Triggered by geopolitical supply concerns, Nickle prices have soared in just a few hours. The trigger was a massive short-squeeze held by a few large short market players. Guess who is the largest Nickel producer in the world … Russia. Learn more here.
What Is a Short Squeeze? A short squeeze is an unusual condition that triggers rapidly rising prices in a stock or other tradable security. For a short squeeze to occur, the security must have an unusual degree of short-sellers holding positions in it. The short squeeze begins when the price jumps higher unexpectedly. The condition plays out as a significant measure of the short sellers coincidentally decide to cut losses and exit their positions.
What Is a Margin Call? A margin call occurs when the value of an investor’s margin account falls below the broker’s required amount. An investor’s margin account contains securities bought with borrowed money (typically a combination of the investor’s own money and money borrowed from the investor’s broker).
A margin call refers specifically to a broker’s demand that an investor deposit additional money or securities into the account so that it is brought up to the minimum value, known as the maintenance margin. A margin call is usually an indicator that one or more of the securities held in the margin account has decreased in value. When a margin call occurs, the investor must choose to either deposit additional funds or marginable securities in the account or sell some of the assets held in their account.
Around the time Peabody was served with a $534 million margin call on its hedging coal futures short, which it funded with a new $150MM unsecured (10%) revolver from Goldman Sachs, one of China’s largest banks was also served with a margin call for hundreds of millions of dollars on a nickel short gone terribly bad – see below the chart (yippes if you were short) and learn more here.
It pays to have friends in high places. Unlike Peabody, a unit of China Construction Bank Corp – one of China’s “Big Four” banks – was given additional time by the London Metal Exchange (LME) to pay hundreds of millions of dollars of margin calls it missed Monday amid an unprecedented spike in nickel prices. The reprieve from the LME means that the unit, called CCBI Global Markets, is not formally in default, Bloomberg reported.
Perhaps this is just a one-off and nothing to worry about. However, one begins to wonder with all these financial charts making wild swings, cracks in global markets will emerge. Remember, in the last financial blowup back in 2007. It was all about counterparty risk with those nasty CDSs (Credit Default Swaps) that got everyone afraid and froze up the credit markets.
Warren Buffet has so famously said in the past that derivatives are “Weapons of Financial Mass Destruction.” See below in a decades-old video explaining this notion.
With all the “nuke” talk going around on the geopolitical stage, one also has to worry about “nukes” in the financial markets. The main takeaway from Buffet’s comments that should be understood is that it is not a matter of “if,” rather it is a matter of “when.” Perhaps this time is coming very soon.
One day, perhaps very soon, we will wake up and find that many financial institutions (and other corporates) just went broke on some short-squeeze margin call that cascades across all business sectors, and there will be an even fewer group of people very rich. You? You will immediately receive a “pink slip,” and your last paycheck will bounce.
Perhaps the Fed and/or governments will provide a bailout once again to the too-big-to-fail and save your job. Forget about the currency debasement and subsequent hyperinflation that this will cause. We will be heading for the closest soup kitchen.
Remember the last time when the then-Treasury Secretary Hank Paulson kneeled before House Speaker Nancy Pelosi begging for a bailout? Would a future House Speaker Alexandria Ocasio-Cortez be so kind?
What could go wrong?
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