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Discussion in 'The Kruse Longevity Center' started by Jack Kruse, Jan 29, 2021.

  1. Jack Kruse

    Jack Kruse Administrator

    Stevie "Billions" Cohen deleted his Twitter account over his losses on GME. I have a feeling his losses are not the big story. I think the bigger story will come out next week when the market fails further........ he needs a major plumber to fix the pipes he broke at DTCC. I think settlement showed RH was short securities to sell and they may fail and so may several custodians over this short sell.

    We now know that the DTCC has exercised its right to add additional margin charges to brokers for a set of these stocks to clear regulatory hurdles to settle all the trades they made. It's called a Margin Liquidity Adjustment Charge and the DTCC is a Wall St gang that is able to raise the RobinHood requirements to 100% on a basket of stocks tied to the sell-off. I think GME broke the pipes that support the water coolant plant that keeps the nuclear reactor that runs the market cool. The temperature in the containment building (DTCC) is rising. This is why RH got a billion dollars of capital infusion and the contagion still spread to Schwab, Fidelity, and Coinbase. If the pipes are broken and the temperature keeps rising next week might bring a Chernobyl level event to the White House and Federal Reserve. Just a hunch.


    Helio Silva and GavinH like this.
  2. Jack Kruse

    Jack Kruse Administrator

    Robinhood offered retail investors free trading........the Fed offered retailer investors a cheap source of money.

    Recall, if something's free, you're the product in the transaction. I think the order flow is the key in this story. I think this is where the pipes broke and trade settlements are the problem. This is what broke the pipes. As more volume came through the pipes the leak got worse. As the retailers continued their massive buying, the short squeeze shattered the pipes and the market failed on settlements. I think Yellen was called about this. The SEC could do nothing to stop the leak and as the patient bled out, Hedge funds were bled dry and so was the foundation that underpins the market.

    Trading on Robinhood is free, so the retail investors from Wall St bets are likely the product being sold to someone else tied to the plumbing of the market. That someone else is who Biden and Yellen will have to protect. You can bet your ass on it.

    It might be what leads to a meltdown and spills out and causes a lot more damage than anyone thinks next week.
  3. Jack Kruse

    Jack Kruse Administrator

    Melvin Capital is the HF that got its positions blown up. Melvin Capital is a tiny player in the scope of Wall Street overall and this is why I became worried when I saw the collateral damage start to affect other brokerages. Melvin has a couple of dozen employees and managed $7billion. Do you know who profits when it gets in trouble? People with even more money under management.

    That is when the infrastructure that underpins the market begins to fail.

    In the case of Melvin Capital, billionaires Ken Griffin and Steve Cohen bought into the fund this week, in what were assuredly fire-sale prices. So, a $7b, 30-employee entity got into trouble, and two men worth $35b profited by getting to buy a chunk of it for cheap.

    I have a feeling the ticket they just bought a heavily discounted ticket on the Titanic.
    GavinH likes this.
  4. Jack Kruse

    Jack Kruse Administrator

    Per the Financial Times, Cohen’s Point72 Asset Management — with $750 million — joined with Citadel to infuse money into Melvin Capital, one of the firms hit hard because of its short position on GameStop stock. We now know Melvin lost 2.75 billion dollars........that is a whole lot more than 750 million.

    CNBC then reported on Wednesday morning that Melvin Capital closed out on its GameStop investments the day before, booking a huge loss, but it was the money from Cohen and Citadel that helped. https://www.ft.com/content/1791269f-fe8c-47e3-b933-62125ee83242
  5. Jack Kruse

    Jack Kruse Administrator

    Keep an eye on hedge fund managers who own pro teams this coming week. We may see fire sales.
    Melvin Capital is the plight of Gabe Plotkin, whose firm has taken a massive hit. Plotkin bought a piece of the Hornets in Sept. 2019. Mets owner Steve Cohen was part of a $2.75B bailout to attempt to save Plotkin who is a protege of Cohen's.

    GME 2021 might turn out like LTCM, 1998.

    If we want to really stop market manipulation?

    End the Fed.

    This situation could be that contagion.
  6. Jack Kruse

    Jack Kruse Administrator

    GME might be the red pill that leads us to the 'orange pill'

    Morpheus offers Neo an opportunity to break the bondage of mental servitude. This was a message to GenXers to combat the influence of Big Corporate Interests on Big Government. Sounds eerily familiar to what is going on today in the markets.

    Once red-pilled, Neo doesn't actually awaken to the prophesied new world. In fact, quite the opposite: "The reality that Neo wakes up to is actually super-vulnerable and weak."

    Neo recognized that knowledge he gained inside of the Matrix had to be brought back to the real world—a world, today, marked by a small trade imbalance in a market. The red pill opened Neo's eyes to destruction and decay in society. Neo vowed to open the eyes of his peers upon his return about what really was going on under the hood.

    The red pill symbolizes a spiritual initiation common in mythological storytelling. Upon entering the Matrix, Neo comes into harmony and discovers an awareness of energy through the ancient discipline of martial arts. Inside of the simulation, he develops the ability to flow like water, deflecting any dangers thrown at him. I think this is how a HF manager feels in their element.

    What usually gets left out when referencing the red pill and is forgotten, that he only has his abilities while he's in the simulation. When he's inside of the Matrix, he learns how to bend the rules of the Matrix. Very similar to an HF manager. But the real world is horrible. When he's not inside of the Matrix, the reality he's been woken up to is really scary and dark.

    I think GME is the same.
    Lesson of the week: Counterparty risk is pretty significant.
    The red pill of GME might lead to the orange pill of BTC with a ton of chaos.
    GavinH likes this.
  7. Jack Kruse

    Jack Kruse Administrator

    What will be the next domino?

    Might Treasury secretary be called on to recuse herself from advising Biden on Reddit rebellion........???
  8. Jack Kruse

    Jack Kruse Administrator

    Can this nuclear meltdown affect crypto markets?

    Yep. RH sells BTC too.
    So the wise should ask this question: What are the risks? A threat on potential risks on this market and why we may see more asset price volatility and failing companies next week. I think this weekend the trading of BTC will foretell what we will see next week. Swap markets are what underpin the exchanges and market makers. So what happens when the pipes burst in the swap markets?
  9. Jack Kruse

    Jack Kruse Administrator

    Let's use Robinhood and their "crypto" platform as an example. A user logs into their RH account and buys $500 worth of bitcoin. What happens next? Most would intuitively think: "Well... Of course, RH goes out, finds a seller of the same amount of bitcoin, and holds those bitcoins in their custody under my name." Right? Nope...
  10. Jack Kruse

    Jack Kruse Administrator

    One of the main reasons why you can't withdraw the BTC from your RH account is because.... wait for it.... there is no real bitcoin in their balance sheet!

    Why? They rehypothocate their coins.........
  11. Jack Kruse

    Jack Kruse Administrator

    When you rehypothocate you are performing fractional banking fundamentally which = CENTRALIZED CONTROL. What RH probably does when you purchase a bitcoin in their account is to enter into a total return swap with a counterparty. Let's use an example to make it easier to understand.

    Made up Total Return Swap ---------------------------
    Notional: $500
    Maturity: 1 week
    Citadel pays/receive: BTC price return (+ / -)
    RH pays: 3mo Libor + spread
    Collateral: 10% (daily margin call)

    ^^^^^^^^^^What does the above mean? After 1 week, Citadel will pay the positive return on BTC (or receive if negative). RH will pay interest (why? because there is no cash exchange on a swap. When you buy BTC you have to pay upfront, on a swap you don't.) RH will place 10% collateral ($50)

    OK, by now you may have started to see some problems with this......

    Now, RH is hedged. If your Bitcoin goes up, Citadel pays them and you get your money (assuming you sell also in a week). Citadel, on the other hand.... Now is short BTC. Price goes up, they have to pay RH.

    But Citadel is not in the business of going long or short BTC. So they either go out, find the real thing and perfectly hedge their positions or.... They call another exchange to do a similar swap they did with RH (with a better spread). Let's say they trade with Square in this case.

    Before complicating things a bit more (trust me, these things have more layers than a Russian nesting doll on LSD) let's start pointing some obvious and not-so-obvious risks here.

    Risk 1: Counterparty risk Square goes under (for any reason) => they don't pay Citadel => Citadel still needs to pay RH = Citadel in trouble
    Risk 1.a: The never-ending hedge Let's say Square does another swap with another counterparty, that does it with another and another and another. Technically, this thing can keep going without anyone ever buying a single satoshi. A compounding risk of counterparty risks! THIS IS THE ONE I AM WORRIED ABOUT NEXT WEEK.

    There may be 10x, 100x, nx the notional in swaps than there are in sats positions at any given point.

    Risk 3: Matching duration (smaller risk) Remember RH did a 1-week swap? What if after day one every single RH user sells their bitcoin? Usually, in large numbers and in normal markets these risks are small and manageable but managing this gets complicated fast.

    Risk 4: Margin Calls Let's say the Bitcoin price goes down by a lot. RH will need to pay Citadel a lot of money. To reduce the risk, Citadel calls them up and asks for margin. ASSUMING they still have the $500 you paid them, they should be fine. But usually, they use this capital.

    There are other risks but I'm trying to keep this thread simple (otherwise I would have written a blog and maybe I will tomorrow). I am leaving a lot of details out........on purpose.

    Why? 2008 taught many lessons.......
    GavinH likes this.
  12. Jack Kruse

    Jack Kruse Administrator

    After 2008, swap desks started getting a bit more sophisticated and cute by developing products that could be more "efficient" in terms of taxes, protection, and collateral. This is the plumbing level of the markets...........

    Some, for example, would have embedded leverage where the collateral is fixed and can never be margin called (but with the risk of a gap move in price). Other systems were created to net collateral so it is also more "efficient". Others can be converted to the underlying asset. After the nightmare of 2008,
    this situation created a black box of risk. It is a risk that is opaque and therefore mispriced often. It is a nightmare for regulators trying to monitor systemic risk. Sometimes a small hedge fund going under triggers a cascade of defaults in the swap markets. I think this is what happened to RH and why they limited their crypto trading and their stock trading today. No one knows where the risk ends and how it compounds until the house of cards falls on you. That could be next week's story............

    With exchanges offering fractional shares and trying to optimize for low fees (since trades are all zero-commission) they have used swaps more. But someone, somewhere, at some point, still needs to buy the real asset. The market gets nervous, liquidations happen......Remember what I said.......when you get something for free you are the product to another entity.

    ... all of a sudden swap participants are scrambling to find the underlying asset (maybe what happened with Dogecoin?). Low liquidity + need to deliver = prices explode.

    The bottom line is there is now serious systemic risk building that is opaque. The size of this event is unknown, as a result.

    What should be the immediate plan? Do not use any exchanges to hold any bitcoin. Buy the real thing, keep in cold storage and let the financial markets shenanigans happen while you enjoy some popcorn. When the pipes break, exchanges can go belly up.
  13. Jack Kruse

    Jack Kruse Administrator

  14. JanSz

    JanSz Gold

  15. Jack Kruse

    Jack Kruse Administrator

    Blockchain technology does not allow this to happen.......bankruptcy of a custodian creates a legal problem between state law and FDIC law. I think this is what is happening to GME this weekend and it will hammer the market.
    The first 21 minutes of this interview explain what happened in the Dole merger likely happened in GME and that is there was a 140% short position. Custodians created GME equity for HF to sell short and when settlement time came DTCC realized they were missing stock certificates to settle.

    Johan Lindstrøm and caroline like this.
  16. Jack Kruse

    Jack Kruse Administrator

    Both Guggenheim Investments and BlackRock Investments are able to participate in bitcoin futures markets tomorrow, February 1st. Guggenheim has ~$270B under management. BlackRock has ~$7.8T under management. Should make for an exciting week. I expect a dip tonight and into about Wed and then when these institutions buy it cheap it will fly higher really fast.
    GavinH and John Schumacher like this.
  17. Thank you for the heads up - Uncle @Jack Kruse
    DebraGM likes this.
  18. DebraGM

    DebraGM My Quest for True Health

    A few questions. Is BlockFi an exchange I can keep my bitcoin in right now or do I need to move it to a cold wallet?
    Is the expected dip going lower than the recent low of 29k?
    caroline likes this.
  19. GavinH

    GavinH Gavin Horner

  20. Michael CULLEN

    Michael CULLEN New Member

    Wall st is controlled by the Sovereign City of London.
    U.S.A Financial LTD is owned by the City, like nearly every nation on earth, all made into corporations.

    Not the UK capital, I mean the country City Of London where the epicenter of global power is. The Rothchilds dominion.
    Last edited: Feb 5, 2021
    Helio Silva likes this.

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