It started a few days ago with silver – when the Chicago Mercantile Exchange increased the amount of money you had to put up to trade silver futures contracts.
Reportedly, George Soros liquidated his Silver and Gold positions – but I’m not sure that rumor is well sourced.
So today almost everything is in free fall – oil is down almost 10% in a day – but it’s not because the dollar is suddenly worth more.
This has the feel of a speculative bubble bursting – the more things drop, the more people who borrowed money to pump up the bubble will face margin calls and be forced to exit their positions by selling, creating further pressure on downward prices, which then picks up momentum, wiping out more and more wealth that never existed.
The big risk is if things fall too fast, people won’t be able exit before they are completely wiped out – whoever loaned the money will then be in a liquidity squeeze. In the worst case scenario, the exchange could fail if it is unable to stand behind the trades.
As to why this is happening, it still isn’t clear. Yesterday, it was concern the economy is slowing down. Whatever is going on, we’re back to a September 2008 moment.
As near as I can determine, enough of the major players are betting that QE2 is coming to an end and no QE3 will happen. The dollar will stabilize, returns on bonds will be decent and commodities will be sold off. Seems like as good an explanation as any. There’s a 50/50 chance that they’re right. Funny how the odds never change.
Rumor swirling around today was that Greece was going to quit the Eurozone and default on their Euro based loans – creating a surge to safety buying up US Treasuries. Our debt sucks and pays no interest, but nobody else has a better offer.
The Euto did weaken, but not as much as things dropped. It looks like gasoline demand trailed off and the US economy is back towards decline. Just wait until Bernanke stops the intravenous injection of meth into the banking system and wait for the withdrawal symptoms. Oh Nurse!