A friend of mine sent me a documentary “The Great Taking”. I also saw it posted on ZeroHedge and another friend of mine told me about it in the comments of another blog.
Republicans Achilles Heel is that we tend to lend credence to conspiracy theories too easily.
Fortunately, I have taken a few classes in cinema. My teachers at my high school, Ralph Emelio and John Mostacci, were really clear when talking about documentaries. Documentaries have a point of view, and they are made to get you to agree with the directors’ point of view. Hence, Michael Moore’s “Roger and Me” is hardly an unbiased look at Flint and GM.
In my lifetime, I have traded through and seen:
the crash of 1987 (still the single most scary financial event I have witnessed)
the mini crash in 1989 (yawn)
the Solomon attempt to corner the Treasury market
the Long Term Capital Management debacle in 1998 (manageable)
The collapse of the pork industry in 1998
Y2K nothing burger (hype. I sat through SEVERAL CME Board meetings on this…thanks whoever made this up)
the 2001 Internet bubble bursting (companies without profits went public which I called in January 2001 on Bloomberg Television)
Enron (bad corporate behavior in ONE company)
the 2008 crash (bad government behavior and why did they bail out banks?)
The Flash Crash (a scary few minutes)
Negative crude oil prices (-$40/bbl!)
Covid Crash (engineered in a Chinese lab by Fauci unintentionally and exploited by Democrats to get rid of Trump)
No regulation or regulatory body saw any of that coming. No one could have lifted a finger to stop them. The laws put in place after Enron do little to nothing except keep private companies from going public sooner and robbing the American people of a chance at taking a shot on a growth company. Dodd-Frank was some of the worst financial legislation ever passed by a deliberative body in the United States. It’s done nothing but empower centralized bureaucrats and fuck up free markets.
The Great Taking is a big scary documentary that is designed to create doubt, instill fear, and get you to distrust the entire worldwide financial system.
I watched half of it. I turned it off when he asserted that if you pay cash for your car you don’t own it. That’s totally 100% a fallacy. We have property rights in the US.
I think the guy who made the documentary is smart. I think he probably did pretty well running his hedge fund so he could retire to Sweden. Although, probably not smart to retire to Sweden, but whatever. He’s calling for a Great Depression. He’s wrong.
Will the stock market go down again? Yes. For sure. But, he said down to 10% of the current value and that is just not close to being realistic. The only thing that could do that is nuclear war.
I am not a lawyer. I am not a securities law expert. The assertions he makes regarding changes in bankruptcy law I cannot really dispute, agree with or anything. I can disagree with a lot of his assumptions.
Banking looks like a black box to most people and when you start to try and understand the Fed, worldwide payments, and risk management, it gets even hairier.
First, the visuals are really scary. It’s the Great Depression, visuals of people cleaning out their offices in 2008, lots of real estate that’s vacant, and real estate in places like Cleveland and Detroit that are decrepit. Ignore the visuals if you can and listen to exactly what is said. There is a lot of quick cutting and editing to make you feel nervous.
Let’s take them one at a time.
The Great Depression was caused by really bad government policy and an adherence to the gold standard. Because of the gold standard, and inaction by the Fed, the money supply decreased dramatically killing growth and opportunity.
The rot in Cleveland and Detroit happened because the US government had really bad commerce polices, and the management teams of Big Auto never saw the Japanese coming. Detroit was one of the wealthiest cities on the planet until 1970. Michigan state and Detroit city government contributed greatly to its decline.
Today’s vacant city real estate is caused by really terrible city policy, and innovation in the form of the internet. Not by a breakdown in the financial system.
People lost their jobs in 2008. People lost their jobs in tech over the last couple of years too. It wasn’t a breakdown in the financial system that caused the internet job layoffs. Government policy contributed as much or more to 2008 than “bad bank behavior”.
The documentary looks only at the “velocity of money” not the total money supply. If we look at a chart of M3, the money supply is significantly larger than it was in 1960. The money supply has contracted since its high in June 2022. Why is that? The Federal Reserve raised interest rates significantly, and that contracted the money supply. The “velocity of money” also slows down when you increase rates.
One of the scary things during the Obama years was that we had a 0% interest rate policy and a slowing velocity of money due to Obama’s policies. GDP growth under Obama was anemic at best.
The “velocity” of money is not the total money supply. It’s the rate of change of the money supply. If you know basic calculus it’s the derivative of M2. It is an attempt to understand how often the money supply turns over. During recessions, velocity should slow down. During times when the interest rate is increased, velocity should slow down. Based on this graph of the velocity of M2, that’s exactly what you see.
Look at the huge drop from 2019 to 2020. That’s Covid. Look at the chart of the M3 money supply. It expanded during the same period because the Fed was on 0%, and the government was sending money bombs all over the place.
That expansion of the money supply along with a highly expansionary spending policy from Biden caused inflation when the economy opened up again. Too much money chasing too few goods.
Does velocity matter? It does but it is not he be-all end-all of financial analysis. It gives you a clue to what is going on in the economy. But, it’s a clue. Velocity doesn’t pinpoint where problems or excesses might lie. Maybe faster velocity is what we want and sometimes we want it slower than it is. It depends.
Econ 101.
What about stock ownership? If you buy a stock, do you have a claim on the profits of the company just like you are taught in Finance 101? Yes. But, if you own common stock there could be a lot of people ahead of you in the case of a bankruptcy. The documentary makes the case that some shady judge changed the laws.
I am not an attorney and I would leave it to securities lawyers to tell me, but I don’t think his interpretation of the law is correct.
One issue might be ETFs. In that case, you own shares in a company, but it is through an index. In bankruptcy, what’s your claim on the assets of the company? The ETF would have a claim, and then dole out any proceeds to you pro-rata based on the number of shares you own in the ETF. Hence, you might not do as well as a regular common shareholder who doesn’t have the extra gatekeepers. That’s speculation on my part.
The documentary wades into derivatives. Munger/Buffett have called them financial weapons of mass destruction because they got caught holding the bag on them. They certainly can be if they are used improperly.
There are all kinds of derivatives. When you work for a company and they issue options to you as a form of salary, that’s a derivative. It’s not stock. It is a claim on future stock at a specified strike price. You don’t pay any margin and it doesn’t run through any clearing operation until it is exercised. It’s a contractual obligation. There is no custodian, except the company who carries those options on its financial statements.
The futures market and the listed options market are derivatives. It’s a negotiated price that is settled on an exact date in the future. Market participants use them to hedge their risk. Read Scott Irwin’s book, “Back to The Futures” and you will understand how.
All these plain vanilla derivatives are margined each and every day using a centralized clearing house. In the case of the futures market, exchanges generally own their clearing operations. They have a vested interest in making sure everyone is margined correctly. In case of a huge market dislocation, they purchase insurance to guarantee they don’t go under. Clearing is a huge strategic asset for futures exchanges. It’s not a stretch to say owning your own clearing is worth billions to the valuation of places like ICE and CME. That’s why the London Metal Exchange nickel contract dust up was such a disaster. The LME looks like a third-rate operation, and if I were a competitor you bet I’d list every contract they had.
All listed stock options are cleared through the Options Clearing Corporation (OCC) based in Chicago. Doesn’t matter where you trade them, on an exchange or off exchange in a dark pool, they clear the OCC. The OCC takes care of margin, and settlement. It is different than the CFTC-regulated futures market clearinghouses because it is run as a utility and owned by all the market participants.
But, the derivatives market goes deeper. Back in the day, we’d traded notionally billions and billions of Eurodollar contracts every day at CME. Guess what? The OTC derivatives market for that contract was trillions.
These are privately negotiated contracts between two parties. They are negotiated by attorneys, accountants, and investment banks.
If you read “The Big Short” by Michael Lewis, the contracts that the “winners” of the financial crash had were OTC derivatives contracts privately negotiated with counterparties like big investment banks. The bank set the margin and settlement terms. That’s why Michael Burry was almost bust.
Those contracts are cleared at places like the Depository Trust Clearing Corp (DTCC), the OCC, ICE Clear, and LCH Clearing. There are not a lot of OTC options for clearing but there are enough so that the market is competitive. When it’s a cross-border derivative often the Bank of International Settlements (BIS) gets involved. The BIS is a bank that works with individual central banks to make sure worldwide commerce transacts smoothly.
To be clear, the 2008-09 financial crisis wasn’t caused by lack of access to clearing, or clearing houses blowing up. It was caused by really bad US government policy that allowed for the creation of a market for subprime home mortgages.
House Financial Services Committee hearing, Sept. 10, 2003:
Rep. Barney Frank (D., Mass.): I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .
Because they were subprime, there was a lot of risk to be hedged. The problem was the backstop that Fannie and Freddie gave the market with the implicit government guarantee they had caused everyone in the banking industry to be very cavalier about pricing the actual risk.
The documentary talks a lot about the volume of derivatives, then gives you the scary names for them, but never says why they exist.
I’d like to point out that when Lehman Brothers went down, their entire portfolio was competitively bid and sold to market participants almost overnight without a ripply in any clearinghouse. The documentary omits that fact because it doesn’t fit their story.
OTC derivatives exist to hedge risk.
Let’s say you are Michael Burry. You go to a variety of investment banks and pitch your trade. You think the subprime market is going to tank and you want to short the subprime market. You can’t sell a plain vanilla product and get that kind exposure.
Goldman decides to do a deal with me. We know all the parameters of the contract. Burry has his trade on and has assumed the risk. Goldman also has assumed risk because they took the other side.
What’s Goldman do?
They hedge. They look for another entity to take the other side. They write another CDO. They have all kinds of OTC trades going every direction so maybe they slice up the risk, repackage it and do a credit debt obligation with some other bank or hedge fund.
It doesn’t stop there. It keeps going almost ad infinitum. That’s why so many CDOs can get created off of one person like Michael Burry assuming one big risk.
Did you know the overnight turnover of foreign exchange markets when you add up cash, derivatives, and OTC derivatives is in the many trillions of dollars? They are cleared through several clearinghouses. Just because the number is big doesn’t make it scary.
My view today is that the danger is this. We have created a government policy that rewards big centralized banking and insurance entities. It’s become less competitive. Free market systems are better with lots of competition and decentralization so risk is spread out over the entire system not concentrated in a few big players.
That’s a lot different than “The Great Taking”.
It is a myopic view to look at Federal Reserve bank policy from its inception to today and say they have stolen dollars out of your pocket. Sure, the US dollar is worth less today than it was in 1913 when the Fed was created. That’s because the money supply is a lot larger and you should be grateful for that. Because it means the underlying economy and opportunities being created are larger.
Ask yourself a question. Would you rather be poor in 1913, or poor in 2023? Would you rather be rich in 1913, or in 2023?
I will take today on all counts. Being poor in 1913 sucked way worse than today and you had far less opportunity. By the way, the technological advances in all industries that we are seeing today will leap society forward farther in the next thirty years than the last thirty. It is happening in the United States for the most part. There are no startup hubs in Marxist countries or Socialist countries.
The Fed for sure has its problems. The documentary had the opinion that the Fed left rates too low for too long. I agree! I wrote about it at the time and still would argue with anyone that doing quantitative easing as many times as they did was far too many. They should have stopped at QE1. Rates should have started to go up in 2011.
But, the Fed is always behind the curve. They are human.
I was a big advocate for central party clearing of most OTC derivatives after the crash. I thought that clearing might have fended off the worst parts of the crash. My friend Dr. Craig Pirrong of Streetwise Professor disabused me of that idea. Craig is probably the best expert on clearing blogging today.
Sometimes, OTC derivatives should be cleared through a central clearing operation. There are OTC derivatives that are relatively vanilla, and a central clearing party (CCP) can handle them. However, many of them are so specialized forcing them to go through a traditional CCP increases the risk to the financial system, not decrease it.
Craig wrote an excellent piece here on forced clearing of US Treasuries. Read it to see what I am talking about.
The biggest thing we have to fear in our financial markets is not the exchanges or the players in them. Free markets work if you let them. The biggest thing we have to fear are bureaucrats and dumb politicians that pass regulation after regulation that impose all kinds of artificial restrictions on the market so they are guaranteed to fail.
I find documentaries are mostly biased propaganda. Manipulative and deceitful. Therefore I rarely watch them. I can’t stop to question or engage with the information presented. Often context that argues against or mitigates the point being made is glossed over or omitted. Thus the viewer forms strong opinions and is not aware of their own ignorance, believing themselves to be well-informed on the topic . The prime example is “Making a Murderer”, which, due to its combination of huge popularity and significant omissions, has done immense damage to the credibility of the genre. They are just longer forms of news (and perhaps even more pernicious), which is also all biased propaganda now in favor of the Oligarchy and Deep State.
I don't know how to communicate with you by email, so I'm adding this to the post discussing the same topic.
FYI, there seems to be a growing movement of people concerned about this. This came from The Heartland Institute via Red State. I think both are pretty reasonable conservative outlets.
https://redstate.com/heartlandinstitute/2024/01/12/you-dont-own-what-you-think-you-own-n2168617