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The Solari Report – 07 May 2009
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In our last two Solari Reports we listened to two astute commentators (Dmitry Orlov, Clif High) describe why they believe the U.S. dollar could lose its reserve currency status, including in the next year.
On this week’s Solari Report I will be presenting an introduction to derivatives. Wikipedia describes derivatives as follows:
“Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying). The underlying value on which a derivative is based can be an asset (e.g., commodities, equities, mortgages, real estate, loans, bonds) , an index (e.g., interest rates, currency exchange rates, stock market indices, consumer price index (CPI), weather conditions, or other items. Credit derivatives are based on loans, bonds or other forms of credit. The main types of derivatives are forwards, futures, options and swaps.”
The title of my presentation is:
Derivatives 101: Useful knowledge in plain English about credit default swaps, interest rate swaps, futures and other complex financial instruments that help centralize the financial system, steal money in the trillions and make the financial news incomprehensible.
I will address why these financial tools are so important to maintaining the dollar as reserve currency and continuing the “Slow Burn.”
I coined the “Slow Burn” scenario years ago to describe a politically managed economy in which financial and economic failures would not translate into system collapse. Instead, they would translate into continued transfers of resources from political outsiders to political insiders to subsidize and manage the asset values and power of various corporate and bank interests. Countries would be drained to feed the system, or various populations, species or places. Replenished by draining others, the system would continue to move forward.
For many years, a variety of highly capable, intelligent people have tried to persuade me that the dollar is imminently going to lose its status as the global reserve currency and collapse and that the price of gold is going to shortly increase to $2,000/oz. or more. When these events do not come to pass and time goes by—something strange happens. We never sit down and do a “lessons learned” to determine why it did not happen. No one wants to discuss it. There is no venue to ask and answer the questions:
- Why does the dollar’s performance defy economic fundamentals?
- Why is it that U.S. trade and budget deficits don’t matter?
- How can $20 trillion in global bailouts not yet trigger global hyperinflation?
It turns out that understanding the Slow Burn and the amazing strength of the U.S. dollar requires several “building blocks” of knowledge that most of us have not acquired through our formal education or media:
Shadow Governance: Our world is governed on a highly centralized basis that networks into every industry (or so-called “cartels”) and every place—whether country, region or local area. This system is not new—it has evolved organically for centuries within “the central banking-warfare model.” Much of its evolution has organized around intergenerational pools of capital, the growth of which reflect the fundamentals of economic and military warfare as they determine command of intelligence, technology, populations, natural resources and trade routes.
The U.S. Federal Credit: The U.S. economy is a highly controlled political economy, with most of the economy managed through the U.S. government budget—both the Congressionally approved budget as well as secretive black budgets run with no transparency and oversight but with the benefit of governmental powers and authority. Building literacy of how this governmental financial mechanism operates both globally, throughout financial and commodities markets, and at the federal, state, and local levels requires an understanding of the financial ecosystems of places and industries.
Suppressed Technology and Knowledge: Political control depends on suppression of knowledge. We do not have ready access to the knowledge that we need to understand our history and economy. Significant health, energy, information, military, and space technology has been suppressed, from the citizens who funded its development and management.
Advanced Surveillance Technology and Weaponry: Historically, financial leadership requires some form of military dominance and enforcement – which comes down to supremacy on land, on sea, and/or in the air. What this means is that invisible weaponry, particularly that created with new advanced technology, can have a profound influence on our world while many people can not fathom that such powers exist. The U.S. has sea and air supremacy which is critical in supporting the dollar.
Control Files and Tools: Many of us have enjoyed the movie, The Matrix, yet we fail to understand how our own incentives and behavior are manipulated. While it has become easier to see the control on a broad, national scale, we are resistant to seeing and understanding how it operates at a more intimate level—in the media and entertainment we choose, within our own family, our school, our workplace, and our community. We see the torture in Guantánamo Bay. We do not see it in our community. Indeed, to see the control mechanisms and how to navigate them often requires that we understand the areas of knowledge described above.
One of my goals for The Solari Report is to break down these different areas, help you understand them and see the threads weave through the current news of the day. The more you are armed with this knowledge, the more powerful you become. I want us to address what is holding up the dollar and why. Understanding this is critical to understanding how to best manage our time and assets.
In this week’s Solari Report, in Money & Markets, I will discuss the extraordinary success of the Obama Administration’s first 100 days in further centralizing political and financial controls and how this is shifting popular opinion, answer your latest questions in Ask Catherine and then present Derivatives 101.
What are derivatives? Who uses them and why? Why are derivatives at the heart of the current bailouts? We will cover these questions as well as how critical derivatives are to the political management of the financial system and maintenance of the Slow Burn. Understanding derivatives is part of understanding the federal credit system—and how the Anglo-American interests maintain a strong dollar and trigger and exploit the selective collapses that subsidize it. Derivatives are at the financial heart of building Empire.
This week, in Let’s Go to the Movies, we will be discussing A Very British Coup. Made for British television, when a populist committed to disarmament becomes British prime minister, he finds himself up against the entrenched Anglo-American partnership of spies, diplomats and investment interests and some of the dirty tricks they can bring to bear on an honest government official. Want to communicate effectively with your political representatives? To do so, you need to understand the pressures they face when trying to act in our interests, including the risk that the media will not allow the truth to be told.
If you are a subscriber to The Solari Report, you can post your questions at your private panel or as a comment to this blog post. If you would like to learn more about The Solari Report and subscribe, click here.
We would love to have you join us.
View this week’s Money & Markets Charts here.
The slow burn in my opinion is quite accurate. Letting the air out of the market needs to be done slowly in order to keep the sheeple in their pens. – aka their 401k S&P 500 index funds, mutual funds, etc. Need to keep that dollar cost averaging money flowing in. It’s always buy and hold, be a long term “investor”, you can’t time the market, you’ll miss the train if you’re not in the market, stocks are cheap,garbage, garbage, garbage.
But it seems that perhaps a few sheep are straying from their pens,
Some investors in 401(k) retirement funds who are moving to grab their money are finding they can’t.
Even with recent gains in stocks such as Monday’s, the months of market turmoil have delivered a blow to some 401(k) participants: freezing their investments in certain plans. In some cases, individual investors can’t withdraw money from certain retirement-plan options. In other cases, employers are having trouble getting rid of risky investments in 401(k) plans.
http://online.wsj.com/article/SB124148012581385199.html?ref=patrick.net
Does the same thing happen to wall street and corporate executives?
When the bottom finally does arrive – the headlines will be literslly screaming for people to get out of stocks at all costs, because they’re a horrible investment. Of course, that’s when they’ll be cheap.
Never underestimate a wild cornered animal to do the unthinkable in order to escape. Financial engineering has been going on for some time to cover up the “bad” stuff. I recommend the book by Frank Partnoy, FIASCO. Some excerpts,
“That was merely one of many such conversations at BT and I imagine at most other investment banks. If a client couldn’t figure out how much a complex derivative trade was worth on a given day, the investment bank could misrepresent the up front value of the trade, then revalue the trade over time extracting more fees.”
“The trick LEH had discovered was that if you put the xxx bond into a trust and added some zero coupon bonds with the junk interest payments, you could convince S&P to rate the entire trust AAA. Combining the two was like baking a cake and then adding icing. The cake was crap, but the icing was real chocolate. The icing persauded the ratings agencies to call a crap cake a chocolate cake.”
“Sure enough, it could generate instantaneous false profits. It could be used to hide just about any investment oss.”
-Basically what I took away from the book, was the biggest buyers of these derivative were pension/retirement funds and insurance companies. Once they were “blown” up, they would either double down or request another derivative designed to cover up the losses for as long as possible.
Go look up the term – ripping your face off, as it relates to wall street vernacular.
Also here’s an article,
Financial Engineering/Alchemy 101 – turning toxic waste into AAA gold
http://www.thebarricadeblog.com/?p=939&ref=patrick.net
Check out the chart regarding what percentage of securties rated since Jan 1, 2000 have received the coveted AAA rating.
Steve:
Don’t assume….:)
John:
Yes, I agree. Things will take more and more cleverness to keep together. I think the problem will not be intelligence or resources, rather the politics of managing the collective greed and hubris.
Oldwiseman:
Oh, my, you are indeed wise. Yes, when with the enormous and growing pools start to flow back on shore. A very big swing….
Catherine
So the dollar will continue to hobble on in a slow burn unless the world decides to go off the dollar? What is your immediate forcast for the bond market this summer? So gold will continue to be suppressed unless the world goes off the dollar or is it possible they will run out of gold to suppress the gold market.
Dear Catherine: Hope this finds you once more in the strawberry patch….
This http://www.321gold.com article might be reading material for your derivatives 101 blog..
http://www.321gold.com/editorials/wilson/wilson050509.html
Clearly we as a civilization founded on high ideals and fundamental precepts derived from great thinkers from the Age of Enlightenment is under severe attack from these self ascribed ‘financial oligarchs’…
IMO, behavioral science and social engineering will remold our collective psyches into a new form of neo-feudalism ( not socialism nor old style fascism ). I know your approach to our dilemma will be explained and disected in a most dynamic way….I only hope you include in this endeavour a huge section on the covert usurpation ( and syphoning away ) of vast trillions into the accounts of the multiple offshore tax havens established by the age old NSA and other Intelligence agency financial entitiies. A loophole as big as a bank has continually been left open to funnel vast amounts of electronic cash to the usual culprits…As you are already aware the very bigness of this slush fund makes common bottom up control of our institutions impossible and pointless…The normal “oversight” has been systematically bought off and the “Slow Burn” you describe is ongoing…I enjoy your approach as ‘Permaculture’…I remember the original concepts that came from ‘the land downunder’ in innovating the thinking behind home grown agronomy…Most folks I interact with still cannot see through the looking glass, and relate in left/right paradigm conversation…How was American education so twisted?? It must have been the TV??? HA!! Hate speech must be the easy way out in speaking one’s mind…I sure miss “critical thinking”…I hope it makes a comeback ( soon!!!). Are you invited to the Jekyll Island gathering organized by Mr. E. Viera and Mr R. Schultz, etc., this month??? I foresee a global satellite link up with strategic cities in a three day seminar style educational broadcast dealing with this very sensative topic …I remember a previous one that took place in the 70’s that linked London, Toronto and LA….If nothing else it might expose the underbelly of the beast ( so to say ). In advance I believe your derivatives 101 seminar will be a smash hit…warm regards, Richard ( the oldwiseman )
Thanks Catherine for these insights surrounding your ‘Slow Burn’ metaphore. I look forward to the derivatives talk Thursday. A number of commentators see things falling apart very quickly. It’s good that you point out just how clever our friends are – those behind our age old instutions. As you say, they have their interests protected in ways that we may not realise.
But it may also require more than cleverness on their part, to keep their world intact. The forces pulling it apart are becoming enormous. And unfortunately for them, they don’t have a great deal more than ‘cleverness’ available to them, for coping with massive changes.
Australian poet Francis Brabazon uses the achetypal figure of ‘Big Fist’ to symbolise the power elite.
“None thrives on song; lives are fattened for gain –
Grain
Grown and ripened only for the mills of Big Fist.
Brain and muscle, love and fair speech, all to him are grist.
But the Wind of God blows where it lists –
And Big Fist and his satraps will bow before its storm.”
Excellent ideas, Catherine. Keep up the good work!
I am assuming this translates into a “buy” rating for the overall market, for now. At least until stocks begin slamming into hard overhead resistance in the form of the 200-day moving average. This will take several weeks to unfold… after we touch the 200-day MA, still a slow burn or Market Crash Part II? Time will tell the story.