The horizon is not so far as we can see, but as far as we can imagine

Author: Sean Paul Kelley Page 4 of 13

'89-'93 BA History, Houston
'95-'07 Morgan Stanley, Associate Vice President
'99-'02 MS International Relations and Economic Development, Saint Mary's University
'07-'13 International Software Sales Manager, Singapore
'13-'16 MA, History, Thesis on Ancient Silk Road City of Merv, UTSA
Kelley lives in San Antonio, Texas.

The Doom Spiral Of Executive Decision Making

~by Sean Paul Kelley

A tweet I encountered last night and obsessed over as I followed its logic all the way to the bottom terrified me in its potential implications. The poster links to another poster highlighting a few Euro press releases lambasting Iran for such a disproportionate response to our unprovoked attack and ends with this question:

“I want to know what they think is a “proportionate” response when invaders assassinate your head of state and civilian leaders in an explicit campaign to destroy your government?”

So, follow my logic here. I replied to their posts with the following:

This is exactly what terrifies me about Operation Epstein Fury: Trump cannot abide defeat in any way. It’s seen as a personal rebuke to his idand his constant self-aggrandizement. Moreover, the more the US is percieved to lose–the US embodied by Trump’s idand what it loses in reality, is blamed on Iran and its evil.

No introspection from the Empire of Chaos.

No acknowledgement that we started this war.

As American losses mount and Trump’s prestige fades, the doom spiral of executive decision making begins.

As my father has always said, “there is nothing more dangerous than a coward,” which is what Trump is.

And a coward in a doom spiral with his finger on the button terrifies me to the core.

As it should terrify us all.”

Yup, I’m talking about Trump’s id. He’s a walking manifestation of the human id. He’s the epitome of Freud’s id.

The possibility of him driving humanity off a cliff is NON-ZERO. Slight, yes, but what could a man such as he do in a state of desperation?

Short Take on Iran, Russia and the Ukraine: Cui Bono?

~by Sean Paul Kelley

Cui bono? (From the Latin, who stands to gain?) Who benefits from our war on Iran, internationally speaking? And who loses?

First, the Ukraine loses bad the longer the attack on Iran continues, as all the oxygen is sucked into a vortext surrounding the Persian Gulf. All the weapon systems the Ukraine desperately needs are being consumed rapidly over the skies of Iran and the Gulf States. This will undoubtedly hasten the Ukrainian Armed Forces collapse as a meaningful battlefield foe. Score one for Russia.

Second, energy prices will rise, and if the Straits of Hormuz get shut the Europeans will have to re-evaluate their energy supplies vis-a-vis Russia. Score two for Russia. Also, score one for Texas oilmen, who have watched WTI rise from $58 a barrel a month ago to $73.78. Royalty checks be getting phat!

Third, diplomatic pressure will decrease on Pootie-poot and Lavrov due to European energy desperation and all the diplo-oxygen being sucked out of the UN and other multi-lateral forumns, as if a thermobaric bomb went off. This widens Putin’s and Lavrov’s room to manuever even more. It also increases the chance Russia delivers a devastating denouement to the ‘Rules Based Order’ with an unmistakable battlefield victory. As my teachers said about school-yard fights when I was growing up (I went to an all boys school most of my life): you get your ass whooped, you probably deserved it. Score three for Russia.

Fourth, with the US murder/assassination of Iran’s Surpreme leader the precedent has been set, nay, locked the fuck in, for Russia to lob an Oreshnik or two Zelensky’s way and damn the consequences. The US could hardly protest. Not with a straight face. Score four for the Russkis.

Not to beat a frog at the bottom of a well, as the Chinese proverb goes, but the Ukraine is the biggest loser thus far and Russia the biggest winner as of today. The Euros are losing as well, but seem determined to snatch fantasy from the maw of reality. Israel is also on the losing end. Have you seen some of the explosions in Tel Aviv? This Iranian strike is positively surreal. Looks like that Israeli Iron Dome has turned into an Iranian Golden Shower.

Then again, if Bibi pops off a nuke or two, all bets are off.

Friday Morning Highlights and Lowlifes

~by Sean Paul Kelley

Couple of random notes this Friday morning, mostly economics related, some silver news and my personal reaction to portions of the discusssion in Ian’s “Is Virtue An Advantage Or Disadvantage For Societies?” post.

First, econonomics. It looks more and more like we are heading into a 2008-style credit crisis/crunch.

Don’t believe me? Well, the FED flooded the US banking system with $18.5 billion to ease liquidity concerns during the week of Feb. 17 because cockroaches be busting out of just about every private equity/credit shop present. And we all know, if you just don’t turn on the lights, you don’t see roaches.

These kind of economic events don’t do what you think they are going to do. Many people assume any economic crisis in the US will lead to a rapid dollar hegemony collapse. But as I explain, the dollar will actually get stronger:

“[W]hen the credit crunch gets a full head of steam it won’t lead to reserve status collapse of the dollar. It will, counter-intuitively, but inexorably pump the dollar higher and stronger as NYC becomes a 2008-like Black Hole for cash allocated dollars world wide desperate to fill potential insolvency holes in banks and shadow-banks/private equity credit boutiques . . . . “

That’s what happened in 2008. As I conclude, “Dollar reserve collpase will be a result of national insolvency, not a global credit-crisis/crunch.”

Basically what End Game Macro is saying in this post is the following: the economy grew little to naught post-COVID to present. It basically did what equity markets sometimes do: trade sideways for years, decades even. For example, after the 2008 Financial Crisis the S&P 500 traded sideways for four years until it broke out in late 2012, early 2013. That’w what the US economy has done since 2020: move sideways, although Biden-inspired over-immigration skewed the growth numbers, as End Game Macro notes:

From 2021 to 2024 the U.S. saw over 11 million arrivals, more than 3 million in 2023, and net migration around 2.4 million per year in 2021 to 2023. That can lift GDP and payrolls while masking weaker per capita momentum. As the surge cools, the masking fades.”

I’m not being anti-immigrant here, I’m just stating the facts. As Trump dug his heels in and unleashed his ICE goons, the econ surge faded, and fast. End Game Macro also notes, a lá 2008 that system-wide credit stress is popping up whack-a-mole like in almost every category:

“As of February 2026 serious delinquency is flashing late cycle strain. Auto loans 5.2 percent, credit cards 12.7 percent, student loans 9.6 percent 90+ days past due with estimates as high as 16.3 percent turning delinquent late 2025, and FHA delinquency 11.52 percent. Job quality also reflects strain.”

And I’m not even going to touch on the downward revisions to US employment except to say we’ve not gained a single job, but actually lost millions. The BLS hints at the size of the disaster in jobs “recovery.”

Last econ note: big move in India just confirms my thesis/argument/assertion that the combined wealth of the West is undergoing a multi-decade transfer back to the East:

For decades, the price of silver in India—the “diamond hands” of the silver world—was dictated by a small group in London and USA. Indian ETFs used the London Bullion Market Association (LBMA) prices, which often had nothing to do with the actual physical demand on the ground in India.

The Move:

On February 26, 2026, SEBI officially announced that starting April 1, 2026, Indian mutual funds and ETFs will no longer rely solely on London’s “AM fixing” prices. Instead, valuation will be based on polled spot prices from recognized domestic exchanges like the MCX.”

That’s one serious high hard one to the Comex and LBMA! This is a big fucking deal.

Next up: war in the Ukraine.

I’ve repeatedly argued that the Ukraine has lost all any and all possibility of regaining strategic initiative, and this reinforces it, way wickedly:

As I have noted ad nauseam for months now: the #Ukraine has lost any chance to sieze the initiative on the battlefield. All the #AFU can do is ineffectively counter-attack like a punch-drunk boxer. Trading lives for time will not work out for #Zelensky in the end and the end is coming sooner than he thinks.

On that note, the Red Cross confirms the Ukrainian to Russian KIA ratio. And it is bloody awful: 34/1. People often tell me that my belief in realism in foreign affairs is deeply immoral. Fuck that shit. International liberal hegemony is 100% at fault for all the deaths in the Ukraine. All. Of. Them. The denizens of Davos are uttely complicit.

In another grim note: Russia is in the initial stages of attacking The Big Banana. For the first time artillery shells are falling down with impunity on the city of Kramatorsk, like rain does on an average Portland Wednesday.

In regards to the conversation on Virtue and especially regarding the 800,000,000 number of Chinese lifted out of poverty. Well, Ian is correct. I did the numbers here back in September.

As regards Chinese leaders being better or worse than those in the West, especially the US: Ian, again is correct. The best way to view the argument is by winnowing it down to two prepositions. The Western view of liberty has its origins in peasant upward mobility in the aftermath of the Black Death and the clash of classes. Ergo: in the West we have the freedom “of” speech, assembly, bear arms, etc. . The Chinese view of liberty derives its origins from a long exigetical tradition of the origins and limits of dignity. In essences, the Chinese see liberty as freedom “from” poverty, warlordism, chaos, illness, crime, rapine, etc. . .  Both views are valid. Both views are limited. But at present the Chinese view of liberty is more effective in increasing the common good than that of the West.

On the posssible, now looking more probable, war with Iran, the US has ordered the evacuation of its embassy in Israel. I don’t know what could make it more obvious, you?

More as it happens.

And more happens. This comment by Ray Dalio reminds me when I was a young broker I read Robert Rubin’s memoirs, In an Uncertain World, and took to heart many of his investment rules, going so far as to write many down on old fashioned white catalog cards–this was before the internet, btw! and memorize what I wrote down. Don’t judge me. I was young and dumb.

Love Rubin or hate him, like James Carville said, when I get resurrected I want to come back as thet bond market. Rubin knew how to invest and make consistent returns. So did Barton Biggs, long time chief investment strategist at my alma mater, Morgan Stanley. Those two men shaped my view of economics, markets and political economy more than anyone or anything else. And yes, I read Jesse Livermore’s memoirs. They did little for me precisely because at his heart Livemore was un-disciplined. And discipline is key to making money.

If you take your own advice you’ll do well. If you’re like me and stayed retarded longer than markets remained illogical, well, you’re fucked. If I’d taken my own advice I’d have a small fortune like a handful of former clients do to this day.

One of my key rules: if you want to get rich, speculate in the stock market, but if you want to be truly wealthy, invest in bonds. In other words, the real wealth, massive cash-flow comes from debt service. That’s just an ugly reality humanity has yet to escape.

Another rule to live by: if an investment goes more than 15% against you, cash out. You can recover from a 15% loss, but a 25% or 30% or even 50%? Not a chance in hell. Ever.

Last rule: if you double your money in an investment, sell half of your gain and let the rest ride. I guarantee you’ll never lose a dime on that investment if you follow that rule.

One last comment on Rubin: he was a ‘careful contrarian’ and being a contrarian has served me very, very well. It’s a painful and lonely place to occupy at times so be prepared to man up. In the end recognize when you feel the least amount of risk is the precise moment of the most risk, the instant before you lose your ass.

Maybe more, maybe not. Time dictates all.

So the muse is a fickle-bitch. This analysis of the transcripts of the Trump-Xi phone calls is brutally and hysterically accurate:

This time it’s particularly funny because the Chinese transcript (fmprc.gov.cn/eng/xw/zyxw/20) has Xi telling Trump: “It is always right to do a good thing, however small, and always wrong to do a bad thing, however small.” This proverb might not sound like much but it’s actually extremely meaningful when you understand the reference.

The reference comes from the Romance of the Three Kingdoms, China’s Illiad and Odyssey plus the Aeneid and a smattering of Dante’s Inferno for good measure. It’s indicative of how urbane and historically literate the Chinese are. And a clear notice that China is what historians, anthropologists and others of such ilk refer to as a “high context” culture: 

China is a High Context culture, a communicated message has different layers of meaning, While America as majority of the West is Low Context. The other culture/language that is High Context is Arabic. To understand the spoken words one need to be deeply rooted in its culture, its history and religious tradition.

Spoken like a true scholar and humble student.

I want the last word. Heh! But seriously, silver trading at the Comex closes the day sharply higher, firmly walking through a wall of resistance at $92, ending the day at $93.06, up 7%. A very bullish closing price for silver. Silver bugs should sleep happy tonight.

 

 

 

Short Take On Possible/Probable War On Iran

~by Sean Paul Kelley

I don’t know if we’re going to bomb Iran or not. I hope we don’t but hope is not a policy. All I’m left with is my personal experience in Iran and how I go about analyzing foreign affairs.

As many of you know, I’m a realist. Once upon a time, my realism was based on the correlation of powers and what the United States could and couldn’t do with its capabilities so long as they were in line with political adjectives that were achievable.

Today I’m a realist, a chastened realist; more a pragmatist who has withnessed war after war after war lost. I’ve witnessed “Western powers often wage wars disconnected from achievable political outcomes (Afghanistan, Iraq, Libya),” instead of aligning the wars with achievable political aims. You know, the exact opposite of Uncle Carl Clausewitz!

Moreoever, my hardcore realism has ameliorated over the years after several long discussions with Ian. Ian’s never been afraid to upbraid me publicly and privately for my quasi imperial impulses. I’m grateful to Ian for helping me see the error of my ways.

But I digress.

I know for certain two things will happen if we attack Iran.

First, based on my experience in Iran, the Iranians will rally around their legitimate government and support it to the end. When I was there the Iranians were warm and engaging. Even the Mullahs at the mosques we visited. But when it came to the subject of US interference in internal Iranian affairs, all were a unified voice: stay out of our government. Seems like a reasonable request, if you ask me.

Take a close look at the photo. A young couple enjoying pizza with my father and I in 2006. This is who we’ll be kiling. They have faces and names.

Second, we will use an enormous amount of ordinance attacking Iran and leave ourselves even more vulnerable than we already are because we have such a shitty military industrial complex that can’t make anything without a long lead time and shit tons of profits. Our defense industry is dominated by general and flag officers on the grift.

Like I said, I don’t know if we’re just posturing or if we’re really gonna attack.

I hope we’re not but I’m afraid we are.

Nota bene: In the comments Nat mentions a depressing X thread worth a read. But if you really want to be depressed check this X thread out where Col. Wilkerson says, “I think Israel will cease to exist unless Netanyahu does turn to a nuclear weapon or two.”

A Story of Iran from 2006 That Deserves To Be Retold

~by Sean Paul Kelley

This narrative originally appeared in the San Antonio Express News on 3/17/2007, which is no longer online. 

Tehran’s Mehrabad Airport is a cheerless backwater, especially at four in the morning, after enduring a ten hour flight to Amsterdam, a nine hour delay, followed by the six hour flight to Tehran. At this hour clearing customs takes an eternity and the only stimulus in the lonely, echoing arrival hall, other than young female passport inspectors sporting lumpy black chadors and henna tattooed hands, is the faded portrait of the Ayatollah Khomenei grimly staring down at those unlucky enough to remain in the customs queue. But that’s how my pilgrimage to Iran began last October, bone-tired, bleary-eyed and ready for whatever came next.

Then, like the click of a slide show I was off to the golden domes of Qom, through elegant Isfahan, the desolate, ancient beauty of Pasagardae and Persepolis and graceful Shiraz. I dashed across the Dasht-i Kavir desert, passing through Yazd long enough to explore its underground aqueducts. I spent one lonely night in Tabas, Queen of the Desert and then to Nishapur the gateway to Khorasan and Iran’s most wrecked, ruined and rebuilt city, which has survived earthquakes, Scythians, Turks, Mongols and Timurids. It was two short weeks of grasping memories from the jealous clutches of time; three thousand years of culture rushed by me in a blur until I arrived in Iran’s holiest city, Meshed, the chief object of my journey.

Once known as Sanabad, it was here, in 817 AD, that the eighth Shi’ite Imam, Reza, a direct descendant of the Prophet Muhammad, arrived after a triumphant tour of the Shi’a heartland. The Abbasid Caliph Ma’mun, a Sunni, grew jealous of the Imam’s rising popularity and imprisoned him. Fearing the Imam’s growing spiritual authority might mature into something more temporal, something the greedy Caliph could not allow, Ma’mun devised a plot involving pomegranates and poison, which were fed to an unsuspecting Imam who soon fell ill and died.

Immense waves of grief washed over the sands of Persia and the martyred Imam’s tomb quickly became a site of pilgrimage, one that attracted the scattered Shi’a of the Caliph’s far flung empire. Surviving invasions, earthquakes, rapine and ruin, the site, and even the name changed. Sanabad became known as Meshed—‘place of Martyrdom’—and Meshed turned into a booming modern metropolis sitting astride the old Silk Roads, some lead north to Samarkand and China and others west to the Levant and the Italian city states.

I crawled out of the car just as the sun set and walked into the hotel. Members of the Tajik national soccer team milled about the small, two-star hotel lobby; a curious mélange of Tajik, Farsi and Russian filled my ears.

“Passport please,” the attendant asked. I fumbled through my money belt but quickly complied.

I looked up, behind the desk stood a clean shaven young man with slightly receding hair and cheerful, pecan colored eyes.
“American?”

“Yes.”

“How awesome!” he exclaimed in perfect iomatic American English.
“Never met an one of you before,” he blurted excitedly

He came out from around the lobby desk, arms outstretched, exclaiming all in one breath, “This is the best day of my life.”

And hugged me.

After two weeks of kind salutations, warm welcomes and polite, almost infectious pride I still wasn’t prepared for an outpouring quite like this.

“So, now that I’ve hugged a complete stranger, do you have a name?” I joked, awkwardly.

“Amir Isazysadr,” he said, stretching out his hand.

“Sean-Paul Kelley,” I replied.

We shook hands vigorously. Full of contagious enthusiasm, I liked him instantly.

“Why Meshed? It is a big, dusty, ugly city, filled with too many people.”

“Gohar Shad,” I told him, as if in a whisper. “If I’m lucky I will see the Gohar Shad.”

“The mosque surrounding the Shrine of the Imam Reza is splendid,” he said.

“Are you Muslim?” he asked.

“No, I am not.”

“That is a pity my friend, because one pilgrimage to the Shrine of the Imam Reza is equal to 17,000 Meccan pilgrimages, or so say the mullahs.”

Between the late 9th and 14th centuries the area surrounding Meshed witnessed the collapse of the Abbasid Caliphate, an irruption of Turkic hordes into Persia and then the Mongol cataclysm. Through it all the pilgrims returned. Finally, Tamerlane’s son Shah Rukh, who, faced with the growing demands of pilgrims, enlarged the shrine in the early 15th century. His formidable wife, Gohar Shad, ordered the construction of a new congregational mosque around the Imam’s tomb as well, commissioning the Persian architect Qavam al-din Shirazi with the task. In the 1930s the shrine, by now a burgeoning complex in need of restoration, was again enlarged by Reza Shah. After the revolution it was enlarged once more to its present size encompassing more than 75 hectares in the heart of the city.

Since the revolution non-Muslims have been prohibited entry into the Shrine housing Imam Reza’s tomb, but the rules regarding the Sacred Precinct and mosque surrounding the Shrine are more confusing. Some guards let non-Muslims pass. Others do not. Sometimes it just depends on what day one visits. Aware of this maddening state of affairs long before I arrived in Meshed, it wasn’t until the night before my visit that I asked Amir and his brothers, who had come for dinner at the hotel, for help.
“What should I do? I want to get in, but I don’t want to see the Shrine, that would be disrespectful. I only want to see the Gohar Shad.”

“Talk to the guards, express to them your deep admiration for the art of our land,” he told me, winking.

“No,” said Ali, with a strange grin, “it would be best if he said nothing. Just act like an Iranian.”

Adel, the youngest suggested that I hire a local guide, one who might be able to bribe the guards.

“No bribes, not for this,” I replied.

The brothers looked at each other, said something in Farsi and laughed.

“What’s so funny?” I asked.

“You are funny. This is such a serious matter for you. But Ali is right. Just walk in. Say nothing to the guards. Act like you belong there.”

“So, I’ll have to brazen it out, yes?”

They laughed again, as if in on some secret.

“Yes,” said Adel. “I’m certain you will be fine.”

The next day I set off before late afternoon prayers. The walk from my hotel to the Sacred Precinct in the heart of the city was easy. I only stopped once for directions before I arrived.

I crossed the street, dodging traffic, stepped onto the large plaza and strode towards the entrance gates. A large family ambled slowly in front of me, the mother pushing a baby stroller. I followed them closely, better to blend in. A guard waved a security wand over and around me as nervous fear and excitement pulsed through me. He patted me down for good measure and sent me through the gates. Not a word was spoken until I was about ten meters away. I said nothing and kept walking.

Once inside the main gates I took a moment to absorb the outer plaza. Polished and sparkling in the sun the immense outer courtyard was paved in bluish marble. A thick wall of brick geometrical shapes rose up in front of me, not, however, high enough to block out the sun, as I shielded my eyes. Finally, I caught a glimpse of a small passageway, took three deep breaths and walked into the main quadrangle of the Gohar Shad.

For a moment all activity around me stopped. The colors were mesmerizing, as turquoise, pink, purple, yellow and green danced along the walls. Tall bands of ivory white kufic calligraphy topped four high iwans (monumental arches). Arabesques and floral patterns blended into the right angles of the courtyard. A perfect symmetry of light and beauty collided and caromed up and across the walls climaxing in a narrowing pointed arch, its niche filled with deep blue muqarnas. Sitting against a wall in a small niche I watched pilgrims enter the courtyard, hundreds of them milling about under the cerulean sky. Like the sacred spaces of any religion, they all come to participate in something personal but paradoxically bigger than themselves. Perhaps a few came, like me, hoping to snatch a hint of inspiration, to touch the walls and feel the echoes of the past on my fingertips. Or maybe there were others seeking surcease from their own troubles, finding peace at the foot of the Imam’s tomb.

A thick cloud covered the sun while the faint prayers of the devout rose up into the cool air of the courtyard. An inner calm came over me, that wondrous calm which is reserved for the summits of mountains, perfect sunsets and the birth of one’s children.
The call to prayer sounded. Thus, like many other more famous travelers before me, my time was cut short. Out of respect for traditions not my own, I left. I walked back to our hotel in contented silence.

Later that evening I ate a last meal with the Brothers Isazysadr. All three asked me the finer points of certain English words and taught me a few similar Farsi words, but cautioned me not to speak them in public or in mixed company. Towards the end of the night, Adel asked me about my day.

“I hear you made it into the Gohar Shad today, yes?”

“I did. It was worth coming all this way just to have ten minutes there.”

“Indeed, they let many foreigners in at this time, especially Americans. I think the Mullahs are trying to, how do you say it, ‘play nice’ with your government?”

Slightly crestfallen, I replied, “I didn’t know that. I thought I was sneaking in. Like a real adventurer, you know? You three knew all along I would get in, didn’t you?” The table erupted in laughter.

“Sean-Paul, my good friend,” said Ali, “nothing is ever as it appears in Iran. Surely you have learned this by now.”

Apparently I hadn’t. But I was catching on.

Short Take: Modern Infrastucture Miracles

~by Sean Paul Kelley

The Chinese rail network now carries 23 million passengers a day. Multiply that by 365 and it carries 8.365 billion passengers a year. And does not account for the increase in passengers during major holidays.

Now consider these two facts. First, India’s rail network carries 23 million passengers a day also. But it took the Brits and Indians 172 years to build out the network. China did it in under 30 years.

Second: California voted in 2008 to build a high speed rail network between Los Angeles and San Francisco with a completion date of 2022. Operations are projected to start in 2030 now.

Ponder that for a moment and then puke.

The future does not happen in America anymore.

Nota bene: Jan’s comment reminded me of something I saw in China. It was the summer of 2003. After the first big SARs outbreak. I was in far west China trying to get to India. At the time there was zero high speed rail. Understand? Zero. To get to Tibet and then Nepal and finally India I had to travel across Qinghai, starting in Goldmud where I ended up in Lhasa, Tibet.

If you’ll allow an old backpacking traveller a brag, I’d be grateful. At the time, every backpacker I ever met considered the Golmud to Lhasa bus trip the sine qua non of the complete backpacker/traveller. You could not consider yourself a true traveller if you had never made this journey. 40 hours above 10,000 ft. (3,050 meters), often times as high as 14,000 feet (4,267 meters) on a sleeper bus, in which every passenger has altitude sickness of one degree or another. Puke in the aisles. No clean up. Restroom breaks rare, maybe five the entire journey. It is a badge of honor I wear with pride to this day.

Late at night about 24 hours into the journey we drove in to a traffic jam of epic proportions. A crazed, disorganized, enormous traffic jam on a dirt road somewhere between Golmud and Lhasa high up on the Himalayan Plateau. It took an hour to get through. But what I saw mezmerized me like nothing else and I will never forget it. The Chinese, busy at Buddha knows what hour, building a High Speed Rail Link between Golmud and Lhasa, much constructed on damn near permafrost conditions. Look it up if you disbeleive me.

They did it. It’s a first class wonder, the new rail link, complete with oxygen bars, etc. . .

But me, I’m glad I did it the hard way. It has more meaning.

Lamentatio finalis: Our mad rush to adopt technology in every aspect of our lives has robbed us of many beautiful and rare experiences, many of which are gone forever. I’ll leave you with one example. In 2008 I took the ferry from Penang, Malaysia across the Straits of Malacca. It was a leisurely six hour ride from Penang to Medan, Sumatra. While making the crossing I saw just how strategic a waterway it was: the sheer mass of container ships was mind boggling.

When I returned to Malaysia in 2011 specifically to share with my father the experience of the ferry ride acrosss the Straits, the ferry had been shuttered by low cost airlines flying from Penang to Medan. To me that is a loss equivalent to someone torching a Rembrandt in a Dutch museum. Irrevocable. Gone forever.

Following Up My Silver Post By Answering A Damn Good Comment

~by Sean Paul Kelley

So, Marku asks:

But aren’t most of those contracts never expecting to take physical delivery? Just gambling, er excuse me, investment hedging?

Or is the problem that given that Comex price is under the real, that all those contracts *want* to be exercised in delivery so they can arbitrage to China (who has a real price?)

I’ve always found futures confusing, thanks for any help.

Answer is complex by I’ll do my best to simplify. I’m going to base my answer on much of what Dario says in this video, so it might be worth a watch for anyone interested in how the contracts are viewed at the Comex versus SHFE.

All contracts traded on Comex are designed to take physical delivery. Understood? They are designed for industrial hedging so corporations can smooth out their expenses on needed commodities. That said, under Clinton and accelerating under Bush, the CTFC made a whole raft of rule changes that changed the PRIME AIM of the commodities markets from honest price discovery into something resembling a casino. I’ll spare you the details, but I was in the business at the time and I still can’t believe what they did.

As for arbitraging Comex prices over those on the SHFE. Rumor is someone tried it–a Chinese trader–and got hammered hard. Main reason: the cost of shipping and arranging for delivery, even if, as rumored, he made the trade when there was a $20 USD premium at SHFE, and all the subsequent logistics of physical delivery, added up rather too quickly. But as a former arbitrage clerk myself, kudos to the brother for trying. Fortune does favor the bold. Until she doesn’t: fickle bitch she is.

Futures are identical to stock options: calls-are the expectation a stock will rise-and puts are the opposite. On the commodities exchanges you buy long exepcting the price to go up, but your buying price of the long give you the right to exercise it at that price not its current high, if it did go up. Buying short means you expect the commodity to go lower. You can also combine the two into a hedging bridge of sorts, where you give yourself the right to exercise the contracts within a range. This is what hedging truly is. Not hedgefund bullshit. I used to know the head commodities trader at Pioneer Flour Mills here in San Antonio and how he explained it was elegant. One of the reasons I went into the business.

I’ve never mentioned this before but what made me leave was a long time ago I was sitting first class next to a former international business man. He asked most of the questions, but the upshot is I was sitting next to John Perkins and the questions he asked me opened my eyes to what I was truly participating in. It was only a matter of time til I left.

The US commodities exchanges were originally established, and this was hammered into me when I took my commodities trader’s exam, for price discovery and sanctity of the market mechanism. Used to be you had to own or expect to take delivery of the underlying commodity you were hedging/selling/buying. Now you don’t.

At the SHFE the rules are much similar to the pre-Clinton era rule changes. And Chinese regulators are hardcore. They’ve shutdown at least 25 trading groups accounts last week alone for breaking the rules, which Dario explains in his video.

Hope this helped.

 

Silver: East Versus West

In my long post about silver prices, I talked about a reversion to the mean. This is something that frequently happens in life: something overshoots the norm and then it swings back and overshoots the abnormal. Slowly but surely it finally settles smack in the middle of the bell curve, to use a shit metaphor.

This is what we’re seeing in silver right now. For 150 years silver has underpinned a great deal of US monetary decisions. Then, for the last 50 years the United States fostered and protected a rentiers silver market by turning a blind eye to manipulations in the paper markets at the Comex and simultaneously creating a rentier situation for the distributors of silver buillon in the country. If I went into detail how that happened this post would never end. Needless to say it was a very cozy arrangement that is unraveling every day and it’s something that has the large silver distributors very, very worried.

I’ll give you the short version: the US mint prints the coins, proofs, bars, etc. It then sells that silver to about five large national distributors for a little bit under the spot price of silver. Then those large distributors turn around and mark up the silver bulliion by about 25% and charge huge premiums for every coin, bar, proof, etc., Cozy! Like I said, and like all good rent markets it produces no value. N0w, sometimes this has been done to keep silver in a stable range for industrial purposes, but after the US wholesale deindustrialized beginning with Clinton but turbocharging under Bush–to fund our illegal wars–the justitication fell apart.

While we sold off all our capital stock to China, its demand for silver became unslakable. As I noted in a previous post one gigawatt [error corrected, mea culpa, SPK] hour of power from solar panels requires 1,000,000 ounces of silver and that’s just for solar panels. Silver goes into so many more things than we can possibly imagine. Pick someting electronic in your house; its got silver in it. Silver is the single most important industrial metal in the world because it is the most conductive and oxidizes less than only one other metal: gold.

But I’ve digressed from my argument.

For at least 150 years, starting with the opium wars, the balance of trade from East to west was very much skewed to the west: let’s call it what it was: economic pillage masquerading as lifting up all our little brown sisters and brothers. All of the wealth in the east, and that includes India, was over the course of 350 years, siphoned west. That’s economic fact, although people don’t teach economic history, which is a shame. They should.

I say all of this because the Comex has literally become a casino. For example, the total number of registered bars, registered meaning it’s in the vaults and it’s there for delivery has fallen under 100,000,000 ounces it’s now 98,000,000 ounces.

To make matters worse, there are 65,000 contracts of open interest on silver futures at the Comex right now, due in two weeks, that if optioned require the delivery of 325,000,000 ounces of physical silver. Where is that kind of silver going to come from? Pawn shops? Coin dealers? GTFO! Comex is in the grips of a slow, existential crisis, that it’s going to lose.

If those contracts are exercised at the end of February, because they’re March contracts, there is absolutely no telling what kind of chaos the US financial system might endure. Why do I say the entire financial system? The dreaded ‘D’ word.

Remember mortgage backed securities, CDOs, CDO2, synthetic CDOs etc. . .

There are similar derivatives in the silver market, but they exist in a black box, undisclosed so nobody really knows how much the open interest or notional value really is or who owns the risk—although the prevailing guess is about $1trillion USD notional. If the Comex implodes the cascade effects might well resemble what happened to those two Bear Stearns Hedge Funds in the summer of 2007 that set off the 2008 Financial Crisis.

Even if the Comex manages to extend contracts out a few more months, the physical supply of silver does not exist. I repeat there is no physical supply anywhere that can meet this year‘s demand for silver. Only two places comes close to the silver necessary for global demand: one is already fully allocated in the Canadian vaults in Ottawa in Toronto and that silver is not going to be let go of. The other is silver owned by retail investors. But as I have said before: silverbugs aren’t going to sell for $95, not $120, not $175. Not going to happen.

So in two weeks time, it looks like the Comex is going to implode.

How about over in the East? What’s China doing?

Chinese market regulators are actually doing their job. Here’s how, as I am quoting Dario at this link:

“What the Shanghai future exchange just did and what they did yesterday is effectively saying that starting from the last month of February that (it’s not a coincidence is the same day when the settlement for March 2026 futures contracts and the Comex begins starting) from that day any participant in the exchange that is not purchasing contracts for [physical] hedging purposes and even if purchased for hedging purposes they haven’t been allocated [a] physical delivery quota all their quota for silver in the front end contract is going to be brought down to zero.

So what the Shanghai future exchange here is saying is like okay game is over. We have to restrict the physical silver that we have left here for settlement for those that need it from an industrial perspective. So for hedging purposes and we need to keep the real purpose of the exchange going otherwise if things continue in this way we can effectively shut for business and that is going to be a huge mayhem not only across China but across Asia.

What’s China doing? Well, those communist bureaucrats that oversee the Shanghai Futures Exchange are doing something remarkable: they are working as hard as they can to preserve the sanctity of a free and fairly functioning market dedicated to true price discovery. Listen to the full podcast. You’ll listen in disbelief. The Chinese are better free-marketeers than the corrupt managers of the SEC. I’m dead serious. Chinese regulators make our SEC look like a collection of jackasses at a rodeo-clown show.

So, here is how this plays out: if Comex implodes—which is probable—but Shanghai muddles through, which given its bottom of the barrel minimum silver reserves is going to be extremely hard to pull off, but not impossible, massive amounts of wealth will accelerate their repatriation into the mainland. For over a thousand years silver formed the basis of Chinese monetary policy. They know what they are doing.

And the West? The West will reap what it sowed for near on 500 years. Our wealth is soon to be a multi-century river filling the current account surplus of the East.

Just watch.

IT SHOULD GO WITHOUT SAYING, EXCEPT IT MUST BE SAID: THIS IS NOT INVESTMENT ADVICE. THIS IS OPINION, FULL STOP. DYOR. 

 

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