Guys like Hennecke "talk their books", which is understandable because they position assets based on their views.

What's bad for the public is when the manager being interviewed feels that he made a bad decision and now has to unwind that position. Maybe he picks up the phone and gets an interview on CNBC (if he has the credentials). Then he can say that 4.5% in the 10 yr looks good. I'm not saying that the Bond King was doing anything wrong, only he knows that answer. What I am saying is that after watching this for years, I don't trust what they say - I simply try to learn the rationale behind their position and then weigh the rationale. I wonder how many people bought bonds because of the Bill Gross interview.

Bill, keep up the great work. Not the "calls", but explaining the process behind the "calls". BTW, you are right, it truly is a dance.

From an e-mail I received last evening--

The Definition of Fundementals:

I see the same garbage written about $copper every day. The price of $copper defies fundamentals.

What exactly are fundamentals? Is it the law of supply and demand? Damn right, but that doesn't mean jack anymore. The number one fundamental in any market is the derivative position if there exists one. Supply and demand is an afterthought.

Example, the short position in $Silver far exceeds any rationale. Should the longs wish to take delivery, the game is over. We know this from the existing COT report versus stockpiles. However, what we do not know is what the OTC position is of any of the players. JP Morgan has the largest derivative position in the OTC markets, yet it is unregulated, so we have no idea what markets they even play in.

The fact is that someone or a group of "someones" are short and they are short via the OTC market. We know this because the price keeps going up but reported futures positions keep falling as volume keeps building.

The raising of margin requirements in LME base metals to levels higher than the Sumitomo crisis of the mid 1990's is a sign of market turmoil. Someone is on the verge of bankruptcy, it is as
obvious as the day is long. And that is why derivatives are the only fundamental that matter.

================================================

So anyone care to speculate as to the role derivatives are playing in this "crisis"?

JB -

Based on what you are saying, it sounds like some important hands at the LME are short and needed some help to stay afloat. Maybe that was what the gold selloff was about.

Hedge funds seem to have a large appetite for computer based trading models. If you are a physics major and have a backtested and profitable model that involves spreads, you can find a job overnight. When these models are applied in the trading world, derivatives are used (as you know). These models are supposed to limit risk, but you've got to wonder how many of these models are set the same way. When the risk manager of these funds says to liquidate, won't they all go the same way leading to a crisis and LTCM scenarios? It's nuts when you really think about it.

Let me add a fundamental; government intervention. But maybe that's the same story...

Bill & All , Interesting post and comments,

Here are some relate links :

BIS OTC derivative report analysis:
http://globalgold.blogspot.com/2005/12/great-gold-paradox-part-ii.html

Cheuvreux gold report :
http://globalgold.blogspot.com/2006/02/cheuvreux-gold-report.html

*
http://www.moneyweek.com/file/12641/how-the-dollars-collapse-will-lead-to-a-new-gold-standard.html

http://goldandoil.blogspot.com/2006/04/will-derivatives-cause-this-market-to.html

What are your thoughts regarding those issues?

ALOHA !!

If CPI drives investment decisions then why invest? Is there a more manipulated data set than that? How many versions of CPI have been played with from one administration to the other over the past 30 years.

I do not see any confidence in government policy or their numbers ... CPI ... the jobs data which is nothing more than Birth/Death Ratio models easily manipulated for political expedience.

Core inflation? The only inflation I care about is what it cost me for gas, food and shelter ... add in health care. I have been alive for 45 years and I have yet to see any prices go down for the essential basics to survive. Of course our government CPI data doesn't cover basic costs to survive. If it did Social Security checks would need to be practically double.

I would prefer to use the SPI(Sea World Price Index). Sea World San Diego raises its price of admission 11% to cover the added costs to keep their doors open. I consider that more reliable than what the government puts out to the traders.

How can one trade manipulated data?

g034,

Indeed, any here who are unware of LTCM should do a Google and get up to speed. Maybe the "speculators" are those best informed about the true nature of things, including fundemental analysis built around the derivative folly. We shall see.

Global central banks allowed credit expansion of 3-4X GDP growth leading to asset inflation beyond belief. Now the powers at be want to remove the excess-one small problem. Bond market leverage, including OTC derivatives, is off the charts so the LTCM debacle will look like a walk in the park. Of course, the US consumer is the first casualty this summer.

Since g034 mentioned Bill Gross in the first comment, I thought I should point this article out. Looks like he is apologizing for giving such bad forecasts. ;)

http://money.cnn.com/2006/05/17/markets/gross_outlook/index.htm

Bill Gross: 'My bad'

Manager of No. 1 bond fund admits he was off-target with forecast of continued low rates for 10-year Treasurys; now sees rates at 4 to 5.5 percent.

NEW YORK (CNNMoney.com) - A year ago, Bill Gross, the manager of the world's biggest bond fund, said he believed the 10-year Treasury rates could stay in the 3- to 4.5-percent range during the next three to five years.

Now, with the 10-year above 5 percent, Gross, manager of the PIMCO bond fund, admitted in his most recent forecast that he was obviously off-base.
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