Barnhardt: On Cascading Counterparty Risk & Economic Treason

From Ann Barnhardt:


I’m out of pocket for a few days, but K.D. over at ran THIS PIECE on Wednesday, and I just wanted to chime in and expand the concept at bit.

First, I absolutely, totally, completely and 105% confirm that the futures markets are withering and dying on the vine AS WE SPEAK. I’m hearing for every single one of my contacts, both floor guys (in both Chicago and NY) and introducing brokers (as I used to be) all over the country, that business is totally evaporating. And we’re not talking the normal Christmas season slowdown. No. We’re talking people explicitly stating that they are done trading and hedging with futures, both speculators and hedgers. It’s over.

No mas. See you later, Alligator. Buh-bye.

This was going on to some extent before the MF Global rape/theft. The markets had grown thinner and thinner, ironically on more net volume, but the volume increases were due to the veritable fungal infection of the market that is the high frequency algorithm trading systems. Furthermore, any short hedger with a brain in their head over the last 18 months has known that short hedging in an inflationary environment is and would be needless suicide. Why IN THE WORLD would you SHORT an inflating market? If Mrs. Reggie Love is printing money a trillion at a pop, and I think Mrs. Love’s debasement will be at $8.5 TRILLION in a few weeks after the debt ceiling is raised yet again, isn’t it obvious that currency debasement is happening and that physical commodity prices are going to necessarily inflate?

At this point, anyone who actually believes any statistics that come out of the federal government or the Federal Reserve (there’s no inflation!) has got to be mentally disabled.

Literally. Mentally disabled.

But I want address another issue that I don’t think many people are aware of yet. I taught one of my Level 2 Cornerstone Cattle Marketing schools a couple of weeks ago and we talked at length about cascading counterparty risk. Not only are producers not using the futures themselves, but they are also VERY keenly aware of the fact that if they enter into a private treaty forward delivery contract with a grain elevator or a feedlot, that they would STILL be exposed to the futures market, and to the risk of a futures market collapse, or even just another wealth confiscation. Yes, even though the producer was not engaged in the futures markets himself, if his counterparty turned around and laid off the risk on their private treaty forward contract using the futures, if their private counterparty were to be caught up in either a single-firm collapse OR a total system collapse, it is highly probable that the effects of that would cascade back to them.

For example, if a rancher forward sells his calf crop to a feedlot and locks in his price with the feedlot on a purely private basis, if the feedlot then turned around and SOLD futures to offset the private forward BUY of the rancher’s cattle and then got caught up in a futures market confiscation or collapse, the feedlot might be so financially hamstrung that they might then DEFAULT on the PRIVATE contract with the rancher. This same dynamic could also happen with grain farmers who forward sell grain to an elevator on a private contract. Or it could happen to a feedlot that forward buys feed grain from an elevator. It could also happen in the petroleum markets, and on and on.

I just want to remind people that there are lots of private treaty forward contracting going on, and always have been. In fact, I have almost always advocated to my clients that they look to a private treaty “cash market contract” with feedlots or elevators first before using futures, because that way the feedlot or the elevator is the entity carrying the hedge in the futures market, and thus posting margin and meeting margin calls. For my guys, it was frequently worthwhile for them to cede a few cents on their side in exchange for not having to tap a line of credit for margin calls, and have that cash available for other uses, or to just have the ease of mind that comes from NOT having one’s interim cash flows exposed dollar-for-dollar to market movements.

But, it was fair to say that whenever a private treaty forward contract was entered into, EVENTUALLY someone laid that risk off on the futures market. Some big players are still so attached and dependent on the futures market, and simply can not comprehend or execute a paradigm shift – which betrays a massive weakness of intellect – that they are still trying to operate as usual, with their brokers, likewise in denial, telling them that “everything is just fine”. The sensible players and producers are wising up, and are now even shunning private treaty forward contracts in fear of counterparty risk should a cascading collapse occur.

This MF Global situation isn’t just about a few bucks being stolen from a brokerage firm. Both the scope and cascading consequences of Corzine’s actions put this firmly in the domain of economic treason – as in an act of economic war upon the United States and her people. This is why I told Peter Schiff that execution should be on the table for Corzine. Treason, in whatever form, is a capital offense. If Schiff hadn’t cut me off, I would have explained this.

Capital punishment is serious, solemn business. It’s not an inflammatory rhetorical tool. If execution is ever put on the table, there had better be a solid, well-thought out justification for it.

In this situation of massive economic treason, it would be fully justified.

I continue to marvel at how the cash cattle marketing skillset that I was taught and continue to teach is EXACTLY the remedy for what is happening around us. The answer is not in ever more complex derivatives, but in the simple, millennia-old arithmetical art of physical commodity arbitrage.

It truly is amazing how the Lord works and moves.

13 responses to “Barnhardt: On Cascading Counterparty Risk & Economic Treason

  1. Pingback:

  2. I wish to nominate Ann as Treasury Secretary and general wup ass person.

    • Treasury Sec? Hell… My personal financial adviser and accountant.

      Wife, if I were single and she’d have me.

      Love that Ann!

      Jon III

      P.S. Oh yes….. convert your paper and computer fictions into hard negotiable goods and preps. Do it now.

  3. And, I might ask, why is Congress not all over this situation and it’s implications, collusion perhaps?, and they think we’re all too stupid to notice. 3 B’s are suggested, Bandaids, Beans and Bullets.

  4. We all have a front row seat to the unfolding TRAIN WRECK.
    It’s horrific and yet fascinating- to see the wheels come off, as the drama unfolds day by day, industry by industry, institution by institution. Soon, only the failed Central State remains, as everything else has been burned or eaten.

    Saddened by what is happening. Concerned by what must surely be coming. Yet unable to turn away from the spectacle, the carnage.

  5. Atlas is Shrugging.

  6. “We’ll go down beneath the clawed hands of the Gen-X and Gen-Y folks who blame us for the last fifty years of oligarchy that we didn’t rise up and destroy somehow. Of course our magazines will be empty, the barrels hot and smoking, the dead piled up at our feet, Ka-bar snapped off in the skull of the next-to-last guy to reach us.

    “Our 401ks will be gone, stolen by .gov, our food stocks used up or taken by FEMA, along with whatever is left of our ammo. The blacksmithing tools, reloading equipment, wood and metal working equipment will rust because they just don’t hook up to the X-Box and WII (Wee?) controllers.”

    –RegT at SiliconGreybeard

    Well said.
    Well spoken.
    Well done.
    Well, well.

    • ““We’ll go down beneath the clawed hands of the Gen-X and Gen-Y folks…”

      What are they going to attack us with, Halo Three, World of Warcraft mad “master chief” skilzzz ??? Really?

      “Virtual” combat is to actual combat as rap is to music, as legal is to ethical, as porn is to sex, as hamburger helper is to steak….(feel free to help me out here).

      They’ll lose interest in inverse proportion to their rapidly diminishing numbers, numbers diminished as well by simple attrition of those unprepared to simply survive the lack of electricity.

    • Pdxr13’s reply was better. Besides, most of the boomers who were/are part of the problem will die off rather quickly due to lack of preparation. I’ll be saving bullets for the gov jackboots and any of the FSA/boomers they gather up for cannon fodder.

      • Just remember that the Masters are going to be VARY wary of arming the FSA significantly, because they understand the FSA may RAPIDLY turn on the Masters. And to the Masters, that is a HIGHLY undesirable situation…

  7. You Ann Barnhardt sycophants really should get a dope-slap upside the head…unless, of course, you believe all of her ranting…granted, even a blind nut finds a squirrel now and then, but, really…….

    Let’s see…oh, the government explanation of the 9/11 ‘incident’ is not to be questioned…and those of us with a ‘bit’ of physics in our background are just a bunch of cranks for bringing up a few contradictions explicit in the ‘official’ conspiracy theory…

    And…Ron Paul, the sole representative of the Dead Elephant Party who dares to bring at least A FEW of the necessary questions to the table is an “Israel hater”…WTF? Ummm….class, can we all say, “U.S.S. Liberty?” Ipso facto, we must be Muslim lovers….

    Get a grip..and start using a little more analysis and bit less infatuation, lest you start getting even MORE like the cretins at DU…

  8. Based on Ann’s summary of the situation, it seems most prudent for FREEFOR to:

    (a) Secure farms/farmland for individual production and sale of surplus within the local area;
    (a)(1) Food production for personal use need not be accomplished on
    large tracts — you can obtain much of the basic plant matter you need
    by gardening quarter- or third-acre lots (relevant resource on survival
    gardening and permaculture:
    (b) Support local farmers by minimizing purchase of items such as meat/cheese/fruits/vegetables from large-scale chains;
    (b)(1) Stabilization of sales for these local farmers will have the added
    benefit of stabilizing prices for customers — assured of being able to sell
    their products, local farmers will not have to gyrate prices wildly to end
    the year “in the black”
    (b)(2) Purchase from local farmers also will allow the opportunity to
    develop independent exchange networks, to include gold/silver and
    barter (relevant resource on barter networks:
    (c) Patronize restaurants that obtain their supplies from local sources.
    (c)(1) By doing this, FREEFOR will encourage local suppliers to
    maintain high and steady production and thereby assure ample
    supplies for the local population.

    By directing FREEFOR resources in this way, we enhance the resilience of local food production. When the time comes, this will pay dividends by ensuring a stable, independent, well-developed source of food logistics for FREEFOR.