Derivatives are a $1 quadrillion ticking time bomb, soaked in gasoline and sprinkled with gunpowder.

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Is it even possible that eurobonds are being sold because fear of a Greek default?

Is the fear of a default cascade the reason bonds are being dumped in wholesale batches?  I have heard the explanation that “net issuance” has again gone positive as the reason for these air pockets.  Maybe this is true, I do not think so but if it is then there is a very real problem!  If this is true, it means the market cannot absorb the issuance and yields are going higher not by design but because there are simply not enough buyers, an “uh oh moment” so to speak.

I have a little different theory which if not so now, or “yet”, it will be soon!

I believe much of the bond market weakness is being caused (and saved) by OTC derivatives.  I believe and have said multiple time before, “someone(s) out there is already dead”.  I believe that “bankrupts” are strewn all over the place and have been hidden with overnight loans… but there is a new problem.  The recent volatility has created more and more losers …which creates more and more FORCED SALES!  (Please don’t scoff at this as there are a handful of “choice” firms who have not had a single day of trading losses in over four years, with a whole string of losers in their wake? )

You see, for all intents and purposes we have lived through a global bull market in bonds since 1982.  This has culminated in negative interest rates and we ended up with everyone on the same side of the boat with no one left to “buy”.  Of course you could ask the question “why would anyone buy?” with zero or even negative interest rates.  Only a few of the “sane ones” out there have asked this question until now, it seems maybe a few of the insane may be regaining at least some sense of sanity!?

As I did yesterday, I will repeat “why” all of this is important.  “Credit” is what our entire system is based upon.  It has become the basis for all paper wealth and the lubricant for all real economic activity.  Should credit collapse (it will), everything we have come to believe in (been fooled by) will change.  Credit has come to be viewed as “wealth”, it is considered an “asset”… with just one problem, it is neither!  Credit is only an asset and can be considered wealth as long as the borrower “can pay”.

And herein lies the rub, Greece cannot pay which means the holders of Greek debt (along with issuers of CDS) cannot pay and so on.  It is not just Greece of course, it is the entire Western world, it just happens that Greece is first because they lied the most with the help of Goldman Sachs and other “benefactors”.  If counterparty risk did not matter, there would be no problem.  The reality is this, the whole show from single dollar bills to trillions in derivatives will be engulfed in this “counterparty risk”!

Derivatives are a $1 quadrillion ticking time bomb, soaked in gasoline and sprinkled with gunpowder.  The volatility we are now seeing are the matches!  While we have had two “saves” where the central banks have stepped in and bought debt to steady the markets, the day will come when it does not work.  This game has gone on for a very long time and resulted in a mania where most all of the players are “long”.  The only potential new longs left are the central banks themselves who can only buy more debt with money created by debt.  The day will come when the ability to “save” is overcome.  Along with it will come the freedom of prices created by Mother Nature herself.  Stocks, bonds, currencies, commodities and yes, even silver and gold will finally break the chains of “algo mania”.

Finally, this you must understand, “power” is currently debt.  The control of debt is also the power of prices.  Once debt breaks loose and trades out of the control of central banks, these central banks will also lose the control to price everything else.  We have come very close twice in the last four trading days of the credit market control being broken.  Will loss of control be on the next convulsion?  Or the next?  I nor anyone else knows this answer, I do know the greatest margin call in all of history will be issued … and it cannot be met!

http://www.globalresearch.ca/credit-markets-have-melted-overnight-derivatives-are-a-1-quadrillion-ticking-time-bomb/5449142