Robert Steele: Wall Street Controlled Demolition Part 1

Letter

Alert Reader sent me this.

Robert,

I believe that some opening shots may have been fired on Wall Street and the central banking system. It is unlikely that the recent price action GameStop stock (and others) was simply caused by Reddit bloggers. Understand that stock bloggers chat rooms have been around for two decades. Also understand that in order for a stock to move a couple of points, some serious and sustained purchase volume is needed. This would only come from well-capitalized or institutional sources. It is dubious to conclude that a bunch of keyboard warriors pooling their relative “nickels and dimes” would cause a major stock or market movement.

To me, this smells like an orchestrated attack intended to expose a weakness in the financial system, as well as begin to exploit a potential pressure point. It is conceivable that Reddit bloggers were later used to “pile on” to the trade, create a smokescreen, and possibly sell a story to the public.

Consider the following:

1. Most hedge funds short sell stocks (different than naked short-selling). There is nothing wrong with this and it is just a part of their business model. One of the strategies used in short selling is to study the company’s financial statements and ratios. This can provide invaluable insights as to which companies have unsustainable business models and/or are cooking the books.

2. Many hedge funds use leverage of +30x their underlying investor capital. So, when they have a large position that either runs-against them or blows-up, the financial is magnified. Imagine having a one dollar move in a position having a thirty-dollar actual financial loss. Position sizes at hedge funds can be in the tens or hundreds of millions.

3. Large commercial and investment banks trip over one another to lend money to hedge funds to enable such large amounts of leverage. If the public actually understood how much leverage, how interconnected, and what the potential societal ramifications were – there would be a rush to purchase farmland and seed.

4. It would be fairly straight-forward for a well-capitalized group to attack and damage a hedge fund. (a) Find out which hedge funds carried the most leverage, (b) Understand their largest short positions are, and (c) Attack them by running up the price on their short positions. If a short position moves too far in the opposite direction, the manager will close-out or “cover” that position. This is done by buying shares of stock in the open market. If there isn’t ample supply available of that stock to purchase, the share price runs and causes a “short squeeze.” The adverse move would get out of hand and the hedge fund may incur significant losses.

5. If enough of these positions are blown up, the leverage creates a domino effect where a firm cannot make capital calls and may need to liquidate. In extended situations, firms may fail. The failure of the hedge fund Long Term Capital is a great example of the impact that the failure of one firm can have on the markets.

6. It is not far-fetched to understand that a few sequences like this could quickly ripple through a highly levered and interconnected system and trigger a significant crisis. This is especially true when the system is tired and vulnerable. The system is a literal house of cards. When you pull out the most strategic cards at the base level, the entire structure can collapse unto itself.

If somebody had the goal of exposing Wall Street and the Central Banking system, this is actually a very clever way of attacking. Large doors can swing on small hinges, especially when massive amounts of leverage are used. Another crisis would have the potential to bring the central banking system into a check-mate scenario. Most monetary authorities have likely exhausted their policy arsenals. So, if something caused several investment and money center banks to fail, it would trigger a market or liquidity crisis that would be difficult to manage.

If the Fed/Central banks do nothing, liquidity (money movement) freezes-up and this will spread globally as we saw in 2008. The entire system (flow of money) will come to a fairly quick halt or systematic collapse. The consequences would be unimaginable.

On the other hand, if the monetary authorities did intervene and attempt to stabilize they would need to inject liquidity (a proverbial blood transfusion). Massive amounts of money will need to be created out of thin air. Understand that this is all fiat currency with no collateral backing. And when you infuse too much money into the system, rapid inflation follows. Investors would start buying gold and silver as safe havens or de facto money. In the end, the monetary authorities would have printed themselves out of existence.