Friday, May 06, 2011

Our favorite post of the year (so far)

….goes to Peter Brandt’s  “Cop’s raid the brothel” — part 2

If you haven’t read the post, go read it.  If you’re read it already, go read it again.   Here’s our favorite part:

“first heard this phrase at the CBOT in early 1980 in direct reference to the Silver market collapse…  you will note that Silver topped at 5056, dropped quickly to 3025, recovered to 3970, then was destroyed to 1080 and eventually 4 (that is $4 per oz.) for a total decline exceeding 90 percent.

The reported reason for the decline was the failed attempt to corner the physical market by the Hunt brothers of Texas. Today’s equivilant would be a combination of JP Morgan and the small speculators through the ETFs. The CFTC stepped in January 1980 and hiked the margin requirements. The rest was history.  The real reason for the decline was that Silver had no business being at $50, that Silver is a COMMODITY, and that commodities have boom and bust cycles.

Many, many investors got wiped out by the drop. During a meeting at the CBOT, a member made the statement, “Isn’t it too bad that not only the Hunts got wiped out, but little investors who had nothing to do with the manipulation also lost the family farm.”   To this comment, and old-time trader made the statement…”Well, you must remember, when the cops raid the brothel, everyone gets arrested, even the piano player.” I will never forget the phrase or the meaning of the phrase.”

Love that.  Enough to go download his book tonight for a weekend read.  You can get it here The only thing we’d like to add is that we don’t think the “little investors” were so innocent after all, they were greedy and trying to cash in on the speculative fever.   In the same vein,  the piano player upstairs knows exactly what’s going on downstairs in the brothel.