Think back, do you remember Lehman Bros.? How about MF Global and more recently PFG Best? What do they all have in common? Yes, they all went bankrupt you are correct but…what they ALL had in common was “how,” or more to the point HOW FAST they went bankrupt. All of these entities literally went belly up within a week’s time. But how does a firm “just go bankrupt” … overnight? Easy, other firms begin to pull money out at the same time that no one will “lend” to them in the overnight markets. With 20 or 30 to 1 leverage, the milk spoils pretty quickly!
Now, we have Knight Capital in the exact same situation and it has been reported that they are looking for a buyer. They lost $440 Million (chump change in today’s world) when their “algo” trading system “malfunctioned” 2 days ago. There is speculation as to the how’s and why’s, I don’t really care. There is speculation on the conspiratorial level that this is just another “rehypothecated vacuum cleaner” being used to force people out of their commodity contracts or to steal client money, (I hope not and feel for the customers) but this I believe is losing sight of the much MUCH bigger picture.
If these firms (along with Merrill Lynch, Coutrywide Mortgage, AIG and many more back in 2008) can become insolvent within 5 trading days and close their doors, what does that say? While reading this piece, please keep in mind that financial institutions now “mark” their assets to whatever they please no matter how farcical the price. I would venture to say with few exceptions, none of the firms that have gone under were considered “at risk” a month or two before their doors were closed. So, looking at the situation from a “systemic standpoint” you must ask yourself “what is to stop this type of scenario from happening to the whole system “overnight” and not just firm by firm?”.
The answer…very simple, the printing presses. Central banks will create as much money as necessary, whenever necessary to prevent a systemic default. Yes I know, I sound like a broken record but this is what will happen because there are no other alternatives. Please think long and hard about this topic because your financial lives depend on it. We know that the system is over leveraged, we know that ALL the monies (currencies) are based on and backed by all of this debt, we know that governments have always responded (including the last 4 years) by debasing their currency. We know all of this yes, yet people are still depressed because their Gold and Silver is “down”. You can see the falsehoods everywhere and you know what the government responses have been. You also know what those responses will do to the currency and that in a collapsing currency, what it does to the precious metals value’s. Don’t let boredom, frustration or fear separate you from your insurance!