Yesterday I wrote that JP Morgan is party to $70 trillion (with a “t”) of derivatives with $209 billion (with a “b”) of retained equity. I said that they are levered “35-1.” Sorry, I was wrong and several astute readers pointed this out to me. Simple math mistake but when talking about this size of numbers “what’s a decimal point between friends?” The true leverage is 350-1! Yes, just a small oversight on my part and I apologize.
I apologize for the math mistake but what I’m truly sorry about is how BAD this really and truly is. I said that JP Morgan could “lose” up to 3% or have 3% of their counterparties not perform in which case they would then lose all of their equity…my bad, the real number is “.3%.” Yep, POINT THREE PERCENT is the margin of error on their derivatives book between what they call a “fortress balance sheet” and total loss of equity…as in going belly up and leaving nothing left at all for the sharks, barracudas or even the minnows!
Speaking of “nothing left,” so far for the month of October there have been 218,000 ounces of gold already “served” for delivery with another potential 223,000 ounces standing for delivery. This works out to just less than 14 tons of gold while the “dealers” only have just less than 24 tons in inventory on hand. October alone looks like it could take over 50% of gold in the registered category. “But surely they will just re stock and everything will work out just fine”…we maybe…or not? So far this year as far as I can tell, JP Morgan has had exactly ZERO ounces enter their dealer inventory and only 12,000 ounces enter their customer inventory. “Dealer” inventory has been decimated already this year and we haven’t even gotten to December. Not because December is the end of the year, it is…but it is also traditionally THE biggest gold delivery month of the year.
Currently the December contract has open interest of 225,914 contracts open; this is 60% of total open interest which is now at just under 375,000 contracts so you can see how important December really is. The December OI (Open Interest) represents over 22.5 million ounces or just over 700 tons. Let me put this in perspective for you. The dealers purportedly have 24 tons of gold, not counting what will be withdrawn in Oct., and December open interest is almost 30 times what the dealers have. If you include customer gold in the equation, there is open interest currently of more than 3 times the TOTAL dealer and customer gold held at the COMEX…for just this one delivery month! And yes I know that all of the open interest will not stand for delivery and will surely sink from here before first notice day…but by how much? I also know that historically most metal that is delivered comes from the dealers and not customers meaning less gets reclassified to “registered” from “eligible” than gets straight delivered from the already registered side. So…my point? We haven’t even gotten through the delivery of Oct. Gold and the inventory already looks like it could be squeezed, December looks like the vaults could be emptied to the point of only cobwebs remaining in the vaults…
Let’s go back to the top of the page. I talked about derivatives and I’m sure some will say “but it’s all hedged.” Then at the bottom of the page regarding gold and potentially how much more paper gold there is in relation to real gold. Again, I’m sure the battle cry is either “it’s all hedged” or better yet “it is all a hedge.” My point is that it is all “fractional reserve” on massive steroids. This is dangerous. This is WAY beyond dangerous! We are living “fractional reserve everything” and “leveraged leverage” at its finest and most pure form ever experienced to mankind.
With the above in mind, now we are faced with, well…”should be” facing up to our indebtedness. The government shutdown and debt ceiling debates should be about facing up to where we find ourselves financially. It is not and most probably won’t be anything other than another attempt at kicking the can down the road another year or so. The markets are upset with this and will probably be a catalyst for some sort of deal. Good deal? A deal that fixes anything? Of course not but that is what we will hear.
On a more comical note, wasn’t everyone just holding their breath about 2 weeks ago as to whether the Fed would taper or not? TAPER? In just 2 weeks the economy has shown signs of completely rolling over. Car sales down and inventories up, homes sales slowing, heck, inventory is even piling up on Walmart shelves. The dollar has now smashed through the “important” but totally meaningless level of “80” and stocks look to finally have rolled over…so I ask you this, what would the markets and economy look like 30 days from now if the Fed were to “taper” and monetize less than $85 billion per month? Would THIS maybe affect JP Morgan’s derivative book by a whopping “.3%?” Or maybe some of their counterparties since Morgan can quarters at a time without EVER losing on a trade?
I know that I bounced all over the place with this piece and I apologize but there are so many moving parts and so much danger no matter where or how you look at things. We are now totally set up for a complete collapse of everything financial. I wrote 4 or maybe 5 years ago that “no one could be so stupid as to make the policies that we have” and concluded that the policies were put in place on purpose and were actually designed to tear the system apart and down. I believe this now more than ever because there is no one stupid enough to logically believe that current policy is correct policy. “There are no coincidences.” A perfect example is the now famous phone number that our president has told us to call for help with Obamacare questions which is 1-800-318-2596. Please go to your phone and look at what these numbers spell out, I will give you some help.
1-800-F1U-CKYO. Is this a coincidence in a world where there are none?