Tag Archives: derivatives

Time To Get Out Of Your Bond Fund Investments

The elite aristocracy has at least on rule of morality:   they consider it to be in poor taste to not warn in advance of doing something horrible to the middle class .  Here, middle class is defined as anyone not rich enough to own his/her own politician – that probably means you.

The latest warning involves what is likely an the eventual onset of a huge derivatives blow-up in a one or several large bond mutual funds.   There are reasons I believe that this event may be closer than any of us realize.

Pimco, Fidelity and Blackrock manage by far the largest amount of money in bond funds. In fact, I would bet good money that when the accident occurs, the White House will deem each of those as “Too Big To Fail” and find cause to bail them out using your money.

I know for a fact that Pimco’s Total Rate of Return fund is loaded with hidden derivatives risk.  Did you know that?  Does your financial advisor know that.  I’d bet that 99.5% of the advisor world does not know this.  I know because I know of a study that was done which spent a month pulling apart all of the data and information available on Pimco’s Total ROR bond fund.   I was told that it is a derivatives train wreck waiting to happen.

The money management world is “monkey see/monkey do.”  So it’s a good bet that most, if not all, big bond funds are loaded with dangerous derivatives.

So here’ s your warning:   GET OUT OF YOUR BOND FUNDS NOW

And be thankful that the elitists at least consider it rude not to signal a “heads up” before they flush the toilet when you are in the shower.  This is your chance to side-step the water before getting scalded badly.

New Derivatives Rules Rescinded To Help Banks Make More Money

The rules originally established to help protect the system from bank greed and fraud connected to derivatives were just rescinded by the same Basel Committee that drafted the original blueprint – article link.  The original rules would have significantly curtailed the ability of banks to underwrite the derivatives they sell to pension funds and hedge funds. It would have required that the banks put up a lot more in reserve capital, which in turn would have forced the banks to charge a much higher premium – or cost to the buyers – for the derivatives it sells. Make no mistake about it, AIG and Goldman would not have blown up if both parties had been forced to properly reserve against their derivatives contracts.

The financial collapse in 2008 was largely triggered because banks systematically under-priced the risk premium built-in to derivatives.  The original rules were designed to help limit the disaster caused by the under-reserved derivatives which blew up Lehman, AIG and Goldman and triggered the massive bailouts.  If the risk premium had been properly priced in a way that reflected the degree of risk embedded in the derivatives deals, it would have made most derivative contracts unaffordable to the end-user – pensions, hedge funds, municipalities, insurance companies etc. In other words, the new rules were established to protect the system from extreme greed and risk.

But if banks were forced to properly put up reserve capital to protect against the risks for which derivatives are used, most end-users would never buy them. This in turn would shut off the spigot to Wall Street’s most profitable business line. The change in the rules now means that the banks can party on as usual and make huge profit spreads on the derivative ticking time bombs they dump into  the financial system.

Again, make no mistake about it, this rule change is going to lead to another financial system collapse.  Only this time everyone will be forced to contribute directly to the bailout of the big Wall Street banks in the form of “bail-ins.”  Now we know why the bail-in rules are being transitioned and we know why big banks are moving their derivatives exposure up to their bank holding company level.

Anyone who understands what is going on here and continues to keep their money inside the financial system is either extremely naive or tragically stupid.  Forewarned is forearmed.