping your emotions in check and remaining rational.

Those who remain steadfast now, defiant against the naysayers, will ultimately be proven correct. More importantly, they will have safe harbor from the coming storm and a position of strength preserved for when the storm finally passes.

TF

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turd [at] tfmetalsreport [dot] com ()

  351 Comments

Occasnltrvlr
Jun 22, 2013 - 2:46pm

@Sad-descent

I have no idea. I'm not a technician, and I'm not "hooked-up" in any meaningful way.

My "gut feel" is that 2.5% is problematic and anything near 3.5% would be absolute death. But I'm more concerned with the rate of change. Gradual changes allow time to react and reposition, and these last couple of days haven't been gradual changes.

To me, the fact that the Bernanke didn't come out with salve after Wednesday is very telling.

Lew has the mechanisms in place to unwind SIFIs.

These are reasons why I suspect this may be a plan.

Sad-descent Occasnltrvlr
Jun 22, 2013 - 3:02pm

@Occasn

I will split the difference on that and guess that 3% and things go into meltdown. I think that would pretty much shutdown real estate after the initial panic to rush and lock in a rate. Before that I can't help but think that there are those using treasuries for collateral that might have to do some de-leveraging.

I don't really know I am just kicking stuff around on a slow Saturday.

I am a bit surprised they haven't come out and "clarified" the statement. Maybe they are waiting for the Sunday news shows.

ivars
Jun 22, 2013 - 3:18pm

Senator Cutting who

Senator Cutting who introduced a bill including 100% backed banking, government issuance of money, and paying of of private non-investment = money creating- debts in 1935 died in a plane crash. The bill did not go through. Instead, Watered down Banking Act was introduced. The cause of Great Depression survived then- will it now?

https://www.levyinstitute.org/pubs/wp/76.pdf BTW, introduction of such a plan or similar could be a reason Gold bull market ends this time- but its so major change (separation of money creation and lending functions) that it won't happen very soon. Some reasonable size wars may prolong the agony of banking and CBs quite substantially. Otherwise, it should have happened already now with QE proving to be just another smoke screen from bankers as "saving economy" by saving bankers and ruining economy.
ctob
Jun 22, 2013 - 3:24pm

Hmmm

Well Maguire is calling the bottom in that KWN article and I usually give that a lot of credence. But since his reasoning is based on the bullion banks abilities, positioning and inclination I am sticking with what I said before. I am an inveterate slacker and I can just feel what can be gotten away with in my bones and am usually right. The bullion banks feels they can get away with another slamdown so its gonna happen and its gonna happen with very very little imagination. Unless Thursday's bloodletting continues, which in the short term, I don't don't believe it will. Next few weeks will be choppy, yes, but not black hole spiral utter panic. Yet. Then slamdown beginning/mid july. Hate disagreeing with Andy but doing it anyway. After that I think it'll be the, for all practical purposes, bottom. But I will have to see then.

Kerbouchard
Jun 22, 2013 - 3:24pm

1-guy, Fix, and airgead

that-1-guy:

Thanks for the "farm" post. I've seen it before, but because of the simplicity of the message, it was very much worth seeing again.

Mr. Fix:

I always enjoy your thoughts, and especially the ones commenting on the "farm." We have a lot in common, but you're far more articulate than me, so I'm very happy to know that someone is in my corner.

airgead:

Thanks for posting Clare Daly's address to the Irish parliament. I was blown away by her eloquent speech. I envy her ability to express herself so fluently. The issue she was discussing brings to mind an episode of Borgen, currently airing on PBS. It's a Danish series, and the same issue regarding U.S. planes flying in to Greenland (a Danish territory) and doing the same thing, was the topic of a recent episode.

Sincerely,

Mr. K.

Hunt brother
Jun 22, 2013 - 3:25pm

If the COMEX gold shorts....

If the COMEX gold shorts have no intention of covering, at any time or price, then the COT data is useless. Who would go long gold at the COMEX knowing there is an infinite supply of short gold paper?

Ben is supplying the paper. His 3.4 trillion paper portfolio of toxic Countrywide mortgages and US Treasury debt had a bad week. Ben is long bonds and short gold. Ben is headed for the hills.

Keg
Jun 22, 2013 - 3:52pm

Bank runs

My 97 year old father in law has told me the story (multiple times) about the bank his father had an account in closing during the depression. When it re-opened accounts were valued at a fraction of what they were before and the depositors received stock to make up the difference. Two brothers that had money bought up the shares from those willing to sell. Just like Potter. My father in law still holds the stock that his father received. After multiple mergers it has morphed into Wells Fargo stock.

Gold Dog
Jun 22, 2013 - 3:53pm

Urban

We are rolling short Treasuries, but are worried about using Schwab. I have a mid level CPA from accounting running the numbers and security levels of all of the discount brokerages.

I will share his findings here.

Schwab say they use the Schwab Bank and I have some action at TDAmeritrade as well as a small account at Forex.com.

TDA say they use the TD Bank, whatever the hell that is.

I found, I think, on the other thread a link to a letter to send to your broker demanding Senior Debt Status on your account so the Morge doesn't grab it for collateral but I really want a belt and suspenders right now.

YF,

D

EDIT- A nap two days in a row?? The book The Ezekiel Option is paper Ambien!

Urban Roman Gold Dog
Jun 22, 2013 - 3:55pm

@Dog,

I saw your post, and then later Occasnltrvlr posted a link to The Automatic Earth. I have been following Stoneleigh since 2007 or so. They are into the big picture, but not really day-to-day timing. I started following Stoneleigh on The Oil Drum, where she was the editor for a while on the Canadian branch. Everyone on The Oil Drum was saying that the decline in oil production would cause oil to keep going up, and it was going to hit $200 and keep on going. Stoneleigh said, no, it would not, and that it would in fact decline at some point. And in fact it did (though it doesnt look like it will collapse back to $20/bbl). SRSRocco knows her too, I'm pretty sure. By the way, there's no way that the miners will survive this next five years or so.

There will be deflation (and financial crime, which those of us watching the PM world have seen in spades). Stoneleigh and Ilargi have had a peek into the engine room, and they know that the bilge pumps will not be able to keep up. All those fraudulent mortgages done over the last decade have been leveraged up, and there is so much more notional "money" in the system that will simply evaporate when the MBS, CDOs, CDO2s, etc. fall apart, that Bernankenstein will not be able to hit Ctrl-P enough times to compensate, even as hard as he has tried. The thing that keeps Bernank from simply issuing eleventy trillion dollars is that he knows as well as all of the kleptocrats that doing so would reduce pigatha to toilet paper overnight. They aren't going to do that; they will, in the end, "protect the dollar". Perhaps that is why he is backing toward the exit now. Just leave the mess to Janet, right?

Stoneleigh has written about the precious metals, and the reasons she is not an enthusiastic collector of them. The main reasons she has against PMs are the lack of security and convenience, and the probability that the Masters of the Financial Universe will, when backed into a corner, try to ban the usage of PMs (which we can already see creeping up -- and then think of 1933 to 1964 in the USA). She says you have to be ready to hang onto those PMs for about twenty years of political turmoil before they will once again have a place in the economy. Stoneleigh does not think the dollar's death will be easy, nor is it imminent (not for another 2-3 years anyway). She agrees, however, that it is inevitable. (note that Roman coinage in bronze and pewter and whatnot was used for centuries after the western empire had ceased to be a going concern)

So to get to the bottom line, the advice of TAE is to be prepared. To keep enough currency handy to get through three to six months. And to stash extra dollars, they recommend buying T-Bills. Yes, that's correct. Keep it in the belly of the beast. Nothing with a maturity longer than 2 years, but the nice thing about it is that you'll get your money back at the end. The short maturities don't pay much interest, but if your corresponding bank collapses, the treasury will still have your cash on deposit. They don't issue the paper documents like they used to sell at the Post Office, so there might be an interruption if the internet is disrupted for some reason. But they consider the Treasury to be more stable than any of the banks (and please note that most credit unions get their credit from one of the TBTF banks, so they can fail as well).

There are a few websites that track banks and credit unions and post graphs of their boring financial statements, for those who wish to do some investigation. I had a link to such a site, but have lost it in a netbook accident. Anywho, that's the news from Lake Otterville.

Response to: Random Thoughts From The Den

Gold Dog
Jun 22, 2013 - 4:08pm

Roman

I kind of jumped the gun on your longer post while you were typing, then went to catch up on the other thread. (Can we pick one for the weekend peeps- I dasn't care witch!)<--See how I reminded everyone that Turd is a Warlock there?

In the "make up the law as we go along" environment* that we are in I worry about the "three million is enough for anybody" comments recently muttered by Dear Leader and Pelosi's endless war on the savings of everyone that has not personally contributed to her campaign. Maybe I am too paranoid.

Our esteemed word smith Fix always scares the shit out of me when he posts the blindingly obvious!

I have to hit the Meat Pond**.....back in a half.

Your friend,

D

* See GM and Chrysler bond holders.

** Walk the Wonderdog.

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