# You're The Liquidity



## tygrus (Mar 13, 2012)

I just want to point out something that many people don't realize. When you watch all the talking heads from hedge funds etc on CNBC or BNN, they always say two things - time to buy is now and hold forever. And many people are long term holders. 

But....

You should know, you are the anchor for those big shops who told you to hold, because they aren't holding. Why would they need huge trading desks and a fleet of analysts and algos if they were going to just buy and hold. They are trading out millions of shares on a daily basis and if they did that alone, they would crash the stock before they could exit their position. So mom and pop retail holders are the glue that facilitates those actions. So you get your little 5% divi and you are happy, even though inflation is running more than half that, and you hold on through all those crazy gyrations every day mostly made up news events to get the market churning.

And right over top of you the big boys are making double digit returns every day. Not saying its wrong or right, but now you at least know.


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## james4beach (Nov 15, 2012)

It's really quite interesting. Goldman Sachs and JPM post their trade results and these are places that can trade profitably on 99% of days. Sometimes it's as little as 1 losing day in a quarter.

If they're winning on all those trades, who is losing?


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## atrp2biz (Sep 22, 2010)

Or is it the case of scalping small wins and then being on the wrong side of a 1% trade that wipes out the gains of the 99%? Kinda like shorting volatility.


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## andrewf (Mar 1, 2010)

tygrus said:


> And right over top of you the big boys are making double digit returns every day. Not saying its wrong or right, but now you at least know.


If anyone could make double digit returns every day, they would in short order own every asset on earth. Do the math.

At 10% daily return over 250 trading days per year, $1 becomes $22.3 billion after one year and $500 million trillion dollars after 2. That's about 500,000 Earths worth of assets.


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## james4beach (Nov 15, 2012)

My criticisms of institutions has more to do with unfair support they receive. That's what really makes this an unfair playing field.

Institutions *do* engage in risk, and do lose money in markets. You only have to look back to 2007-2009... many institutions lost plenty. These entities normally operate at high leverage and bring in steady profits, but when the market turns sour they can suffer horrendous losses.

So it's not like they make profit come hell or high water.

But then we get into the problem of bailouts and special support. If *you or I* suffer losses, or even screw up our investments so badly that we go bankrupt, nobody comes to our assistance. We eat the losses and our lives suffer. Some of us on this forum run a business. If we make a big mistake, our business can collapse.

However institutions have tremendous assistance, meaning it's not a "free market" at all. In a free market, institutions that screwed up would disintegrate.

Instead, institutions (talking Canadian ones here) receive assistance from the CMHC, Bank of Canada, US Federal Reserve, and even the Canada Pension Plan. All of the Canadian banks benefited from this assistance, and some very heavily: CIBC, BMO, Scotia received very large loans that kept them alive.

And in fact every large commercial bank has this advantage. Remember that just by virtue of having access to the central bank's overnight loans, they get limitless liquidity whenever they need it.

*Hey CMF business owner: do you have limitless liquidity whenever you need it?*

And this is what makes it an unfair playing field. They make good trades, they win. They make bad trades, they get assistance and win.


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## Eder (Feb 16, 2011)

I always like to think I'm sticking it to the hedge funds by buying great companies & never selling. Maybe it's just been an illusion on my part the last 25 years?


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## Moneytoo (Mar 26, 2014)

What, all those "numerous studies" that keep proving that if you know nothing, listen to nothing and do nothing except just buy index MFs or ETFs you'll beat the majority of active managers/investors in 20-30 years are a lie?  It's good that I listen to some talking heads that advise otherwise then: http://www.valuetrend.ca/rotation-is-going-to-be-key-this-winter


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## Rusty O'Toole (Feb 1, 2012)

Here is how you make sure 99% of your trades are winners, or you make money 99 days out of 100: you cheat. Read Flash Boys for details. Us little guys are a drop in the bucket. Most of their profits come from hedge funds, big banks and insurance companies, mutual funds and pension funds that are trading in the millions of dollars. A lot of prop desks stopped trading because the skim makes it impossible for them to make money.

They snipe pennies per share on each trade, so if you are a buy and hold investor the loss per trade is negligible.


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## james4beach (Nov 15, 2012)

True, Rusty. And let's not forget the nearly monthly scandals that get revealed. There are far too many to list.

LIBOR price fixing (Barclays + friends). European bond fixing (Citigroup). Emerging market bond fixing (Citigroup). Derivative shenanigans (JP Morgan). Losing segregated client funds from brokerage accounts (MF Global). Theft from margin accounts (Opes Prime). Aiding and abetting Madoff despite decades of suspicion (JP Morgan). London Whale (JPM). Early release of Fed minutes to investment banks. Subprime Fraud (Bank of America, Goldman Sachs, etc etc)

The public has become numb to this steady stream of scandals, but every one of them is a gargantuan fraud. And you think it's an even market place?


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## tygrus (Mar 13, 2012)

andrewf said:


> If anyone could make double digit returns every day, they would in short order own every asset on earth. Do the math.


Didn't say everyone, I said the big boys and institutions some of which have never shown their face. 

You're investments are the back bone, their efforts are the pillage. If mom and pop pulled their equities, the whole thing collapses. Why is there such an effort to keep the little guy in the market? Why wouldn't the rich just want to own it all and cut mom and pop out? Because mom and pop front the stability liquidity and the 1% drink daily from it.


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## mrPPincer (Nov 21, 2011)

andrewf said:


> If *any*one could make double digit returns every day, they would in short order own every asset on earth. Do the math.
> 
> At 10% daily return over 250 trading days per year, $1 becomes $22.3 billion after one year and $500 million trillion dollars after 2. That's about 500,000 Earths worth of assets.


+1


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## HaroldCrump (Jun 10, 2009)

james4beach said:


> All of the Canadian banks benefited from this assistance, and some very heavily: CIBC, BMO, Scotia received very large loans that kept them alive


They weren't "loans" - they were liquidity assistance, discount window lending, swaps via central bank agreements, and similar.
CCPA does not really understand how capital markets work - it's a bunch of union shills preaching social welfare.

But that aside, let us assume that it was indeed "bailouts".
It is not really the Canadian banks that got bailed out - it is the granny & the teacher & the police officer & the orphan, etc. that got bailed out.
Those shares of Royal Bank & TD Bank etc. are sitting inside every RRSP account, every RRIF, every pension plan, incl. teachers, nurses, cops, firemen, etc.

It is easy to say "wipe them out".
It is actually scary how trivial it is to wipe out a $100B financial institution.

Lehman Brothers was wiped out during a weekend - one phone call is all that stood between solvency & insolvency.
Hank Paulson hung up the phone on Dick Fuld that Sunday night & Lehman was wiped out...just like that, in 1 second.

Anyway, if the same were done to the 5 Canadian banks, the Rick Waugh's, the Gord Nixon's & the Ed Clark's would have been alright.
It would have been the mom & pop investors, working class pensioners, and millions of other ordinary, hard-working people whose life savings would have been cut in half, or more.

What the CCPA is doing is trying to justify the auto sector bailout, as well as equating then Prime Minister Stephen Harper with then US President George W. Bush.

Well, they have now gotten their wish...


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## james4beach (Nov 15, 2012)

Right, so the banks hold all of us "hostage" and insist they need big assistance to stay afloat. That's definitely what they did in all developed countries.

Simple solution, now that the banks are healthy: we strip the investment banking divisions apart from the depository institutions, ONLY allow the depository institution to use the central bank facilities, and the investment banks have to stand on their own.

That way, investment banks have to take real risks and suffer real consequences, the same as a normal business.

And the deposit-taking institution... the mom & pop and orphan stuff as you put it (hilarious by the way) ... is kept alive by federal government.

This idea of rolling investment banks into traditional banks only start in the 80s and 90s anyway. Banks today are completely unlike banks from past generations; they are hyper-leveraged gambling monsters, holding all of us hostage.


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## james4beach (Nov 15, 2012)

By the way, I wouldn't count on your equity (bank shares) rebounding next time round. Remember that Citibank and Bank of America never recovered. A bailout does not necessarily mean that equity is preserved.


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## HaroldCrump (Jun 10, 2009)

james4beach said:


> Right, so the banks hold all of us "hostage" and insist they need big assistance to stay afloat. That's definitely what they did in all developed countries


That is no different than how big unions & big auto companies hold us "hostage".
Big Bank is same as Big Union is same as Big Auto - the only difference is which politicians they donate to.



> Simple solution, now that the banks are healthy: we strip the investment banking divisions apart from the depository institutions, ONLY allow the depository institution to use the central bank facilities, and the investment banks have to stand on their own


Absolutely...go for it.
I fully support splitting up all TBTF institutions.

BTW, as a side - for all the rhetoric from Mrs. Whitewater about "punishing" the investment banks, she conveniently forgets that it was her husband that repealed the Glass-Steagall Act.



> And the deposit-taking institution... the mom & pop and orphan stuff as you put it (hilarious by the way) ... is kept alive by federal government


Not hilarious at all (assume you mean it sarcastically) - these are among the most widely held stocks.

Regarding completely separating deposit taking, keep in mind that it did not prevent the S&L crisis in the US.
That was while Glass-Steagall was still in force.



> By the way, I wouldn't count on your equity (bank shares) rebounding next time round. Remember that Citibank and Bank of America never recovered. A bailout does not necessarily mean that equity is preserved.


It's not *my* equity - what makes you think I am heavily invested in bank shares?
I was not invested in any US banks during 2007/8, either.

Question for you - in the event of a worse than 2008 crisis, where every type of financial institution is effectively insolvent (that is what you are talking about, right?) - who do you think the Federal govt. will bail out first - the Big 5 Banks or the CDIC?


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## james4beach (Nov 15, 2012)

Harold, I think we're more on the same page than I thought earlier.



> It's not my equity - what makes you think I am heavily invested in bank shares?
> I was not invested in any US banks during 2007/8, either.


My mistake



> Question for you - in the event of a worse than 2008 crisis, where every type of financial institution is effectively insolvent (that is what you are talking about, right?) - who do you think the Federal govt. will bail out first - the Big 5 Banks or the CDIC?


Seems like a very political process. Ugh.

I'm not sure how this would play out. To start with I see the Bank of Canada + Federal Reserve together providing enough liquidity so that the bank could keep operating and honouring the insured deposit accounts.

If things get beyond the point that central bank liquidity can handle, I could see the bank(s) being frozen up while government and CDIC work together to straighten out their balance sheet. Similar procedures happened in the US where FDIC took ownership of insolvent banks.

That's when the real pain would start as the country would start the process of transforming fantasy balance sheets to realistic ones. I expect that bank equity would shrink to zero and the bank would default on some liabilities. This will allow CDIC+govt to focus on the priority, which are insured deposits (a liability they absolutely don't want to default on).

When the balance sheet is rewritten, equity is nil, assets are largely shrunk, some liabilities have gone to nil (default) yet the insured deposit liabilities remain intact.

Other liabilities shrink, such as US dollar deposits and other uninsured deposits. This is the "bail-in" process, and even our federal government has told us can happen.

Then, if there's still a shortfall, that's when claims start getting paid out of the CDIC. I believe this is similar to how the US process worked with the FDIC... it's amazing how far restructuring the bank can get you, before dipping into FDIC coffers.

But like I said, that's when your equity gets wiped out. It's a natural consequence of hyper-leveraged banking, and it's going to shock Canadians (imo)


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## james4beach (Nov 15, 2012)

Another model I can see them using is, again like the US, designating one or two super banks (like Bank of America and JP Morgan have become). The bank is then used as a consolidation entity.

Perhaps they decree RBC to be the super bank. This would be a wise choice, as with $12 trillion of derivative exposure, they'll never sort out RBC's books anyway. Again, same thing happened with derivatives-giant JPM so this is very realistic.

Then, the CDIC takes ownership of the failed banks (say BMO and CIBC) and starts working out the assets and liabilities. Deposits get transferred to the super bank, RBC, and customers carry along without so much as a hiccup. Everyone is happy.

Then the government/central bank pumps a ton of money into the super bank to make everything work. In this scenario, RBC walks away an even giant-er inflated entity, BMO & CIBC are gone, and they never had to work out the headache of sorting out RBC's books.

That's the US playbook, and can't say it worked out too badly, versus the alternative.


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## HaroldCrump (Jun 10, 2009)

james4beach said:


> That's when the real pain would start as the country would start the process of transforming fantasy balance sheets to realistic ones. I expect that bank equity would shrink to zero and the bank would default on some liabilities. This will allow CDIC+govt to focus on the priority, which are insured deposits (a liability they absolutely don't want to default on)


What we observe from similar situations in Greece, Cyprus, Ireland, etc. is that bondholders will never lose a cent.
I'd say even equity will not be wiped out...the banks will simply go into receivership of the govt. (i.e. Ministry of Finance, with oversight & regulation by the OSFI).

There will be M&A, as you alluded to, such as RY gobbling up CIBC, TD gobbling up BMO, etc.

Situation will be very volatile and it will be hard to predict exactly what will happen, who will acquire who, etc.
In the US, it was touch & go...Merrill Lynch & Bear Stears were acquired, but Lehman was allowed to go under, AIG was bailed out.
In the UK, Northern Rock was wiped out but RBS & Lloyds' were bailed out.

Who gets bailed out and who is let go is very political and often comes down to personal rivalries, feuds, etc. (for instance, Hank Paulson & Dick Fuld hated each other).

Anyway, if the European examples are a template, bondholders will be made whole, by hook or crook.
Equity holders of Canadian banks will not be wiped out...although they may get re-structured via M&A and/or dilution (govt. buying shares).
Those with vested interests in the equity of these banks (large public sector pension plans, etc.) will not allow that to happen.
Wiping out even 1 of the Big 5 banks will cause a cascading effect on other financial institutions including the 2 big insurers & so on.


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## lonewolf (Jun 12, 2012)

Russia will set off an electromagnetic pulse knocking out the U.S power grid. The masses are not self sufficient without the power grid & will pretty much destroy themselves then the enemy will walk right in & take over.


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## Janus (Oct 23, 2013)

lonewolf said:


> Russia will set off an electromagnetic pulse knocking out the U.S power grid. The masses are not self sufficient without the power grid & will pretty much destroy themselves then the enemy will walk right in & take over.


Love it.

As for the topic at hand, trading divisions post losses all the time. It's unpredictable business. This whole posting a win 99% of the time doesn't sound legit to me.


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## HaroldCrump (Jun 10, 2009)

Wait...that's from a movie, isn't it...I don't recall which one...


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## mrPPincer (Nov 21, 2011)

yeah.. I didn't think of it until you mentioned that harold, but you're right.. reminds me of 1984 movie, Red Dawn..
http://www.imdb.com/title/tt0087985/

then there's the 2012 version, when the north koreans were the flavour of the month so to speak lol
http://www.imdb.com/title/tt1234719/
^(have not seen that one)


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## Woz (Sep 5, 2013)

Janus said:


> As for the topic at hand, trading divisions post losses all the time. It's unpredictable business. This whole posting a win 99% of the time doesn't sound legit to me.


The OP's probably referring to Goldman. You always see articles about 0 trading loss days (or some other small number). That's the benefit of being the market maker though. They take a small profit on high volume. It's not like they're getting that from directional trading. Also, the returns are not "double digit returns every day". If you look at Goldman's balance sheet for the last quarter they have $8B of revenue with $850B of assets.


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## james4beach (Nov 15, 2012)

Some of these investment banks also benefit from special relationships with government. JPM is another investment bank with spectacular fixed income trading performance. Coincidentally, they are also the Federal Reserve's partner bank in Quantitative Easing and other Treasury operations.

Big surprise ... a lot of the QE treasury purchases go through JPM, and the bank also demonstrates incredibly strong fixed income trading performance. It's a type of inside knowledge.


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## HaroldCrump (Jun 10, 2009)

james4B, that is a curse in disguise...JPM is one of the primary dealers in Treasuries, gold, and other key assets.
The other side of the coin is that the Fed forces them to buy all excess supply from the market, whether they want to or not.

As an example, we all know that China has been selling billions of $$ worth of treasuries in the last 3 months.
August alone was over $300B.
It is very well known news, and China has made no secret about it...

...well, who is buying?

No mutual fund, hedge fund, even Janus Capital or PIMCO is large enough to absorb that kind of supply without sending yield spiking up.
So, who is buying, and under what motivation are they buying?

It's the primary dealers like Goldman, JPM & Citibank that are having to absorb the excess supply to cap the yields.


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## The_Tosser (Oct 20, 2015)

Woz said:


> The OP's probably referring to Goldman. You always see articles about 0 trading loss days (or some other small number). That's the benefit of being the market maker though. They take a small profit on high volume. It's not like they're getting that from directional trading. Also, the returns are not "double digit returns every day". If you look at Goldman's balance sheet for the last quarter they have $8B of revenue with $850B of assets.


Exactly. Plus when you get to see the order-flow, your pet could make money. Besides, market makers WILL step aside when things get real rough....Ooops sorry...., slap my wrist if you dare, i'm not taking the hit, lol. It's just how it is anymore.


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## The_Tosser (Oct 20, 2015)

> As an example, we all know that China has been selling billions of $$ worth of treasuries in the last 3 months.
> August alone was over $300B.
> It is very well known news, and China has made no secret about it...
> 
> ...


Harold, you seem pretty spot on to me but i have to ask. 

Are you one of those dooomers china gonna dump bonds, int rates are gonna spike and we're all going to die a horrible death etc etc, type of guy?

I see China just about net-out for all of 2015 so far which makes sense given slow downs. I see nothing at all to warrant the fear i am reading here. Why on earth would rates rise just because china is sometimes not a net buyer? This is all normal stuff.


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## lonewolf (Jun 12, 2012)

Some say the reason Goldman is able to get away with so much crap is because they are tools of financial warfare so the government looks the other way. Based on he Clintons bank account I think a little bribery goes a long way. Bring down an economy like Russia & they are more likely to go to war so not the smartest thing to do.


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## lonewolf (Jun 12, 2012)

The_Tosser said:


> Harold, you seem pretty spot on to me but i have to ask.
> 
> Are you one of those dooomers china gonna dump bonds, int rates are gonna spike and we're all going to die a horrible death etc etc, type of guy?
> 
> I see China just about net-out for all of 2015 so far which makes sense given slow downs. I see nothing at all to warrant the fear i am reading here. Why on earth would rates rise just because china is sometimes not a net buyer? This is all normal stuff.


 Fear of default would push interest rates higher. Interest rates are @ 5000 year lows. When the cycle of confidence in government is high interest rates on government debt is low. When confidence in private sector is high stocks are high. Right now both stocks & bonds are high.


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## mrPPincer (Nov 21, 2011)

there's money to be made in war lonewolf
let's face it, goldmans squadrons of clowns in suits & ties are not the ones gonna come home in bodybags


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## dogcom (May 23, 2009)

Interest rates can't rise and the dollar must remain the reserve currency and that means keeping gold and silver in check. Ending this means the game is over and something new is coming our way. If you look at what has gone on to date it is very obvious that it is all a game of confidence and smoke and mirrors.

This is no conspiracy theory but instead an attempt to keep things going for whatever reason for as long as possible.


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## peterk (May 16, 2010)

HaroldCrump said:


> BTW, as a side - for all the rhetoric from Mrs. Whitewater about "punishing" the investment banks, she conveniently forgets that it was her husband that repealed the Glass-Steagall Act.


Sorry off topic - What's the source of this "Mrs. Whitewater" naming? Google doesn't seem to turn up anything or I'm missing it.

My preferred use is Hitlery or Shillary.


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## HaroldCrump (Jun 10, 2009)

peterk said:


> Sorry off topic - What's the source of this "Mrs. Whitewater" naming? Google doesn't seem to turn up anything or I'm missing it.


OMG...you don't know Mrs. Whitewater? :biggrin:

I suppose you were too young at that time...you are what, 23? Yeah, that was before your time.

Anyway, look up _Whitewater controversy _on Google :biggrin:


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## HaroldCrump (Jun 10, 2009)

The_Tosser said:


> Harold, you seem pretty spot on to me but i have to ask.
> Are you one of those dooomers china gonna dump bonds, int rates are gonna spike and we're all going to die a horrible death etc etc, type of guy?


Not at all..I think what China is doing is very logical and totally understandable.
China is not going to dump $4 Trillion in US treasuries, which is the largest component of their reserves by far, to push yields up.

If you had a stock in your portfolio that is 75% of your net worth, would you want the price of that stock to crash?
I reckon not, right?

What is the best course of action for you, once you find yourself in that position?
Two things come to mind - you diversify your portfolio, and you hedge the rest of your position.

That is what China is doing.

They are selling US Treasuries to buy other hard asset classes, such as land rights, mining rights, oil fields, foreign real estate, etc.
And they are hedging the rest of their position with gold.

First the hedging part - the price of gold is an inverse of the strength of the USD relative to a basket of currencies (Euro, Yen and Pound Sterling, mainly).
So, selling treasuries & buying gold is perhaps the simplest & most cost-effective way to hedge.
Also, keep in mind that China is among the world's largest producers of gold, if not the largest.
So they don't really need to import much gold.
All they have to do is ensure all domestic production stays in the country and import the rest.

Over time, gold position builds up and provides automatic hedging and diversification.

As for diversifying the rest of their reserves, they are buying up hard assets all around the world.
Land rights and mining rights in Africa, real estate in Europe, oil fields in Canada, offshore gas fields in the South China sea, farmland in New Zealand and Australia, etc.
They recently made deals with Russia for rights of passage in the Arctic.
They now have a preferred customer relationship with Saudi Arabia for importing their oil.

and so on.

What happened in August and Sep with selling US treasuries was also needed to support their currency after the devaluation.
So they sold US dollars to buy Yuan.


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## The_Tosser (Oct 20, 2015)

lonewolf said:


> Fear of default would push interest rates higher.


You mean like when SandP knocked US debt rating down in Aug 2011? Remember that everyone? You are aware that rates were even lower than that 1 year later? Four years later now and we're almost unchanged from then.

By all means I would love for anyone to explain to me how the US can default on debts owed in their own currency, and explain to me why the very catalyst that was supposed to cause this default process to begin (US debt downgrade) did nothing.

This is all laughable and not fitting of intelligent human beings that i know all members here are.

When the facts don't fit the story, then there's something wrong with the story.


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## lonewolf (Jun 12, 2012)

HaroldCrump said:


> OMG...you don't know Mrs. Whitewater? :biggrin:
> 
> I suppose you were too young at that time...you are what, 23? Yeah, that was before your time.
> 
> Anyway, look up _Whitewater controversy _on Google :biggrin:


 The masses in the U.S view the Clintons as rock stars. Can figure that one out? Have to look @ a chart of the DJI & A/D line a strong bull market & president cant do no wrong. the Clintons help to bring Transactional banking (bundled up loans that were sold off ) to the likes of Goldman which almost brought the whole system down, Goldman had no skin in the game if the bundled up loans were not paid back when they are sold off.


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## Rusty O'Toole (Feb 1, 2012)

Re: Whitewater. This was one of the many scams and scandals the Clintons have been involved in. I did some research on it years ago, from memory it worked something like this.

The Clintons and a couple of politically connected friends promoted a vacation property development called Whitewater Estates when he was governor of Arkansas. 

First they bought a thousand acres of bush with no road access for $100,000 and put a $250,000 mortgage on it, pocketing $150,000

A year later when the mortgage came due, the state had built a road 12 miles long going right past the property. This made it more valuable. They refinanced for $500,000, paying off the old loan and putting $250,000 in their pockets.

Another year passed. By this time they had filed a plan of subdivision and this made the property more valuable. They refinanced for $750,000, paid off the old loan and put $250,000 in their pockets.

The following year the plan was approved, and they had sold a few lots (to friends and relatives) and had beautiful pictures of the resort they were going to build. Refinance for $1,000,000 and put another $250,000 in their pockets.

In the end they sold the whole project to a big developer for $2,000,000. They never did build any roads, cottages, or anything else. Nobody could figure out how the developer stood to make any money buying for such a high price. But, he had already made plenty off other projects he could never have gotten zoning and approval for without the help of his good friends the Clintons.

Some people suspected political influence may have been involved in all this but nothing illegal was ever proven. This was one of their sweeter smelling deals, back in Arkansas.


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## The_Tosser (Oct 20, 2015)

HaroldCrump said:


> What is the best course of action for you, once you find yourself in that position?
> Two things come to mind - you diversify your portfolio, and you hedge the rest of your position.


Hedge what? What 'position' do they find themselves in?

This is what i am talking about. Everyone is leaving me with the distinct belief that they believe that somehow China thinks their 'investment' is somehow in peril, as in the US Gov will for whatever reason not be able to pay them what they are 'owed'.

People repeatedly talk this nonsense of China 'dumping" US T's. On net China is not doing it at all so this is a transient condition. Even greater than that, they're doing nothing of the sort anyway. They have no fear of any of this nonsense that has become mainstream thinking.

And do note i am only using the terms in quotations that most use to define the issue, not that I use them in the same manner when it comes to sovereign 'debt'.

Here's the simple facts no-one wants to believe. China has already been paid. Instead of sitting on non-interest bearing 'cash', they've stuffed their excess US dollars into US T's. 

Does the Government directly buy you your Tires, toaster and Tea cups? No, of course not. In fact you the 'consumer' has paid China when you buy their stuff. The US Gov owes them nothing. Now it is a fact that the Gov ultimately provides you with the funds (or you borrow from banks) so in effect and this is key, it all ultimately comes from government anyway. It can't come from anywhere else. It's just keystrokes however. They don't owe or not owe, anyone.




> ...well, who is buying?
> 
> No mutual fund, hedge fund, even Janus Capital or PIMCO is large enough to absorb that kind of supply without sending yield spiking up.
> So, who is buying, and under what motivation are they buying?
> ...


Maybe we'll talk later about this worry that JPM etc are getting 'stuck' buying US Treasuries and this could become a problem one day because they'll evidently run out of funds to buy it all, rates will spike etc. The facts are this is all nonsense. If this story were true they would have long ago gone out of business. You are of course right, they on their own do not have enough money to do so. They never have and never will. This as you can see is not a problem because it doesn't work like that. This does illustrate effectively just how the Fed is indeed the big dog on campus. Interest rates will go exactly where they want them too. This is by design. They aren't going to lose control of rates.

US 30 year rates are 3% Think about it.

If the facts don't fit the story, there's something wrong with the story.


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## Rusty O'Toole (Feb 1, 2012)

The Chinese are not stupid and they are capable of planning 50 to 100 years ahead. Wish I could say the same about our politicians.

They have been buying up hard assets like mines, oil wells, farm land and houses all over the world for several years now. A very clever way of turning billions in US dollars and government bonds to account without driving down the price on themselves. If they are really clever they are paying a small down payment in cash and the rest over 10 - 50 years. The wisdom of this will become obvious in time.


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## HaroldCrump (Jun 10, 2009)

The_Tosser said:


> Hedge what? What 'position' do they find themselves in?
> This is what i am talking about. Everyone is leaving me with the distinct belief that they believe that somehow China thinks their 'investment' is somehow in peril


The position that the bulk of their reserves are in one asset class.
You don't see a problem with that?
Any sovereign govt. even half the size of China would be concerned with a situation like that.
China is the world's largest exporter, the largest trading nation, and the largest economy on a PPP basis, 2nd largest on a nominal basis.
All other countries half the size (such as several in the G7) are already diversified in terms of their sovereign assets.

China is simply trying to catch up with the G7.



> as in the US Gov will for whatever reason not be able to pay them what they are 'owed'


Where did I say that?
I am saying they want to diversify their reserve assets.
In fact, I specifically said that US yields going up is _not_ in their best interest.

You are arguing a point that I did not make.



> People repeatedly talk this nonsense of China 'dumping" US T's. On net China is not doing it at all so this is a transient condition. Even greater than that, they're doing nothing of the sort anyway. They have no fear of any of this nonsense that has become mainstream thinking


Sounds like you have plucked some talking points from the media and arguing it here...that's fine, except that I did not say anything like that.
I said above that China is diversifying their reserves...to me, all their actions are consistent and make sense.

Did you miss the news of Chinese state owned corporations drafting a joint bid for Starwood Hotels?
It is all part of the same "story".



> Does the Government directly buy you your Tires, toaster and Tea cups? No, of course not. In fact you the 'consumer' has paid China when you buy their stuff. The US Gov owes them nothing


Where did I say the US govt. owes China anything?
Every country has to store its reserves in some form or another.
It is typical for most G7 countries to store their reserves in a combination of stable foreign currencies of their trading partners (Yen, Euro, CAD, AUD, etc.), gold, real estate and other hard assets, and some foreign equities (via SWFs).

When the US financial crisis stuck in 2008, China found itself heavily invested in only 1 asset class.
Therefore, they have been diversifying since then.
I don't see how you see this as a "conspiracy theory".

In fact, their actions are remarkably transparent...far more transparent than the US Fed/govt. has ever been in their actions.



> Now it is a fact that the Gov ultimately provides you with the funds (or you borrow from banks) so in effect and this is key, it all ultimately comes from government anyway. It can't come from anywhere else. It's just keystrokes however. They don't owe or not owe, anyone


I don't understand that part at all.
Seems like you are worked up over somethings you have read or heard elsewhere, and want to have that argument here.



> Maybe we'll talk later about this worry that JPM etc are getting 'stuck' buying US Treasuries and this could become a problem one day because they'll evidently run out of funds to buy it all, rates will spike etc.
> The facts are this is all nonsense.
> ...
> Interest rates will go exactly where they want them too. This is by design. They aren't going to lose control of rates


Where did I say rates will rise?
What is the nonsense part?

I suggest you have this argument with whoever has been making these claims, not with me.

If you like, you can explain how you think Chinese actions in the last 12 - 24 months are not part of a diversification plan, and why you think it makes no sense for them to diversify their foreign assets.


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## lonewolf (Jun 12, 2012)

Rusty O'Toole said:


> Re: Whitewater. This was one of the many scams and scandals the Clintons have been involved in. I did some research on it years ago, from memory it worked something like this.
> .


 Wasnt White water was when Hillary with the help of Goldman placed trades & switched them with other investors trades so Hillary was always getting orders filled better then they should have been or was this another scandal that happened around that time?


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