Ahhh, The Smell Of Credit Cross-Defaults In The Morning…

…it smells like, derivatives napalm bombs (with apologies to Robert Duvall and Francis Ford Coppola).

Banco Espirito Santo is in some deep kimchi.  And so our the investors in the bonds issued by the banks. And so are the investors who are unwittingly exposed to these bonds and the derivatives tied to these bonds.   Let’s not forget there’s also OTC credit default swap contracts tied to the bank’s senior secured credit:   Nomura Threatens Cross-Defaults.

We probably won’t find out who is left standing naked when this particular tide flows out because I am betting that the ECB/IMF/US comes to the rescue for the specific purpose of preventing a financial napalm bomb daisy-chain from starting.  But at some point smart investors will catch on (we hope for their sake) and unload anything with any possible hint of derivatives exposure…

27 thoughts on “Ahhh, The Smell Of Credit Cross-Defaults In The Morning…

  1. endless ink spilled about CDS & such, but when u see it in print finally by this top-tier Mockingbird Ambrose, u know he’s publicly warning about something big, & near, not just filling column space.


    The world economy is just as vulnerable to a financial crisis as it was in 2007, with the added danger that debt ratios are now far higher and emerging markets have been drawn into the fire as well, the Bank for International Settlements has warned.

    Jaime Caruana, head of the Swiss-based financial watchdog, said investors were ignoring the risk of monetary tightening in their voracious hunt for yield.

  2. I’m convinced the US is insane!!

    Today, I wired funds from my non-US bank account that is in MY name to a broker account in the US that is also in MY name. (I don’t live in the US nor am I a citizen).

    The funds were returned/rejected….why? Because they won’t accept funds from a bank that is not in the same country I live in…WTF!!!

    ie: if you live in the UK and want to wire funds to your US broker account from your Swiss bank account they will reject it.

    So, how on earth are you meant to fund a US broker account when you live overseas and have bank accounts all over the world??

    Does the US not want foreigners money any more for investment?

    1. You were FACTA’d! Imagine how indignant some of the foreign UN officers where a few weeks ago when a similar
      thing happened to them.

      The U.S. is doing it’s best to make the rest of the world hate our Govt.

      1. So how do I invest in the junior miners as a foreigner then??

        Can anyone recommend a (sane) US stock broker?

        I was thinking Interactive Brokers maybe.

        Argh, the world has gone mad.

      1. It’s probably being held under “expedited” procedures because there will be no change in policy and
        Janet Yellen ran out Depends and she can’t make it through a long meeting without wetting herself.

  3. Dave you gave the game away- derivative risks, moral hazards ranging from over-exposure to exponential leverage have entangled and the old institutions and policy setters in a strangle hold. May “smart investors catch on” to the only game in town, before the referee steps in and lays down those rules of the game once known as market based pricing/setting/discovery etc…
    Time for Dubai to set the gold standards
    Current gold fixing practice is open to abuse and therefore in desperate need for reforms
    By K. Raveendran | Published: 14:40 July 14, 2014 | EXCERPTS:

    “…In the prevailing price fixing system, four banks — Barclays and HSBC along with Societe General of France and Scotiabank of Canada — agree on a price and declare it as the fix.
    The scandal broke out when an ex-trader of Barclays admitted attempts to manipulate gold prices, for which the bank was clamped with a fine of $45 million. The scandal also saw Deutsche Bank pull out of the arrangement.

    In fact, Dubai, which Norman has included among those who are envious of London, has a much more sustainable claim to become the centre for global gold trade. As much as 40 per cent of all gold flows in the world happen through Dubai and the city is easily the most important hub for the trade.
    Dubai has the infrastructure and the systems to set benchmarks, and even its own good delivery standards. It is now time for it to start asserting its role and demand recognition for its contributions to the trade.
    With such major changes happening in every sphere of business, the current age belongs to performers and not consultants, who have had their share of fame but are now ready to be consigned to the dustbins of history. If managing global gold trade is anybody’s business, it is most obviously that of the producers, consumers or those who make trade happen.
    Any other role is secondary.”

  4. When you speak of derivatives, Dave, are you also speaking of futures contracts? I always thought futures contracts had an added level of safety because they are traded on a regulated exchange. Am I mistaken?

    1. Futures are derivatives. Any paper security which represents some form of economic interest in an underlying asset is a derivative. Stocks are derivatives of the underlying business which issue the shares. GLD is a derivative of the gold that is supposedly being kept in HSBC’s vault. EVERY securities exchange is regulated. Big deal. Do you think the regulators are doing their jobs?

      The Comex is the least regulated exchange out there AND the regulations that are in place are not enforced at all.

    1. Dude worked at Bear Stearns. In 15 years working on Wall Street, I NEVER once met ANYONE from Bear Stearns who was not a total sleaze-bag. I remember interviewing there after college and I vividly recall how arrogant yet sleazy the place was.

      I’d be leary of someone who markets their services with a lead-in theme that accuses everyone else of being a con-man.

      1. What I find “funny” is that he is saying that gold/silver are crap and he moans about these other con men selling the stuff and yet he has a book he is selling and the reports on his website are $300?!

        I honestly don’t know who to believe anymore re invesing and especially don’t know who or what to believe regarding this!!

        1. Do you work with Steve at SRSocco? Because I saw your email address, I did a cursory view of the video. To be blunt, it was retarded.

          1. No, I don’t work for SRSrocco but I have commeted there.

            I’m trying to find direction with my investing. I have “bought” into all the precious metal hype for 10 years and after watching quite a few videos Mike Stathis and, to be honest, it has me worried.

            I honestly don’t know what to do next. Continue holding physical PMs that are tanking in value? Sell? Follow Mike Stathis’ advice? Read his books?


          2. You have not done thorough research and if you bought 10 years ago you would still be in the money. As measured over 13 years, when the gold bull market started, gold and silver have been the best performing assets (there may be some obscure commodities that have outperformed). Look it up.

            If you think there’s any validity to what Stathis is saying, then sell your gold/silver/miners and go have fun.

            I’m not going to explain why Stathis is dead-wrong, bordering on psychotically stupid on the subject. You need to go through the process of researching and analyzing and deciding for yourself, on the merits of all the evidence, who’s right and who’s wrong.

            The truth is, if I’m right in my ultimate view (read “The Road” by Cormac McCarthy) then it doesn’t matter who’s right and who’s wrong. That’s why I urge everyone to have as much as they can, while they still can. Unfortunately, the path the U.S. is right now leads me to believe that Cormac McCarthy is ultimately right…

  5. “I’m not going to explain why Stathis is dead-wrong, bordering on psychotically stupid on the subject”

    Would you mind expanding on this?

    And yes, I *have* done my research. I spent a couple years reading/researching/studying PMs before investing. I’m by no means an expert but have spent plenty of time reading about them.

    There are some things that Stathis says that is 100% correct (ie: people trying to sell you something on fear). I agree with him about these con men…it never even crosssed my mind that they were conning me. There is a theme here: Everyones trying to sell you something based on fear with regards to PMs (ie: dollars going to collapse, hyperinflation, etc).

    Are PMs in a bubble? Is the bull market over…or just getting started? I don’t know any more except this is the largest and longest correction ever. Hell, I went through the correction from $21/oz for silver to $9 and it didn’t even bother me but 18mths later things were looking good again!

    Anyways, appreciate your thoughts and comments!

    1. You have to figure that stuff out for yourself. You’ve done all the reading and seen all the analysis. Ultimately you have to make your decisions if you are going to have a chance at being successful.

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