Guest Post: "Is The Global Financial System On The Brink Of Collapse?", by "Denver" Dave Kranzler

Sat, Apr 18, 2015 - 10:51am

About the only items that were UP in Friday were gold and bonds. Everything else was down sharply, including the Dow Jones average which fell by nearly 300 points. Is this just a simple, one day selloff or is something larger afoot? Our pal Denver Dave has some excellent analysis here and I strongly urge you to take the time to read this post.

Since last autumn, here at TFMR we've been discussing a pending global derivative collapse. The likelihood that the global markets can ingest a greater than 50% move down in crude oil and/or a 25% move down in the euro without triggering all sorts of derivative issues is extremely low. But you have to give these things time to play out...and eight months seems about right. Into this discussion steps Denver Dave with this astute bit of observation and analysis. PLEASE TAKE THE TIME TO READ THIS AND FULLY CONSIDER THE IMPLICATIONS.


"Is The Global Financial System On The Brink Of Collapse?",

by Dave Kranzler

A reverse repurchase agreement, also called a “reverse repo” or “RRP,” is an open market operation in which the Desk sells a security to an eligible RRP counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future. LINKIMF tells regulators to brace for global ‘liquidity shock’ - LINK.

The financial news spin-doctors are attributing Friday’s abrupt sell-off to a report of a Bloomberg terminal outage and to a report that China has expanded its list of stocks available for shorting. This explanation for the plunge in stocks globally is so absurd it almost leaves me speechless.

I have been postulating since mid-December that the strange volatility we’ve been experiencing in the markets – combined with the most intensive effort I’ve ever seen by the Plunge Protection Team (the Fed + the Treasury’s Working Group on Financial Markets) to prop up the stock market and keep a manipulative cap on gold – is occurring because there’s is a massive derivatives melt-down going on behind the scenes. The volatility reflects the turmoil and the market intervention in stocks and precious metals reflects the effort to keep the problem covered up.

But a good friend and colleague showed me graph Friday morning that shows my thinking about a derivatives collapse may be correct – click to enlarge:

That graph shows the Fed’s Reverse Repurchase Agreement operations with foreign Central Banks and big foreign banks. A reverse repo is an operation which generally is thought of as being used as a tool to remove short term liquidity from the banking system. However, as you can see from the timing of the first massive spike up, which occurred in early September 2008, it is an absurd notion to think the Fed would have removed liquidity from the system. (Note: the second spike up in 2011 coincided with the Fed’s “Operation Twist” which was essentially a huge QE extension disguised with a “twist” – but nonetheless was done to keep the system from collapsing).

No, instead the massive operation was conducted to INJECT Treasury collateral into the global banking system. Treasuries are used as collateral against derivatives positions. It’s in a sense margin collateral for the big boys. When an entity (typically a bank or hedge fund) takes on a derivatives bet, it needs to post collateral to protect the counterparty from a decline in the value of the bet. Treasuries are the de rigeur collateral, although the ECB now allows everything for collateral except loans to lemonade stands.

When the value of the derivatives bet declines because the value of the underlying asset declines (think: Greek debt, oil debt), more collateral has to posted. Eventually, the market runs out of collateral and there’s a collateral short squeeze. The use of hypothecation exacerbates the situation by several multiples. Please note that ZeroHedge intermittently reports big spikes up in Treasury settlement fails. This reflects the extreme shortage of collateral. When collateral has been posted but not hypothecated, it can be called and used for settlement. When that Treasury has been hypothecated by the custodian of the collateral, it becomes harder to call, especially when it’s been hypothecated several times. Big spikes up in settlement fails occur.

Circling back to my postulation that a massive, ongoing derivatives melt-down has started, as the derivatives lose value, more Treasury collateral has to be posted. When the situation becomes extreme, collateral isn’t posted and counterparties begin to fail, especially if the counterparty can’t come up with the cash needed to remedy a derivatives bet gone bad. My bet is that the Greece situation ignited the problem and the collapse in the price of oil threw millions of gallons of napalm on the situation.

The reason I believe this explanation is correct, is from the graph above. We know that in 2008 we were told that a big derivatives accident started in Europe and spread to the U.S. Lehman filed for Chap 11 on Sept 11, 2008. We also know that AIG and Goldman experienced a massive counterparty default collapse in September 2008 that was remedied thanks to rather explicit lies circulated by Ben Bernanke and Henry Paulson about systemic collapse if TARP wasn’t approved.

A reverse repo can be looked at as tool to remove liquidity from the system OR as a tool to inject Treasury collateral into the system. We know the Fed has been “testing” a new Reverse Repo system since mid-2013 that take Treasuries from its “SOMA” holdings (SOMA = the Treasuries the Fed purchased with QE) and use them for reverse repos, including reverse repos with MONEY MARKET FUNDS and foreign central banks/ Too Big To Fail banks. Nothing happens by accident and that spike above shows us why the Fed was “testing” a new reverse repo system.

The only reason the Fed would need to inject massive amounts of Treasuries into the global banking system is because there’s an extreme shortage. A massive derivatives accident requiring massive amounts of collateral to be posted has developed. If Treasuries are not available to post as collateral, while at the same time a massive amount of hypothecated (Treasuries out on loan, several times over) collateral fails are occurring, it will cause the banking system to seize up. The giant spike up shown in the graph above is occurring because the Fed is engaging in an enormous reverse repo operation in order to prevent the global financial system from collapsing.

Remember I suggested some time ago that the elitists like give us a warning before something bad is about to happen. As my colleague John Titus states: “the true elite aristocracy are polite criminals – they consider it gauche to flush the toilet while we’re in the shower without giving us a heads up.”

This is why the IMF issued this warning yesterday for the financial media to publish:

The so-called ‘flash crash’ on US bond markets last October and the collapse of the Swiss currency floor in January showed how quickly liquidity can vanish, acting as “a powerful amplifier of financial stability risks.” LINK: IMF tells regulators to brace for global ‘liquidity shock’

THIS is why stock markets globally sold off hard on Friday. Typically, the Plunge Protection Team will move to prop up the S&P 500 once it falls by over 1% intraday. However, on Friday, the sell-off only accelerated.

I guarantee that the reason for this is unequivocally NOT because the Chinese Government is letting the public short a few more stock issues OR because Bloomberg experienced a widespread terminal outage. But it does go a long way to explaining THIS: LINK

More great info at:

Follow Dave on Twitter @InvResDynamics

About the Author

turd [at] tfmetalsreport [dot] com ()


Apr 18, 2015 - 3:41pm

Two sides of the reverse repo

Glad Dave explained this. I always thought that the exercise was to remove liquidity, but in essence he says it can be viewed as injecting collateral. I guess that bank currency has limited use but Treasuries can be rehypothecated ad infinitum to support the derivatives.

So with all the Treasuries the Fed has on its books can they delay a derivatives crash for years?

Apr 18, 2015 - 4:11pm

I don't think they can delay

I don't think they can delay if for that long, those on the wrong side of the derivative bets still have to pay cash to purchase the treasuries - which they can only do for so long as they can raise the capital. The fact that there's an entity available and very willing to supply the collateral into the market must help for a time though.

Apr 18, 2015 - 4:31pm

I'm just askin'...

First let me say that I appreciate Denver Dave's presentation of the IMF announcements and the lame Bloomberg terminal/Chinese policy excuses surrounding the big sell off. I really do. Because, to track what the system says is happening is a large part of why i'm here.

But I have to ask- Are we really to assume that all the unseen, behind the charts, system machinations are so legitimate, operational, and adhered to, that an unplanned global financial crisis really could just be caused by an RRP induced liquidity shock that quickly morphs into a derivatives meltdown?? Really?

Let's think back to the 2008 crisis for which we now have the benefit of hindsight. At the time it seemed so real, all the interbank lending charts locking up, imminent global meltdown, martial law if some bill isn't passed, remember all that silly shit? Remember the DJIA dropping like a rock so all the sheeple would buy in to (demand) the "solution"?

Since 2008 we have been re-re-re-reminded many times that the markets (charts) can be moved anyway the gov approved bankers see fit. And that the only way the stock market chart takes a dive is with the full approval of it's owners.

Also looking back at the 2008 "crisis" with 20/20 hindsight we can see what it really accomplished. It was a manufactured means to an end. It gave the bankers carte blanche to TARP/Bail out/QE to their hearts content. AND as demanded by the people (sole purpose for the "crisis") so as to create the perception of banker immunity.

Also, we now know that the TBTF banks create (derive) as many digital dollars as they please, and they have no accounting or oversight (thanks Bernie ). And the charts, aka the Straight Man for these productions, are all fair game for the bankers to manage as they see fit. Legally and since 1934!

We have seen so many false flags and manufactured crises in the last 3 years alone that they are too many to list. And now here we set, ...cell phones silenced, popcorn at the ready, speaking in hushed tones while watching sci-fi horror derivatives previews. But if/before this thing kicks off, i've gotta ask-

Are we really going to believe it's a legitimate crisis? Again?

i'm just askin'

Apr 18, 2015 - 4:43pm

IMF meeting this week

Topics: Greece, Ukraine, yuan/SDR basket.

Apr 18, 2015 - 5:03pm

I'm jus' ruminating' ...

If enough of the acting parties that think they are acting in a market believe there is a legitimate crisis, then, irrespective legitimate or not, it becomes a self fulfilling, and thereby legitimate, crisis. Which only stands as proof that lemmings, unrealized by themselves, can have Real Raw Power (RRP). Lemmings of the market unite! Grasp your fate with all paws, feel the hyperbolic urge, and claim that parabolic trajectory as your own!

Safety Dan
Apr 18, 2015 - 7:52pm

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This same study illustrates how aluminum compounds directly cross the blood-brain barrier, embedding into key areas of the body responsible for energy production, gene expression and enzyme catalysis.

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Apr 18, 2015 - 11:23pm

IMF status of U.S.

So just off the top of my head I remember LaGarde discussing the US not voting on the new reforms for the last 4 years or so, also I remember a quote last year as she said the IMF would be moving to China at some time as the largest paying member had the rights to host the headquarters. I also remember the budget passed in Dec, 14 had no money allocated to pay the dues, which I believe are 67 billion a year. So I wonder the status of the U.S. in the IMF and the plans to pay dues and so forth. All this makes me think this may be a done deal and I'm not sure the U.S. would veto China as the little matter of treasuries owned plus other matters of leverage they hold. May not be a big deal but sure would be another hit in an increasingly large number of hits.

Apr 18, 2015 - 11:38pm

The Fed may have a few trillion in bonds...

...but recall that the total derivative pile is measured in quadrillions.

Apr 19, 2015 - 2:30am


Market Report: PMs confined to tight trading range

By Alasdair Macleod

Posted 17 April 2015

"One of the more intriguing news developments is a joint World Gold Council/Official Monetary and Financial Institutions Forum (OMFIF) meeting this morning in New York to discuss the inclusion of gold in the SDR basket when it is revised later this year. It was agreed in 2010 that the renminbi should be included, but this has never been ratified by the Americans. It is believed by close observers that China's exclusion from the SDR is one of the reasons China set up the Asia Infrastructure Bank rather than pursue the IMF relationship. However, if the proposal to include a weighting for gold in the SDR1 gets any traction at this morning's meeting, it will be interesting to see the reaction from the Americans, given that the Chinese appear to want to incorporate gold into international settlements. It could also provide the Chinese cover for declaring an increase in the gold content of their official reserves.

For what it's worth, the chairman of OMFIF (Lord Desai) is quoted as saying gold's inclusion in the SDR is quite likely to happen. However, there are legal obstacles to overcome.

[1] After the collapse of the Bretton Woods system in 1973, the SDR was redefined as a basket of currencies. Today, the SDR basket consists of the euro, Japanese yen, pound sterling, and U.S. dollar. The value of the SDR in terms of the U.S. dollar is determined daily and posted on the IMF's website.

Apr 19, 2015 - 7:12am

@SS121 - Not a crisis, a process

When you get to borrow free money, free being not your money, the only thing stopping you from borrowing more is the quality of the collateral you put up. Bad collateral stops borrowing. At which point, the borrower looks up and looks for more quality collateral. Another way of looking at Exeters Pyramid is that credit collapses to the quality of the collateral used for the loan.

I've been waiting 8 years for the collateral vacuum to appear.

Now everyone is going to start the process of looking around for collateral. We've been saying for years that you don't convert PMs to USD, soon you can buy things with it...and just as importantly put it up for collateral to borrow.

First though you will need to figure out how to hold on to it.

Forget gold as money, to bankers GOLD is the perfect collateral. Fungible, divisible, easily measured, portable, counter party risks......etc...

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