Source – goldswitzerland.com
- “… Archegos and Credit Suisse, investment banks have created a timebomb with the $1.5 quadrillion derivatives monster. A few years ago, the BIS (Bank of International Settlement) in Basel reduced the $1.5 quadrillion to $600 trillion with a pen stroke. But the real gross figure was still $1.5q at the time. According to my sources, the real figure today is probably over $2 quadrillion. A major part of the outstanding derivatives are OTC (over the counter) and hidden in off balance sheet special purpose vehicles”
Credit Suisse is hours from collapse and the consequences could be a systemic failure of the financial system.
Disappointingly, my dream last night stopped there. So unfortunately I didn’t experience what actually happened.
As I warned in last week’s article on Archegos and Credit Suisse, investment banks have created a timebomb with the $1.5 quadrillion derivatives monster.
A few years ago, the BIS (Bank of International Settlement) in Basel reduced the $1.5 quadrillion to $600 trillion with a pen stroke. But the real gross figure was still $1.5q at the time. According to my sources, the real figure today is probably over $2 quadrillion.
A major part of the outstanding derivatives are OTC (over the counter) and hidden in off balance sheet special purpose vehicles.
LEVERAGED ASSETS JUST GO UP IN SMOKE
The $30 billion in Archegos derivatives that went up in smoke over a weekend is just the tip of the iceberg. The hedge fund Archegos lost everything and the normal uber-leveraged players Goldman Sachs, Morgan Stanley, Credit Suisse, Nomura etc lost at least $30 billion.
These investment banks are making casino bets that they can’t afford to lose. What their boards and top management don’t realise or understand is that the traders, supported by easily manipulated risk managers, are betting the bank on a daily basis.
Most of these ludicrously high bets are in the derivatives market. The management doesn’t understand how they work or what the risks are and the account managers and traders can bet billions on a daily basis with no skin in the game but massive potential upside if nothing goes wrong.
DEUTSCHE BANK – DERIVATIVES 600X EQUITY
But we are now entering an era when things will go wrong. The leverage is just too high and the bets totally out of proportion to the equity.
Just take the notorious Deutsche Bank (DB) that has outstanding derivatives of €37 trillion against total equity of €62 billion. Thus the derivatives position is 600X the equity.
Or to put it in a different way, the equity is 0.17% of the outstanding derivatives. So a loss of 0.2% on the derivatives will wipe the share capital and the bank out!
Now the DB risk managers will argue that the net derivatives position is just a fraction of the €37 trillion at €20 billion. That is of course nonsense as we saw with Archegos when a few banks let $30 billion over a weekend.
Derivatives can only be netted down on the basis that counterparties pay up. But in a real systemic crisis, counterparties will disappear and gross exposure will remain gross.
So all that netting doesn’t stand up to real scrutiny. But it is typical for today’s casino banking world when depositors, shareholders and governments take all the downside risk and the management all the upside.
So let us look at the global risk picture in the financial system:
The $2.3 quadrillion above is what the world is exposed to when this timebomb explodes.
That is the total sum of global debt, derivatives and unfunded liabilities. When all the dominos start falling, and no one can meet their obligations, this is what governments are left to finance.
Yes, they will print this money and much more as deficits mount exponentially due to collapsing currencies. But the MMT (Modern Monetary Theory) clowns will then find out that printed money rightfully has ZERO value.
If these clowns studied history they would learn that MMT has never worked. Just check the Roman Empire 180-280 AD, France in the early 18th century, or the Weimar Republic, Zimbabwe, Argentina and Venezuela in the 19th and 20th centuries.
So when Fiat money dies, how much gold is required to repair the damage?
If we look at the cube below with all the gold ever produced in history, we see that it is 198,000 tonnes valued at $11 trillion.
Egon von Greyerz – Founder and Managing Partner of Matterhorn Asset Management (MAM) and GoldSwitzerland based in Zurich. Egon forecasted the present problems in the world economy already in 2002 when he recommended to investors to allocate 50% of assets into physical gold (at $300) stored outside the banking system. Egon began as a banker in Geneva and was thereafter Finance Director and Vice-Chairman of a FTSE 100 company in the UK. He makes regular media appearances on CNBC, BBC and King World News and speaks at investment conferences around the world. MAM (founded in 1999), specialises in wealth preservation. GoldSwitzerland buys, sells, transfers and stores physical precious metals for private investors and institutions outside the banking system.