The Credit Crisis is Just Another Way of Describing a Loss of Trust

The Credit Crisis is Just Another Way of Describing a Loss of Trust

1. The BDI measures the Baltic Exchange; a market index that calculates the price of a ship lease... for the buying and
selling of time charters of ships. If I need a ship, I lease one from a ship broker and the ship broker reports the terms of my lease
ie: price, size of ship, lease period etc... to the Baltic Exchange and they record the price.

Wall Street speculators entered the market and started buying up time charters. There were no speculative sellers, only buyers. Thus, this inequality between buyers and sellers in an especially illiquid, hitherto "commercial player only" distorted prices.
When the speculative bull decided to cash out of the market, the market collapsed.
In COMEX, you have commercial and speculative buyers and sellers and a highly liquid market.
The Baltic Exchange wasn't historically a speculative market. When speculators finally exited, the BDI crashed.

2. Letters of Credit Explained.

There are many types. Only one matters to the current crisis: Intenational.

Letters of Credit are financial instruments which guarantee payment before delivery.
Example: I'm not shipping copper w/out a letter. I might not get paid on delivery. Your court system may not honor my just argument when I go to sue.
Thus, I need a guarantee before delivery.

Banks used to trust each other, now they don't...
Why not? Off balance sheet accounting.
Commercial buyers and sellers are no different.

The letter of credit is the Achilles heel of the global economy. Without it nothing moves.
The BDI gauges economic activity.

The dishonoring of that document known as the letter of credit, gauges the lack of trust.
The issue, as Rick Santelli points out, is fundamentally one of trust.

Until we have trust we will not have an economic recovery. We can have an inflationary recovery, where the general distrust of is outweighed by the fear of holding currency which is rapidly losing purchasing power/value.
ie: "I'm afraid to hold cash and my fear overwhelms my fear of my counterparty so I'm compelled to put it back into a market that I don't trust" is the only rationale which currently exists to force bullish speculation in the market.
And this rationale isn't tenable until the Fed starts honestly, diligently...throwing money out of helicopters.
And they have to throw it faster than the banks can pick it up.
They must either debase the currency until people panic or prosecute the liars.

One or the other.

Category:

Education

Tags:

• Credit Crisis
• Trust
• Good Faith
• Letters of Credit
• Global Depression.

[TheEditorialist]

I sold DSX this morning.

This market doesn't hand out doubles everyday.

When you get one, take it.

Especially when the position is 12 months old (long term capital gain)

[Teller3448]

Why dont we just require (by law) ALL commodity futures buyers to take delivery?

This would eliminate the speculation and drive down the price of almost everything.

[TheEditorialist]

"Why dont we just require (by law) ALL commodity futures buyers to take delivery?"

******

Would all futures contract sellers be forced to make delivery?

I personally know speculators who short the contracts.

Besides all contracts are settled by firms (usually commercial buyers) taking delivery. For every contract bought there is a contract sold and vice versa.

Supply and demand is at the heart of the market. Speculation is represented only in the extremes swings in price, not in the 365 dma.

[Teller3448]

The ability to short futures is not more important than the health of the economy.

The 60 minutes article on the subject a few weeks ago pointed out that 60-70% of the oil futures market is pure speculation. Buyers who never have any intention of taking delivery. This speculation is very much a part of demand.

Remove that from the market and the price of oil would soon fall to lows favorable to economic recovery.

[TheEditorialist]

"The ability to short futures is not more important than the health of the economy. "

***

The ability to short futures lowers prices and thus, arguably helps the economy.

[TheEditorialist]

I forgot to mention that I think this loss of confidence in Letter of Credit is a black swan event that truly no one anticipated.

International shipping has seized up. And I can guarantee that the masters of the universe didn't want that to happen.

If they had anticipated it, they would've done something to prevent it.

These usually routine letters are the Achilles Heel of the global economy.

The lack of international trade that results will bring about a global, economic disaster.

[Domibond007]

Teller3448: You are wrong and 60 was biased.. What we need is more especulator not less, that way the market can fight the GoldmanSachs front running scheme with USO,UNG and all those ETFs. When the government took out the Onions and garlic from the futures market, the volatility of those products jumps more than 400%.. In the 1970's there was no futures market in oil and yet the Oil went straight to $101,75 by 1980. The FED also is the Biggest player by killing the dollar and creating inflation

[jimmyjustus]

Speculation is killing the economy by driving up the cost of goods. ergo, squeezing the cash flow of we commoners.

[DaddyBlackwood]

Hmm...I understood that explaination. Great video and food for thought. Subscribed.

[blehert]

"On the day when we can fully trust each other, there will be peace on Earth." L. Ron Hubbard, from _A New Slant on Life_