Friday, 04 December 2020

A Analysis

 Let me ask you a question. If you were a prospective gold investor, and were not a client of Veritaseum Knowledge, would you buy these gold instruments?Deuscthe Borse Commodities prospectus

Well, clients of Deustche Bank et. al. certainly did. Reference this story from RT.com: Deutsche Bank refuses clients' demand for physical gold

Clients of Germany’s biggest bank who have invested in the exchange-traded commodity Xetra-Gold are facing problems when they want to obtain physical gold, according to German analytic website Godmode-Trader.de.
Xetra-Gold is a bond on the Deutsche Börse commodities market, and Deutsche Bank is a designated sponsor. On the website, Xetra-Gold says its clients have the right for physical delivery of gold...
“Physically backed: The issuer uses the proceeds from the issue of Xetra-Gold to purchase gold. The physical gold is held in custody for the issuer in the Frankfurt vaults of Clearstream Banking AG, a wholly-owned subsidiary of Deutsche Börse. In order to facilitate the delivery of physical gold, the issuer holds a further limited amount of gold on an unallocated weight account with Umicore AG & Co.,” says Xetra-Gold.
However, despite claims that every virtual gram of gold is backed by the same amount of physical gold, clients have been refused the precious metal upon demand.
According to Godmode Trader, its reader “sought physical delivery of his holdings of Xetra-Gold. For this he approached, as instructed by the German Börse document, his principal bank, Deutsche Bank." However, he was told that “the service” was no longer available for "reasons of business policy". The article went on to say it’s not yet clear whether other banks are still delivering gold through Xetra.

The website's marketing material is clear enough...

DB Xetra Gold

The issuer of Xetra Gold is an entity jointly owned by Germany's Commerzbank & Deutsche Bank (rumored to be merging - Yechh!), among others. Uh Oh!

Deuscthe Borse Commodities

In the Deutsche Borse Xetra Prospectus under the heading "Key information on the key risks that are specific to the Notes", you will find the following snippet:

Upon acquisition of Notes, an investor is, from an economic point of view, invested in gold and thus bears the market risk associated therewith.

This statement is simply not true, and it's amazing that it passed muster with legal counsel and auditors. Why? Because the following line in the prospectus literally says:

"No correlation with the gold price"

Let's look at this a bit more closely, shall we...

The value of the Notes is a function of demand and supply regarding the Notes as such and not of the demand for and supply of gold. For potential purchasers of the Notes the pricing may, apart from the gold price, also be determined by other factors (e.g., the creditworthiness of the Issuer, the evaluation of these risk factors or the liquidity of the Notes).

Hmmm... It sounds as if the gold is actually held on the balance sheet of the note issuers. If that's true, then this is not an investment in gold, it's and investment of a derivative of gold exposure and the balance sheet exposure of the issuer. Now, how many of the so-called "investors" of these derivatives got that concept BEFORE they bought in???

Deuscthe Borse Commodities prospectus - counterparty risks

Now, you guys (and girls) tell me, do we have reason to suspect credit and solvency issues at the Issuer,'s parent, Deutsche Bank? Let's refer to notes available to subscribers of Veritaseum Knowledge, in particular, the European Bank Contagion Assessment, Forensic Analysis & Valuation module... 

DB Cojunterpary risk shift 2

Actually, DB doesn't think we should concern ourselves with things such as adjustements for credit risks or credit worthiness...

Deusstche loan valuation 2

So, with the aforementioned understanding, let's move on through the prospectus...

"The value of a Note will therefore not necessarily equal exactly the value of one gram of Gold at any given time."

"No rights or beneficial ownership in the Gold"

So, let's add these up now...

  • ..."an investor is, from an economic point of view, invested in gold", but
    • "No correlation with the gold price", and 
    • and "The value of the Notes is a function of demand and supply regarding the Notes as such and not of the demand for and supply of gold", but
    • "For potential purchasers of the Notes the pricing may, apart from the gold price, also be determined by other factors (e.g., the creditworthiness of the Issuer, the evaluation of these risk factors or the liquidity of the Notes)." - keeping in mind that Deutsche Bank believes 
    • There's no movement in counterparty risks yearly, or cumulatively, due to collateralization (where said collateral is wide open to market forces and valuations) for instruments.

Oh yeah! If I were hired as an expert witness, this stuff could get ugly.... As for now, methinks its time to go put shopping again.

Oh, there's more, for those of you who believed that line "an investor is, from an economic point of view, invested in gold". 

The purchasers of the Notes will only acquire the rights securitised by the Notes. The purchasers of the Notes will not acquire any title to, or security interests or beneficial ownership in, the physical Gold held in custody on behalf of the Issuer. An investment in the Notes does not constitute a purchase or other acquisition of Gold.

Here's some more risks, this time due to liquidity of the derivatives....

Tradeability No assurance can be given that the admission of the Notes to the regulated market (General Standard) of the Frankfurt Stock Exchange will continue or that the Notes will continuously be traded on the Frankfurt Stock Exchange. Consequently, there is the risk that sale of the Notes on an exchange may not, or not at all times, be possible.

In reference to actually getting what you're paying not to own...

No control of genuineness or fineness of the physical Gold Neither the Issuer nor the Depositary Agent or any other agent of the Issuer will control the genuineness or fineness of the physical Gold held in custody on behalf of the Issuer by Clearstream Banking AG in its capacity as Depositary Agent. As the party responsible for all physical delivery processes, Umicore AG & Co. KG will be liable for the genuineness and fineness of the physical Gold acquired by the Issuer with the proceeds from the issue. If the physical Gold which is held in custody by Clearstream Banking AG as Depositary Agent of the Issuer is not genuine or if its fineness does not comply with the requirements specified in the rules adopted by The London Bullion Market Association (or a successor organisation representing market participants in the London gold trading market) for the delivery of gold bars, as amended from time to time and which, at the date of this Prospectus, provide for a minimum fineness of 995 parts per 1000 pure gold, the Notes might only be covered by the aforementioned liability claims against Umicore AG & Co. KG as the party responsible for all physical delivery processes. Market disruptions If the Calculation Agent determines that a market disruption has occurred or continues to exist at any given time, the Issuer will not fulfil its delivery or payment obligations until the Calculation Agent determines that the relevant market disruption has ceased to exist. Any such determination may delay 16 fulfilment by the Issuer of its delivery or payment obligations

Become a member of Veritaseum Knowledge now, and subscribe to the knowledge module European Bank Contagion Assessment, Forensic Analysis & Valuation. There's much, much, much more to this story than meets the eye. More apparently, there are many more European banks and institutions involved - in countries you'd likely never suspect. We suspect some of them will be going pop in the not too distant future. This is from the team that called Bear Stearns, Lehman, GGP and nearly all of the significant financial institution failures of the 2008 crash.

 

 

Our report on Banco Popular Milano was released to clients in March and April of 2016 as part of the "Potential for a European Banking Collapse" series. This research is continuously being updated at Veritaseum Knowledge, including additional and other financial institutions along the way. Here is an excerpt from the report:

BPM report teaser

This is the Banco Popular Milano share price over the time period in question...

Banco Popular Research stock price

'Nuff said! Click here to participate in Veritaseum Knowledge. We've compiled a list of six banks whom we believe the market has materially underestimated the risk of. Some of which are systemically relevant institutions with plenty of room to fall in terms of public equity pricing.

Thursday, 25 August 2016 15:01

How Deutsche Bank Can Destroy Europe

How can Deutsche Bank destroy the EU? Capital fight and extreme, involuntary deleveraging. DB is closing nearly 200 German bank branches. Not a big deal, right? German bank's depositor base is 111% of German GDP. A run on German banks is literally a run on the German economy - the largest economy in Europe...

fredgraph 1

...not to mention a major (the major) funding source for DB's massive derivative positions.  

Current news events don't portend a positive outcome for Germany's largest bank either. Bloomberg reports: NordLB Boosts Shipping Provisions Five-Fold, Warns of High Loss

Norddeutsche Landesbank boosted provisions for bad loans nearly fivefold to 1 billion euros ($1.1 billion), as Germany’s biggest shipping lender prepares for its first full-year loss since 2009.

NordLB, controlled by the state of Lower Saxony, posted a loss of 406 million euros in the first half as it battles a prolonged slump in maritime markets, including eight years of crisis in the container segment. That compares with a profit of 290 million euros in the same period last year.

“The shipping crisis, which further intensified in the first half of the year, has necessitated impairments that were higher than planned,” Chief Executive Officer Gunter Dunkel said in a statement. The bank lowered its outlook for the year, now anticipating a “significant” loss. It had projected a “negative result” in the spring.

... NordLB’s pessimistic view highlights risks at other German banks, which hold roughly one-quarter of the about 400 billion euros in global shipping loans. Under pressure to unwind sour legacy maritime assets, banks including HSH Nordbank AG and Commerzbank AG are also trying to shrink their loan books.

 What does this have to do with Deutsche Bank? A lot! Because everybody wants to sell these assets that aren't considered very desirable, and all at the same time, we've made a bad situation worse - precisely when DB can't afford it.DB mass selling bad shiping loans

Then there's the issue of DB's somewhat questionable assumptions and characteristics in its financial reporting. Deutsche Bank addendums are quoted as saying:

"The credit risk on the securities purchased under resale agreements and securities borrowed designated under the fair value option is mitigated by the holding of collateral. The valuation of these instruments takes into account the credit enhancement in the form of the collateral received. As such there is no material movement during the year or cumulatively due to movements in counterparty credit risk on these instruments."

What???!!! So, the value of collateral doesn't move now? On planet Earth, not only does the value of collateral move, it tends to move in the exact same direction as the value of the loan, borrowing or underlying, often at an exaggerated pace in the beginning (it's markets are the first to know of turmoil). Reference my podcast interview with Max Keiser at the 2:40 marker. Want some more? Read this page from our EU banking report a couple of quarters ago...

For those who don't believe me, I made this call in early 2008 - twice. Once for Bear Stearns (Is this the Breaking of the Bear?) and once for Lehman Brothers (Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008). Was I right? Of course, that was then and this is now, so the banks are better prepared, right? Of course. The graphic below was taken from our Banco Popular report (click here for more info), not from 8 years ago, but from a quarter ago - yes, 2016! Hey, there's more...

Banco Popular Research teaser3

Now, just imagine that Italy's Banco Popular is the entity that DB used to hedge it's exposure, and Banco Popular (obviously) can't pay up on every(any?)thing. DB's gross exposure become's DB's net exposure as DB's notion value and market value converge near instantaneously if (or when) market shoots off in one direction (you can likely guess what direction that would be for stakeholders, and this time around that includes depositors and bondholders, not just shareholders).

What does this all mean?  Well, we went through this in explicit detail and have identified no less than 6 (and we're still actively looking) financial institutions that may have passed the EBA stress tests, but have miserably failed our examination - and that's without adding in the bank contagion factor!

To partake in this knowledge, join Veritaseum University and purchase the interactive research asset called "European Bank Contagion Assessment, Forensic Analysis & Valuation".

Banks are about to enter a steep cyclical downtrend...

Saturday, 17 October 2015 00:00

The Great Global Macro Experiment Has Failed

My thoughts on today's financial climate. ..

A summary and critique of the Veritaseum Wallet after one month of use. I'd like to note that in regard to the expiry portion of the comment, you can type in any expiry you wish, or use the advanced granular method. The dropdowns are just suggestions.

One Month Review of Veritaseum 1.2.0 Beta

Written by:  This email address is being protected from spambots. You need JavaScript enabled to view it.

I have tried out the Demo and Live Modes of Veritaseum 1.2.0 Beta.  I am satisfied with this derivative trading platform and look forward to seeing future Beta versions.

The platform fairly & accurately updates your P&L until contract expiration, and trades are updated periodically in real time to reflect market conditions. 

The platform currently gives you four order parameters to choose from -- "Principal", "Receive", "Pay", and "Expiry."  Other variables that can be modified are "Deviation" from Principal and two advanced variables -- "Collateral" as a percentage of Principal, and "Leverage" as a percentage of Principal.  

"Principal" refers to principal at risk.  "Receive" is what you buy.  "Pay" is what you sell.  "Expiry" refers to the terms of the contract, which currently is one of six time periods between one minute and five weeks.  The Receive and Pay inputs are keyword sensitive;  so for example, inputting the letter "F" gives you a drop down list of eight possible visible ticker's.  Additionally, there is a scrolling list of tickers which match your keyword phrase.

I have been warning Veritaseum users about the unbridled risks the ECB is taking with its banking system by slamming its yield curve - driving short and medium term rates negative. Despite the ECB's proclamations, its banking system is still quite fragile, and it is putting pressure on the barely recovered fractures, causing additional stress fissures.

Before we go on, if you haven't read "It's All Out War, Pt 3: Is the Danish Krone Peg to Euro More Fragile Than Glass Beads? The Danish National Bank Infers So! and "How the Danish Central Bank is Destroying the Danish Citizens' Wealth Form Both Sides While Stressing It's Bank!", please do. My warnings in 2010 on the PAN-EUROPEAN SOVEREIGN DEBT CRISIS will do a lot to fill in the background as well.

Yesterday, the Wall Street Journal ran a story on the Spanish bank, Bankinter S.A., which was actually paying customers interest on their mortgages, in a rather backwards twist that is the result of the perverse incentives (basically, the opposite of typical tenets that underlying fundamental analysis) that come about when you turn the world of borrowing, literally, upside down. Here's an excerpt (and remember I warned about Spain 5 years ago in "The Spanish Inquisition is About to Begin..."):

From the CATO institute:

Since the New Year, Ukraine’s currency – the hryvnia – has collapsed, losing 51 percent of its value against the U.S. dollar. To put this rout into perspective, consider that the Russian ruble has only lost 8 percent against the greenback during the same period.

Like night follows day, the hryvnia’s meltdown has resulted in a surge of inflation. The last official Ukrainian year-over-year inflation rate is 28.5 percent. This rate was reported for January and is out of date. That said, the official inflation rate has consistently and massively understated Ukraine’s brutal inflation. At present, Ukraine’s implied annual inflation rate is 272 percent. This is the world’s highest inflation rate, well above Venezuela’s 127 percent rate (see the accompanying chart).

...  estimate[d] Ukraine’s current annual inflation rate to be 272 percent – and its monthly inflation rate to be 64.5 percent. This rate exceeds the 50 percent per month threshold required to qualify for hyperinflation. So, if Ukraine sustains its current monthly rate of inflation for several more months, it will enter the record books as the world’s 57th hyperinflation episode. 

There are two ways to approach this through UltraCoin - one as an individual or corporation looking to hedge against the economically destructive forces of hyperinflaton, the second as a speculator looking to profit.

Thei individual looking to protect themeselves from hyperinflation can swap their Hyrvna holdings exposure for GLD - the gold tracking ETF. This would be an expensive hedge that costs less then 3 cents per every $10, and will drop down to less than half of that in volume. Of course, all that glitters is sometimes not always golden. Gold hasn't held its value as well as the inflated USD (relative to most world debased currencies) YTD, but still has done a hell of a lot better then the UAH.

Ukranian Hyperinflation hedge for individuals

For the speculatory who wishes to go balls to the wall, you can use UltraCoin to actual go long/short to distinct and separate currency pairs. The rather strong USDUAH pair would be your long exposure and you would short the UAHUSD pair. To put some spice in the mix (as if this wasn't enough) dial in 80x digital leverage. One can consider using another strengthening (or percieved to be strengthening, which is the dangerous part) curreny such as the Swiss franc on the pay (short) leg, although that would have weakened this return over the last few weeks as the CHF is weakening again. Alas, you are free to put whatever ticker in their you want and dial in whatever leverage you want. I suggest you design the trade in our UltraCoin trade modeler, first, (Excel required). 

Ukranian Hyperinflation Speculative homerun for traders   funds

As you can see, the leverage is dailed up to 80x, but P&L is capped the principal amount put at risk. What this means is you will only get (or lose) up to what you put in as a maximum (these are not binary options and do have a continuous payout that exactly mimics that of the underlying asset(s)), but you will get (or lose) it very, very quickly! This is perfect for you action junkies!

Download the tutorial.

Download the UltraCoin client for PC or Max/Linux.

Download the our UltraCoin trade modeler, first, (Excel required)

 

The Guardian reports: Danish central bank 'will maintain krone's euro exchange rate':

Denmark has no plans to change its fixed exchange rate policy and the central bank has the tools to react “at any given moment” to keep the krone stable against the euro, a central bank spokesman said on Tuesday.

The comments came a day after the bank cut interest rates to weaken the krone. That followed the abandonment last week of the Swiss franc’s cap to the euro, which had raised speculation that Denmark could follow suit.

I commented, at length, on this topic about 3 weeks ago and warned that it is highly unlikely that the Swiss will be the only nation that realizes it can't run lockstep with the behemoth that is the ECB in devaluing its currency.

Nordic deflation

Expect to see practically all of the nordic countries to do what Switzerland did, of course they will be rather late to the party... Then again, better late than never.

It appears as if more than one macro fund manager was paying attention, as I will demonstrate later in this article - but first, back to the Guardian piece:

“We have the necessary instruments in the form of interest rate changes and intervention to maintain the fixed exchange rate and we at all times look at market conditions and determine what to do,” central bank spokesman Karsten Biltoft said.

Hmmm.. We have heard that before, and more than once, no? If you recall, similar rhetoric was bandied about the pound - the 1200 years old currency born when "sterlings" or silver pennies were the main currency in Anglo-Saxon kingdoms. For those that don't know, if you had 240 of them, you had one pound in weight. A pound was  humongous fortune back in the 8th century, but thanks to British monetary policy, inflation brought sterlings, and eventually pounds to even the poorest of the poor. Alas, I digress... In the late '80s and early '90s Britain attempted to peg the pound to the Deustchemark in anticipation of joinig the ERM, with a central banking mandate of keeping the pound withing a +/-3% band of the DM. The problem with that promise is, like with Sweden and Denmark, and many of the countries whose CB attempt to peg to the euro is that their economies do not run in lockstep with that of Germany's - and Germany is, by far and large, the economy that calls the shots in the euro area. Everyone wants to reproduce Germany's economic success, but it's not as easy as just saying so - alas, many will try anyway. Britain tried by attempting to peg its currency to the DM in an attempt to reduce its interest rates (then at 15%) to match Germany's 9% (does this interest rate cue thing sound familiar?). Of course, this backfired as Germany's economy boomed while Britain's fell into recession, while the pound sterling exacerbated the problem by remaining strong relative to the DM, hurting exporters even more.

George Soros and his Quantum Fund (and to be fair, many other global macro currency speculators) recognized the unfavourable entry point the United Kingdom joined the ERM, using simple math to determine the unsustainably high rate at which the United Kingdom was brought into the Exchange Rate Mechanism, the high inflation relative to Germany's and the pain the exporters and asset prices were feeling. So he did what anyone who reads Reggie Middleton would do, he levered up and shorted pounds for deustche marks. The rest was history (Black Wednesday) as the British Central Bank insisted on keeping an unsustainable peg. As per Wikipedia:

The currency traders act

The UK government attempted to prop up the sinking pound to avoid withdrawal from the monetary system the country had joined two years previously. John Major raised interest rates to 10 percent and authorised the spending of billions worth of foreign currency reserves to buy up the sterling being sold on the currency markets but the measures failed to prevent the pound falling below its minimum level in the ERM. The Treasury took the decision to defend the sterling's position, believing that to devalue would be to promote inflation.[7]

George Soros' Quantum Fund began a massive sell-off of pounds on Tuesday, September 15, 1992. The Exchange Rate Mechanism stated that the Bank of England was required to accept any offers to sell pounds. However, the Bank of England only accepted orders during the trading day. When the markets opened in London the next morning, the Bank of England began their attempt to prop up their currency as per the decision made by Norman Lamont and Robin Leigh-Pemberton, the then Chancellor of the Exchequer and President of the Bank of England respectively. They began buying orders to the amount of 300 million pounds twice before 8:30 AM to little effect.[8] The Bank of England’s intervention was not effective because Soros’ Quantum Fund was dumping pounds far faster. The Bank of England continued to buy and Quantum continued to sell until Lamont told Prime Minister John Major, the man responsible for making the controversial decision to bring the United Kingdom into the Exchange Rate Mechanism while he was serving as Chancellor of the Exchequer, that their pound purchasing was failing to produce results. Major ordered Lamont to wait for further data later in the trading day, hoping the trend would pass.[6]

At 10:30 AM on 16 September, the British government announced a rise in the base interest rate from an already high 10 to 12 percent in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15 percent, dealers kept selling pounds, convinced that the government would not stick with its promise. By 7:00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12 percent (however, on the next day interest rate was back on 10%). It was later revealed that the decision to withdraw had been agreed at an emergency meeting during the day between Norman Lamont, Prime Minister John Major, Foreign Secretary Douglas Hurd, President of the Board of Trade Michael Heseltine and Home Secretary Kenneth Clarke (the latter three all being strong pro-Europeans as well as senior Cabinet Ministers), and that the interest rate hike to 15 percent had only been a temporary measure to prevent a rout in the pound that afternoon.

 George Soros is rumoured to have made $2 billion in his bet against streling and was titled "the man who broke the Bank of England" by the Daily Mail. Of course, that was 23 years ago. Central bankers have much more crediblity and smarts now, right? Right?!?!?!

September 15 2011 - SNB Vows To Defend Franc-Euro Peg, Hold Rates Close To Zero

PARIS (MNI) - The Swiss National Bank said Thursday it will continue to keep short-term interest rates as low as possible and defend the peg of the Swiss franc to the euro in order to counter the currency's appreciation resulting from inflowing capital in search of a safe haven amid the Eurozone debt crisis.

June 7, 2012 SNB spends billions defending the franc - FT.com

The SNB in effect pegged the franc to the euro last September after a surge of ... The bank has vowed to defend the franc's value at SFr1.20, ... that the SNBhad spent as much as SFr65bn buying euros to keep the franc weak  ...

January 15, 2015 Switzerland 'capitulates' on franc as global currency wars ... Daily Telegraph

The franc soared 30pc in one of the wildest days in Swiss history ... The move came three days after a top SNB official vowed that the peg would “remain a ...bitterly that it would make it even harder for exporters to keep afloat.

and... Rinse... Wash... Repeat...

Jan 21, 2015 Denmark vows to keep currency peg, likely to cut rates ... Reuters

Denmark vows to keep currency peg, likely to cut rates on Thursday ... The Swiss franc has leapt almost 20 percent against the euro since last week when the Swiss National Bank out of the blue ended a three-year-old.
 

Jan 22, 2015 - Denmark Ready to Dump Kroner on Market to Tame Hedge Funds... Bloomberg

Jan 30, 2015 - Denmark Suspends Bond Issuance to Protect Krone's Peg... Wall Street Journal

Feb 3, 2015 - Denmark Increases Krone Sales to Protect Peg... Wall Street Journal

Feb 6, 2015 - Is Denmark facing a speculative attack?... CNBC

... and the currency brokers get nervous, you know... after FXCM and all (FXCM to Forgive Majority of Clients Who Incurred Negative Balances) - 

Feb 6, 2015 - Dukascopy cuts leverage on pairs with Danish krone to 1:10

Dukascopy Bank and its arm Dukascopy Europe will reduce the maximum leverage on currency pairs with the Danish krone to 1:10. The changes will be effective as of February 8, 2015 (Monday) and will affect positions with EUR/DKK (Euro vs Danish krone) and USD/DKK (US dollar vs Danish krone), the company said in an announcement.

The company attributes the change to “the possibility of recalibration of the trading range of EUR/DKK which may lead to significant price gaps and cause negative equity on client accounts”.

Denmark’s national bank (Nationalbanken) has been taking action to weaken the Krone in order to maintain its peg – the watchdog sold record amounts of Krone during the month of January. The bank is obviously trying to avert “Black Swan” events.

Dukascopy is not the first retail Forex broker to axe leverage on DKK pairs lately – over the past couple of weeks we have seen other companies adopt similar measures too. Forex.com (GAIN Capital’s retail Forex brand) also announced a reduction of maximum leverage on instruments with Danish krone to 1:10 earlier this month.

Other companies, like Australian Forex brokers AxiTrader and Pepperstone have been even stricter and temporarily ceased trading with currency pairs with DKK in the end of January.

As a matter of fact, FXCM, the brokerage that nearly collapsed due to the  Swiss National Bank (Switzerland's Central Bank and the oldest central bank in the world) pulling its peg from the EUR unannounced, is outright banning 13 currency pairs. Check it out, and more importantly, check out the reasons...

With the memories of the Black Swan event still fresh in the minds of investors and FXCM, the company has opted to target thirteen exotic currency pairs that structurally are more prone to rampant fluctuations of volatility given their currency floors, pegs, or bands in placeFXCM will discontinue trading on 13 currency pairs on Friday, February 20, 2015. Many of these exotic currency pairs carry significant risks due to over-active manipulation by their respective governments, either by having a floor, ceiling, pegs, bands, etc in place. As such, FXCM will be removing the 13 currency pairs below:

        • GBP/SEK
        • NOK/JPY
        • HKD/JPY
        • EUR/PLN
        • USD/ILS
        • CHF/SEK
        • SEK/JPY
        • USD/SGD
        • EUR/CZK
        • CHF/NOK
        • SGD/JPY
        • USD/PLN
        • USD/CZK

Despite all of the circumstantial (and not so) evidence above, if we return to the Guardian piece that we opened with...

Economy minister Morten Ostergaard said after Monday’s rate cut that the policy was not in doubt and that “no serious politician” would propose leaving or changing ERM.

Mayhap we should focus a little less on politics and a little more on macroeconomics and fundamental analysis. I will show in just a few paragraphs that these guys really, really don't know what they are doing!

The central bank aims to keep the krone pegged within a narrow band of 7.29252 to 7.62824 kroner to the euro. “The policy remains the way it has been – namely that we maintain it close to central parity,” Biltoft said. Analysts expect a further cut as soon as this Thursday should the European Central Bank announce a widely anticipated quantitative easing package, which they say could lead to the euro weakening and the krone strengthening again.

Central bankers who can't print in bulk (and that's essentially all central banks save the Fed, ECB, Bank of Japan, The People's Bank of China and the Bank of England - and you see what happened to them vis-a-vis Soros, et. al.) essentially have no nucelar arsenals in their toolchests. They do have a few mini-atomics, primarily their credibility. Once that's shot, its the equivalent of their shooting a hand gun in a nuclear war. That leads us back the Danish central bank. These the same people who said "Bitcoins are like 'glass beads', warns Danish national bank":

The Danish national bank has released a briefing note firmly declaring bitcoin to not be money, noting that the currency is more like “glass beads”.

“Bitcoins are not money in a proper sense as there is no issuer behind them,” the report states. “Instead, bitcoins display the characteristics of a commodity to which users attach value. Unlike precious metals such as gold and silver, bitcoins have no actual utility value, bearing closer resemblance to glass beads.

...  “Bitcoin is a virtual currency without any value anchor and hence it may rise sharply or fall very suddenly. A core property of money is that its value is stable so that its purchasing power does not change markedly from day to day,” argued Hugo Frey Jensen, the governor of the central bank.

“In spite of the considerable focus, use of bitcoins as a means of payment remains very limited,” Jensen continued. “Against that background, the risks linked to their use are currently assessed to be limited to the individual user.

The Danish bank’s warning also comes three months after a European Banking Authority warning on cryptocurrencies which stated that “you need to be aware of the risks associated with virtual currencies.

These are statements borne out of pure, unadulterated, uncut ignorance. It is obvious that the issuers of the statements don't understand what Bitcoin is. A quick rundown:

Bitcoin (with a capital "B") is a protocol driven, value exchange platform designed to have applications written on top of it to take advantge of said protocol(s). It is similar to the Internet, which is a protocol driven, data exchange platform upon which many applications run. As such, bitcoin (with a lower case "b") is the earliest and most rudimentary of said applications, and application of digital currency. It is not Bitcoin, but an application written on top of Bitcoin. This is akin to email, being and application written on top of the Internet, or YouTube, Facebook, etc.

To asset that Bitcoin, or even bitcoin, has no value is to ignorantly fly in the face of evidence before you. I will give you a very pertinent example right now, of how applications written on top of Bitcoin, in bitcoin, can not only prove the Danish central bank wrong, but allow funds and individuals to profit immensely from their taking actions without knowing what they are doing. 

My startup, Veritaseum, programs bitcoin to allow you to speculate in the markets (any market) by trading derivative value through smart contracts (unbreakable, self-executing agreements). Below is a screenshot of a setup using the UltraCoin client to take a leveraged long position in Danish Krona exposure. This is a gamble that the Danish central bank, like the Swiss central bank, and the British central bank before it, cannot hold true to its promise to keep a peg to a currency that is tied to an economy that is essentially different from its own. In keeping with the theme that Bitcoin has no value, I want you to pay close attention the pertinent aspects of this smart contract summary, and then I wll use our illustrative tutorial spreadsheet to walk you though a scenario analysis of what can happen if this trade goes in the money and out. 

Long the Danish Krona in UltraCoin client 

So, why buy the Krone, even if you can command $2.1 million of price movement action with $5,561 reports? Well, there are a few more reasons that I haven't mentioned above.

  1. Well, I did mention this one above, but it's worth mentioning againg. They cut interest rates deeply negative and will keep cutting. This shows that they are already under attack as:
    1. Scared money flows in as they are considered a safe haven, and;
    2. Hot money flows in as macro-types pile on for the exact reasons delineated in this article.
    3. The ECB is about to announce another leg of their QE program which will put even more pressure on the Krone to shoot upward, requiring even more capital to keep down.
  2. The Danes don't intend to join the EMU, thus, despite all of the rhetoric that you hear, ex. (and I quote from above), "Economy minister Morten Ostergaard said after Monday’s rate cut that the policy was not in doubt and that “no serious politician” would propose leaving or changing ERM".  Ahem, if that's the case, then why not join the EU? Denmark is the only country that apparently wants to permanently ties its currency to the euro without joining the block. In other words, its seeking euro stability (that's actually quite relative) and ubiquity, but at the same time it wants to retain its economic sovereignty - quite likely looking over at Greece, shaking its head. If at any time Denmark wants to actually behave like an economically sovereign nation, it can do so by abandoning the euro peg (which Greece cannot do, since it gave up its currency) and not have to bother with re-denominating assets and liabilities, re-introduction of an old, but now new currency, and the credit risks, downgrades from uncertainty and strife that is bound to go along with it. So, despite what Danes are saying, what they are doing tells a totally different story!
  3. Denmark has pegged its official interest rate to that of the ECB's (with a slight premium) to finance its currency peg. Since my warning of the Pan-European sovereign debt crisis, Denmark has been forced to materially trail the ECB official rate. This has added materially to the cost of funding the euro peg. Chart source, the Economist.
  4. We all know the peg can break. After all, many funds and retail speculators thought the CHFEUR peg was stolid, and you see how that turned out. If you remember from part 1 of this series and the impossible Triangle, or the trilemma...

    The Impossible Trinity or "The Trilemma", in which three policy positions are possible. If a nation were to adopt positiona, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.

    I think it's clear that Denmark prefers monetary sovereignty. Another possible angle is that breaking the peg once it comes under XXXX euros of pressure is that domestic imbalances will be rectified, at least on paper. The Danish current account surplus spiked over a  5 year period, implying the current exchange rate band has become undervalued. Do you catch any similarities between this and the British pound from the 90s?:
  5. The Economist reports (graphs below) that the Danish central bank's foreign currency reserves are up more than 3x's during the so-called recovery from the great recession through 2012, coinciding with Mario Draghi saying he would do “whatever it takes” to save the euro:
  6.  It's a safe bet to assume that the vast majority of this balance sheet ballooning (accumulation of euros) came from currency manipulation through came from central bank intervention. Remember, parts 1 and 2 of this series :
    1. Despite What You Don't Hear In The Media, It's ALL OUT (Currency) WAR! Pt. 1,

    2. and, Stab, er... I Mean... Beggar Thy Neighbor - It's ALL OUT (Currency) WAR! Pt 2

  7. The Swiss, who unpegged due to fright of being run over by a train, monetary policy was(is) unilateral in nature and not tied to the whims of the ECB, thus the Swiss National Bank had the lattitude to change course at will. Both the ECB and Danmarks Nationalbank are bilaterally mandated to defend the peg due to adherence to the rules of ERM2. The assistane from the ECB means a lot, something that the Swiss didn't have. In addition, this quote from the Danish central bank resonates with me...

"(Bloomberg) -- Lars Rohde, the governor of Denmark’s central bank, addressed speculators in what he said was a verbal intervention designed to stamp out any lingering doubts that he can preserve the krone’s peg to the euro.... Rohde said the central bank hasn’t coordinated its steps to date with the ECB, which is contractually obligated to support the peg should it ever breach its tolerance band. Denmark doesn’t need help from the ECB when the challenge is preventing the krone from appreciating, he said. The question of whether the ECB will step in is a “non-issue,” Rohde said. “This is a very special situation, because as everyone knows, we are all in negative territory in Europe but we are the only supplier of kroner. And we have unlimited access to Danish kroner, so we don’t have to have any coordination with anybody else.”"

Of course, there's always two sides to every story.

Caveat Number 1

All Danish government debt, up to 5 years out is NEGATIVE! That's extreme, that's unprecedented (meaning you have to guess at what the negative consequences are because you really don't know) and most importantly, that's extremely damaging to the Danish banking system! Here's an example re: Mortgage Yields. As mortgage bond yields are trading negative out to three maturities, mortgage banks are offering insanely low fixed-rate 1.5 percent bond-backed loans with a 30-year maturity. Just so we are clear, not just 30 year amortization, 30 year MATURITIES at 1.5%. This is not only the lowest rate in Denmark’s history, it's rate that offers mere basis points in raw return, and if we adjust for the significant risk of the mortgage and real estate industries, this is a materially negative risk-adjusted return. In other words, from an economic profit perspective, Danish mortgage banks are pretty much guaranteed to lose money on every loan that they make. Oh yeah, these are nominal returns. We haven't adjusted for inflation yet. Yes, inflation is currently quite paltry, but when you only have basis points to begin with, you really can't afford much - now can you?

What Mr. Rohde is not including in his rhetoric aimed at backing off speculators is that he is essentially racing against time. The fractional reserve banking system is built upon stacks and theories of debt and lending. When it can't lend profitably, it dies. Mr. Rohde is hoping his peg bears fruit before his banks start dying, but that is highly unlikely from a fundamental perspective. The ECB JUST STARTED its QE program, and is likely to ramp it up some more. In other words, we're just in the first inning of this game (my apologies for an American sports reference in this global article) and whatever suffering the banks may be going through will have to be maintained for a much longer time.

Caveat Number 2

The mandated assistance of the ECB to maintain the Krone/Euro peg comes in the form of unlimited credit lines to be drawn upon in times of insufficient FX reserves from the target central bank's balance sheet. Apparently, the ERM2 didn't anticipate the effects of European Bubble, Bubble, Toil and Trouble. You see, as is show in the Danish central bank balance sheet chart above, the problem is the exact opposite of such - the Danes are accumulating too many euros, with the spectre of having to buy many, many more. Credit lines do nothing for you when the problem is not depreciating currency digging a hole that needs to be filled, but appreciating currency building a mountain that needs to be moved. So, yes Mr. Rohde, you do have access to all of the Krone that you need since you own the printing press, but that's really not your problem, now is it? You have to sell Krone and buy Euro and related (and likely highly unwanted and rapidly depreciating) assets in increasing amounts, putting you right smack dab back where Switzerland was when they broke their peg, no? Buy high and sell low, that's the way to fend off us speculators, right?

Tell me how long can you keep that up while your banks are suffering negative economic profits and the ECB is in the beginning of a long-haul QE to never-ville?

The Economist recommends buy:

"a put option on the EURDKK exchange rate at the current price of about 7.43. Our preferred way to think of the cost of that option is to look at the amount of volatility in the exchange rate implied by the costs of hedging. As you can see in the chart below, the cost of protection has gotten a lot more expensive since the SNB’s policy change last week:

Implied volatility has jumped by more than 10 times — about what happened to 1-week implied volatility in EURCHF, despite the fact that not much has happened to the actual EURDKK exchange rate. This doesn’t necessarily mean that the cost of protection is expensive relative to the risks. While the implied 1-week volatility in EURDKK is a lot higher than it used to be, it is about the same as 1-week implied volatility was in EURCHF back when everyone thought the currency floor was unbreakable.

Of course, I recommend using those glass beads that the Danish National bank was referring to above. There is no price increase or implied volatility spike to measure. Let's take a look at how that would work if modeled out using Veritaseum's UltraCoin Trade Modelling Spreadsheet Version:1.0 Beta.

Revisiting the Swiss Franc uncoupling using the chart above...

Nordic deflation

We see a 22% jump in price relative to the euro. If a similar spike were to happen while the trade setup illustrated above were in place (actually, the trade setup above with the monetary amount at risk x 10, to allow for a bigger trade), it would look something like this.

Krona lonb model results

In case your wondering, the absolute net payout is bounded by what you put in (principal+collateral). If you increase that amount, you increase the amount you are able to claim from your counterparty. The leverage allows this (or the opposite, a loss) to happen very, very quickly if you ratchet it up. The collateral is just that, collateral - and is return to you as yours if it is unused. It's purpose is to allow you to stay in the trade if your orignal principal is eaten up and to guarantee that your counterparty gets paid up to the "smart contract"ual limits. The more you pay, the more can play!

Now, I'm sure many of you should be amazed at these glass beads, as the Danish Central Bank proclaims (because they apparently read the Satoshi whitepaper very, very carefully before going on record. Of those that are amazed, there are probably some of you saying, "That's cool and all, but  I don't want to trade through or have any exposure to bitcoin price volatility." Well, for one, the entire interface can be expressed in the (major) fiat currency of your choice. More importantly, the sytem does a lot to quell the noise of bitcoin. It's almost as if it wasn't there.

This is the result of this trade when bitcoin drops 10% mid-trade...

bitc drops 10 on Krone long trade

 This is what happens if BTC were to go catastrophic and collapse 40% during the trade...

bitc drops 40 on Krone long trade

Yes! You still profit roughly 9%. There are a plethora of other advantages to these "Glass Beads" as well...

UltraCoin summary

 

Download the UltraCoin Value Trading client, tutorial and trade modeling spreadsheet for free, no registration, no account activation, not even an email. Address. Just lock and load, and trade. 

 

 

I have been in discussion with one of the world's largest banks, a US domiciled bank, with over 200 million customers and clients worldwide. After my second meeting with the American FX group, I was referred to one of their biggest clients as it was understood that there were significant synergies to be had between their global operations and our UltraCoin ecosystem which allows counterparty and credit risk free value trades. This particular aspect of our product was, as fate would have it, not only extremely pertinent to the topic at hand but arrived just a few days too late. I was scheduled to meet with one of the original founders of this FX brokerage firm yesterday, but earlier that morning the Swiss National Bank decided to remove thier much publicized and promised floor from their Swiss francs from the euro. Carnage ensued, as I promised that it would.

Of course, this guy was much too busy to meet with me. His firm is now all over the news (there are several firms that could fit the bill, but I will not mention the firm to keep it anonymous nonetheless) as nearly all of the specialist currency brokerages face insolvency issues - the very thing that UltraCoin was designed to prevent! Yesterday Bloomberg reported Casualties From Swiss Shock Spread From New York to New Zealand and today we find members of this group have lost up 90% of thier share price, as per Business Insider: Foreign Exchange Brokers Are Going Bankrupt In The Swiss Franc's Surge

UK FX broker

The recent move on the Swiss franc caused by the Swiss National Bank’s unexpected policy reversal of capping the Swiss franc against the euro has resulted in exceptional volatility and extreme lack of liquidity. This has resulted in the majority of clients sustaining losses which has exceeded their account equity. Where a client cannot cover this loss, it is passed on to us. This has forced Alpari (UK) Limited to confirm today, 16/01/15, that it has entered into insolvency. 

That follows New Zealand's Excel Markets, which made the same statement earlier, according to the Financial Times.

Brokers can go out of business on big moves like this because they give their clients access to leverage. For example, an account holder might have $1,000 with the broker, but hold positions worth $10,000 in currency markets. That doesn't matter so long as the holder's losses are covered by the initial amount. But on Wednesday, for at least two brokers, that wasn't the case for a lot of those clients.

Our solution for these brokerages is to give the leveraged return of $10k but to have contract unwind when his principal and collateral are exhausted. There are NEVER negative equity situations.

New York-based FXCM, one of the world's biggest foreign exchange brokers, says that it may be in breach of rules on capital requirements and that it is owed $225 million by clients who are now in negative equity. FXCM shares are down by an astonishing 90% ahead of the US open. 

IG Group, a publicly listed UK-based broker said yesterday that its losses would not exceed £30 million ($45.7 million)...

swiss franc 2http://static3.businessinsider.com/assets/images/back_gradient_20x40.png?1421356676) repeat-x;">Investing.com, Business Insider

As of 11:30 a.m. GMT (6:30 a.m. ET) the franc is currently looking more settled, down 3.9% at 1.016 against the euro.

Veritaseum's UltraCoin was designed specifically to avoid solvency issues by:

  1. Forcing all participants to prefund their accounts with full principal and optionally additional collateral (margin);
  2. Forcing all participants lever up (via actual loans) outside of the system, leaving the system sacrosanct;
  3. Enabling implied leverage by gearing the returns upon mutual consent of the parties, or using levered securities as price fees (ex. Proshares Ultra);
  4. and most importantly, replacing all counterparies in the trade with the blockchain, which essentially removes all counterparty and credit risk.  

This is what a sample contract looks like before being submitted to trade:

Allianz short and long Franc

I'm thoroughly convinced that this is the trading model for, and of, the future and this week's carnage should go a long way in convincing banks, brokerages and regulators to agree with me. Insolvency can be one hell of a motivator.

Even those who aren't facing insolvency issues still have to deal with the structural decline in big bank profitabilty. I have answers for that as well, right fellas?

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