Failure To Deliver

Posted 30 Oct 2008

Promises are being broken at an alarming rate.  Most of the derivative contracts that vaporized Lehman Brothers are requiring settlement in US Dollars stimulating demand.  Ironically, many are herding into the US Dollar which is akin to running towards the explosion for safety. 

As a result the US Dollar rally has been extremely strong.  There have been record failure to delivers of about $2.5 trillion in US T-Bills.  But this behavior is predictable during the deflationary Kondratieff Winter.

The US Treasury Bill and physical Federal Reserve Notes abut physical gold and silver at the tip of the liquidity pyramid.  This leads to a negatively correlated price relationship.  The other currencies, which are really the Dollar in one way or another, will evaporate first. 

Gold has recently reached all-time highs in the A$, £, C$, Indian Rupee, and the South African Rand.  Gold is about 70€ from an all-time high.  In this deflationary credit contraction these currencies are evaporating and things will get exciting as the last layer of evaporation intensifies through hyperinflation.

The Federal Reserve has recently cut the federal funds rate to a historic 1%.  The futures market has priced in additional cuts by Dec 16.  The CPI rate is positive and the real inflation rate is even worse.  This leads to a negative real return for the US Dollar. 

In other words, those who wish to be safe and liquid are herding into a financial asset with an official real interest rate around (4%).  Why would someone put their liquidity into such an instrument, subject to counter-party and payment risk, when they could store it in a tangible asset like physical gold bullion with GoldMoney for (.18%)?  Negative real returns for fiat currency are extremely bullish for the precious metals.

Argentina recently nationalized the pension system.  Thousands of people mostly around Buenos Aires and the other big cities marched in the streets banging pots and pans together. They are referred to as cacerolazos or pot bangers.  I suppose this is their way to cause political pain without hauling out the guillotine after their entire life savings is stolen?

Americans may not be far behind in grabbing their pots and pans.  The Pension Protection Act of 2006 requires 94% funding of defined benefit pension plans.  The value of so-called defined benefit plans was about $1.3 trillion at the end of September.  By Oct. 24 the value had evaporated to $1.1 trillion.  Lines of credit are being revoked and asset back commercial paper markets are nearly frozen but for Fed intervention. 

This $200 billion shortfall brings the funding level to about 85%.  As a result, companies including names such as Dow Chemical, BNSF, Lockheed Martin, GM, etc. will have to burn through cash dumping it into the pension funds while access to credit is constricted.  Of course, they are pandering to Congress for a bailout.  A lowly $8.4 trillion has dissipated from American retirement plans this year.  When will the pot banging start?

I would talk about how when most people log in to their brokerage account and see X shares of Y company that they really own X FTDs, or Failure To Delivers, of Y company but that may occupy an article all to itself.  For example, has sold about 19 million shares but the markets seem to think there are 35-40 million shares owned by investors. 

Some experts assert that FTDs make up more than 45% of stock market volume.  If you were naked short about $2.5 trillion of a financial asset like the US Dollar that could become worthless what would you want its value to go to?

As the US Dollar system continues to evaporate there will be a lot of confusion.  A lot of assets and purchasing power will be up for grabs all at once.  Millions are seeing the failure to deliver of their retirement planning.  These are merely consequences resulting from an incorrect assumption of what is ‘risk-free’.

My advice still stands:  Through the use of trusted institutions and assets like GoldMoney remove as many layers of risk between you and your purchasing power.