DerivativesSubmitted by Bill Holter:

Kyle Bass claims to have purchased $500 billion worth of Japanese debt protection for 1 basis point (which if my math is correct cost him $5 million).  Presumably he is not the only one that this bank sold the “protection” to.  Is there any bank anywhere on the planet that could come up with that type of cash today?

Let me put this in just a little perspective for you.  $500 billion, doesn’t sound like much the way “billions” are thrown around like confetti does it?  The “admitted” on books accumulated debt of the 237 year history of the U.S. Is $16 trillion…or only 32 times the size of Mr. Bass’s bet!  When (not if) Japan fails, who’s going to bail out this little puppy trade (and presumably many more like it)?


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5+ years into the Greatest Financial Crisis and what has changed?  I could go into how balance sheets have blown out to ridiculous levels, money has been printed to cover up the financial sinkholes and accounting practices exist only at the pleasure of the banks who own the underwater assets, I won’t do that today.  Zerohedge put a piece out yesterday of a presentation by Kyle Bass, in which he said that “banks” (financial sorcerers) were offering Japanese “risk protection” for 1 basis point.  He claims to have purchased $500 billion worth for this 1 basis point (which if my math is correct cost him $5 million).  Now there is some “leverage” huh?!

I wrote about these types of derivatives as far back as mid 2007.  I asked at the time, “OK, so you win the bet but who is gonna pay”?  WHO could pay?  I wrote again several times in 2011 when the CDS of the US was starting to move up when the credit downgrade happened, “OK, so the U.S. actually defaults, what financial institution is still going to be around to pay up”?  Do you see how silly this is?  In Mr. Bass’s case he bought $500 billion worth and presumably he is not the only one that this bank sold the “protection” to.  Is there any bank anywhere on the planet that could come up with that type of cash today?  I say “today” because there are no sovereigns in outright default and the world’s stock markets are at high levels (in other words, these are “good” times), what if times weren’t so “good”?  If no one could pay today then how will they be paid when everything is collapsing?
Let me put this in just a little perspective for you.  $500 billion, doesn’t sound like much the way “billions” are thrown around like confetti does it?  The “admitted” on books accumulated debt of the 237 year history of the U.S. Is $16 trillion…or only 32 times the size of Mr. Bass’s bet!  When (not if) Japan fails, who’s going to bail out this little puppy trade (and presumably many more like it)?  Yes I know, the money will be printed and passed around to the winners (if they are lucky or politically connected) but what value will it have?  The currency system will then be demoted to one of “wumpum” money as Mr. Bass calls it or as I call it “monkey money”.  Don’t get me wrong, Kyle Bass is brilliant and is sitting on a huge pile of Gold (which he believes will be the best investment over the next 10 years), but why would he purchase something…anything that he absolutely knows (must know) cannot ever be paid to him when he wins the bet?

THIS is our banking system.  THIS WAS our banking system back in 2008.  The banking system is a broke, untenable Ponzi scheme where it “works” …until it doesn’t.  This is also our “currency” or monetary system which is why you must have investments in real money.  It is also the reason why I just don’t get it.  I don’t understand “why” people got nearly suicidal on this latest pullback in the precious metals.  If you can understand that literally $ trillions (actually over $1 quadrillion) of leveraged and unbacked bets, pieces of paper and “digits” on computers have infested and now “represent” the monetary system, then why worry?  You possess real money while your bank accounts or Treasury bonds or “money under the mattress” will go the way of the dodo bird.  We are living the biggest, grandest most all encompassing Ponzi scheme of all time…”the best move is not to play the game”!  Which of course you aren’t if you own Silver or Gold but who cares about the game and “who’s winning” if everyone who plays will end up a loser?

Regards,  Bill H.

  1. Yeah, you can win big with derivatives alright.  So big in fact, the casino can’t afford the payout! 
     
    I’ve got a new philosophy Doc.  Stackers have their very own “shadow banking system” they can use now and it’s called Bitcoin.  I’m more bullish near-term on Bitcoin than gold or silver.  I plan on using Bitcoin to help me stack more physical silver than I would have been able to otherwise in the coming months.

    • you are mistaken, bitcoin is no more a ponzi scheme than silver is.
      apparently, you don’t understand the definition of ponzi scheme, i recommend that you check the definition on wikipedia, investopedia, or elsewhere.
      bitcoin does not offer nor promise any rate of return on investment.
      its exchange rate is going up because of its utility, increasing popularity, and speculators.
      but, the fact that its exchange rate is increasing is a by-product, not that important at all.
      the primary value of bitcoin is that it’s a de-centralized payment gateway that can move money through borders and outside of government controls.

  2. Pinocchio, Snow White, and Superman are out for a walk.  They come across a
    sign:

    “Beauty contest for the most beautiful woman in the world.”

    “I am entering.” said Snow White.
    After half an hour she comes out and they ask her,
    “Well, how’d ya do? ” First Place!” said Snow White..

    They continue walking and they see a sign: Contest for the strongest man in

    the world.” “I’m entering,” says Superman.
    After half an hour he returns and they ask him, “How did you make out?”
    ” First Place,” answers Superman. “Did you ever doubt?”

    They continue walking when they see a sign:
    “Contest! Who is the greatest liar in the world?”
    Pinocchio says “This is mine.”
    Half an hour later, he returns with tears in his eyes.
    “What happened?” they asked.

    “Who the hell is Obama?” he asked.

  3. Who is going to pay?  Who`s the only guy in America that can conjure money out of thin air?
     
    It`s like the 3 Stooges are running the country. I`m serious.
     
    It`s part of the plan to desensitize us with numbers sooo big the don`t seem real.
     
    I`m waiting for the president to come on TV, Tell us to make sure are seatbelts are buckled, our tray tables are in their upright and locked position, and hold the fuck on.

  4. ” Don’t get me wrong, Kyle Bass is brilliant and is sitting on a huge pile of Gold (which he believes will be the best investment over the next 10 years), but why would he purchase something…anything that he absolutely knows (must know) cannot ever be paid to him when he wins the bet?”
     
    Given the first part of this comment, would it be wiser to assume that Bass does not know WTF he is doing with this or that he does?  My guess is that he has access to deals that few others do and that if he is involved in this, there is a VERY good reason for it.  The fact that we do not know all the details and so do not understand the FULL story here does not change the fact that Bass does.  Oh, yes, he surely does, as he is not prone to making stupid mistakes where money is concerned.  It will be interesting to see how this all turns out.
     

  5. Bass ain’t stupid.  Why wait for the crash and risk not receiving anything on those derivatives when the bank is desperate to unload their position now.  How many basis points will the bank offer to buy  back those contracts for above the 1 basis point they were purchased for?

    • I have no idea.  But, it is likely that Bass already had some kind of deal in the works when he bought those derivatives.  It is unlikely that he bought them just to sit on them.  There IS a method to this madness, whether or not we understand it… yet.

  6. Insanity….
     
    It’s like you buy ten Premium Bonds [UK Gov National Savings Lottery certificates] for £10 hoping to win one of the monthly £1 million 1st prizes. You then buy insurance on those ten £1 bonds for 1p which will pay out £5 million if the UK Government goes bust and the National Savings scheme closes down. So the banker that sells this insurance has sold millions of these 1p insurance policies to all the other Premium Bond punters too. UK goes down the pan so then all the PB certificate holders put in their £5m insurance claim for compensation. Bankers can’t pay, Original stake gone, Government can’t help = All F%^&*”
     
    For the benefits of non UK people. UK Gov guarantee you will get your original investment back when you buy a Premium Bond, unlike a standard lottery in which you forfeit your bet after a losing draw.
     
    Looking at stacking from this angle puts it into perspective why you shouldn’t worry about the price for Silver being at $26 – $28 – or $48. It’s about how much counter party risk free ounces of REAL insurance you hold and not its current paper value.

  7. Bass is a professional.  He’s not likely trying to ride the position to maximum profit.  He put on a whale-sized trade to reap whale-sized profits that he’ll attempt to ring the cash register on before the situation gets so bad as to invite counter-party risk issues.  That’s probably what he’s thinking.  Will it work?  Time will tell.

  8. I think that no one would buy off those derivatives except the central banks themselves if they want to be destroyed or if they are lucky, the some sheeple might do that. These derivatives will simply accumulate over time and they will vanish when the fiat currencies collapse.

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