You never know what will trigger an bull market and what will trigger a bear market . – Marc Faber on CNBC
Faber goes on to say in his comment on CNBC that you can only know what triggered a bull/bear market after the fact. That is the definition of a “black swan.” There hasbeen a lot of speculation in the last year about what the black swan would be that would trigger the next market collapse. Of course, once a candidate for the Cigno Nero is identified, that takes it out of contention, right?
The collapse of Banco Espirito Santo, Portugal’s 2nd largest bank, could well prove out to be that black swan, as it is an event that no one saw coming (except maybe the bank’s auditors). Too be sure, I read a lot of everything and I have not seen any Oracle of Blogosphere previously mention this situation: Espirito Santo Creditors Doubt Containment on Missed Payment (Bloomberg News).
But this is the reason the U.S. stock market is tanking hard today AND why gold, silver and mining shares are spiking higher.
The Bloomberg story above references the fact that there are credit default swaps – aka OTC derivatives – on Banco Espirito Santo. But what’s missing from the analysis is, “what happens if one of the counterparties who has made the bet that this bank will never go bankrupt can not pay off the bet it has made?”
What happens? A defaulted bank will now be bailed out creditors – depositors and debt holders, in that order. But what about the entities that have to make the payments associated with the credit default swaps?
We don’t know who the counterparties are and we don’t know who will be on the hook – until after the fact, which by then it’s too late. We don’t know this because the Too Big To Fail Banks made sure they paid your elected Congressmen to pass laws that enabled the TBTF’s to keep this information hidden away. I bet even Jamie Dimon, pre-chemo, has no clue whatsoever if JP Morgan is on the hook or if JP Morgan is exposed to someone who is on the hook.
THIS is what could potentially trigger a bigger run on the bond market and THIS is exactly the dynamic of which regulators in the U.S. are terrified. And THIS dynamic is why the Fed was discussing putting capital controls on bond mutual funds. And THIS is why the Vice Chairman of Black Rock, Barbara Novick, is going around like the Sicilian Mob Boss promoting the concept of the need to have a bailout mechanism for the derivatives clearing mechanism. Clearly Black Rock is highly exposed to credit default swaps.
It’s coming. It’s just a matter of time. You have been warned: Get money OUT of bond mutual funds. Get your money out of your IRA and 401k plans TO THE EXTENT YOU CAN. Pay the penalty and taxes. Do you want to pay 30% of something or get 0% of zero, because there will come a time when your retirement fund is reset to zero.
On another note, three of the four junior miners I have published research on are up well over 10% in the short time since I’ve published my reports: Junior Mining Stock Research Reports. “Huge Upside Idea” is up 22% since June 25th. It’s just getting started. Almaden (AAU), spiked higher yesterday on great drilling results and is pulling back today for no reason. This is an entry opportunity, in my opinion. The other two ideas have plenty of room to run and good reasons why they should run.