Baltic Dry Index. 884 +05
LIR Gold Target by 2019: $30,000. Revised due to QE programs.
A Zhongdan client manager surnamed Wang admitted his company's loan application included fake supplier contracts. The bank transferred borrowed money to these "upstream firms" that wound up in Zhongdan's account, he said.
A branch manager at one bank involved in the Zhongdan case said most bankers are fully aware that most companies provide falsified contracts to qualify for loans. Others said they routinely skip certain procedures designed to catch tricksters.
Caixin 20 March 2012.
For more on the growing Zhongdan financial scandal in China scroll down to Crooks and Scoundrels Corner. This one seems to be a deliberate criminal fraud on the Chinese banks by the company and many of its clients, though some of the banks also seem complicit, to invest in get rich schemes that didn’t get rich, on top of a Ponzi scheme like Madoff, although I suspect that plain old embezzlement will also turn up once the books get the MF Global treatment. I expect this scandal to grow. Will Beijing step in to bailout a scandal to save face?
We open with trouble brewing in Germany, “the hammer of Club Med, the American’s of Europe,” and paymaster and overlord of the defeated states of Euroland. Germans aren’t just tired of working hard, paying taxes and bailing out feckless tax shy Club Med’ers, they are increasingly tired of bailing out their former communist parasites in the east. Will it all kick off on May 13, in the state election in North Rhine Westphalia? Now thanks to transfer payments, the euro isn’t even working for parts of Germany. Stay long precious metals. An increasingly angry Europe isn’t going to keep the existing euro for long. As seen from an increasingly spring-like London, Europe’s seething and a pressure cooker likely to explode later this year.
Mayors Attack Solidarity Pact
Poor Western Cities Fed Up with Funding East 03/20/2012
Closed swimming pools, potholed streets, run-down buildings. Many western German cities, especially in the industrial Ruhr rust belt, are looking worse for wear after years of neglect in which they've had to transfer billions funds to help rebuild the former communist east. Now their mayors want to stop paying.
The mayors of highly indebted industrial cities in western Germany have demanded an end to transfer payments to the former communist east, insisting that more than 20 years after unification, the task of building up the eastern economy and infrastructure has been completed.
Eastern Germany is to receive a total of €156 billion ($206 billion) in financial help over the period 2005 until 2019 under the Solidarity Pact II program which obliges the national and regional governments as well as municipalities to make payments regardless of their own financial situation.
In the industrial Ruhr region of western German, which has been struggling to make ends meet for years as a result of the decline of its traditional coal and steel industries, the transfers have forced cities to run up major debts.
The city of Eseen, for example, has €2.1 billion in debt, of which a third stems from solidarity pact contributions, the Süddeutsche Zeitung newspaper reported on Tuesday. Duisburg, another Ruhr city, has borrowed half-billion euros in recent years to finance its Solidarity contributions.
Oberhausen has had to borrow €270 million. "There must be an end to this geographical redistribution," said the city's mayor, Klaus Wehling.
'A Perverse System'
The mayor of Dortmund, Ullrich Sierau, told Süddeutsche: "The Solidarity Pact is a perverse system that has no justification whatsoever anymore." He said it was impossible to explain to local citizens why the poor cities of the Ruhr should be running up large debts to come up with their share of the Solidarity Pact.
The mayor of Gelsenkirchen, Frank Baranowski, demanded that the Solidarity Pact be abolished. "We can't wait until 2019," he told Süddeutsche. "The east is now so well positioned that they don't know what to do with all the money. And we in the Ruhrgebiet are in dire straits. There is much greater need here. The Ruhr region needs more investment in infrastructure and education."
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http://www.spiegel.de/international/germany/0%2c1518%2c822473%2c00.html
While we await today’s UK budget tinkering, where in current fragile economic conditions doing nothing is preferable to stepping up austerity or further complicating the UK’s tax maze, we take the time to look at two different perspectives of the current state of the global economy. In the view from Europe, the Kondratieff wave peaked 2007-2010 and the next leg is down, albeit, thanks to modern technology and the Great Nixonian Error of fiat money, I suspect that the Kondratieff long wave is now compressed. “Things” happen faster now in our globalized world. The second view is from Asia, where the great fear is all the great fiat monetisations setting up the world for a massive bout of energy and food price inflation. I suspect that both will be in large measure correct.
"We are in a world of irredeemable paper money - a state of affairs unprecedented in history."
John Exter
If Kondratieff was right about super-cycles, we've still got years of slump to go
Economics Last updated: March 20th, 2012
----Nor was this the only error in prediction. Kondratieff Waves tend to be associated with the eclipse of one world superpower and the rise of another, so it was logical to assume back then that the still apparently unstoppable rise of Japan would eventually dislodge the United States from its position of economic hegemony. How wrong can you be?
However, none of this disproves the Kondratieff theory. The mistake made in The Sunday Telegraph article may have been merely to misread the cycle. Kondratieff, a Russian economist who died in Stalin's Gulags, identied three distinct long waves, the dates of which you can see in the table below. The downswing in the last of these waves begins during the First World War or shortly afterwards.
----Subsequent students of Kondratieff cycles have placed the end of this third cycle during or shortly after the Second World War, which seems logical enough, and have identified a further two cycles thereafter, with the fifth upswing beginning in the 1980s and ending with the current crisis. On past durations, we are now in a downswing phase lasting anything between ten and forty one years. Dating the beginning of the crisis from 2008, that's between five and thirty six years to go (See table below).
Part of the difficulty with Kondratieff is deciding precisely what the cycle is. Kondratieff himself observed the waves first in capital investment dynamics – high periods of investment followed by low periods – and then later in production of pig iron. Subsequent followers have observed the cycles in price indices, or relatively elevated periods of inflation followed by low ones. A further explanation connects them with waves of technological innovation. Kondratieff himself observed that "during the recession of the long waves, an especially large number of important discoveries and inventions in the technique of production and communication are made, which however are usually applied on a large scale only at the beginning of the next long upswing".
The Austrian economist, Schumpeter, was also a disciple of this latter explanation. Intuitively, it seems likely there is something in it. Periods of very high, transformational innovation are followed by rapid development and high investment as the new infrastructure is rolled out. The consequent increase in productively leads to big gains in living standards. But then the development phase comes to an end and there is a pause for breath before the next big thing comes along.
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Slow-cooking inflation as a global problem
By Andy Xie March 20, 2012, 10:13 p.m. EDT
BEIJING ( Caixin Online ) — Inflation remains on the rise despite a weak global economy.
The U.S. gross domestic product deflator rose to 2.2% in 2011 from 1.2% in 2010, and China’s rose to 8.3% from 7.4%. Monetary expansion around the world will work into prices. It may inflate some asset prices along the way, but will eventually become inflation through the path of least resistance, i.e. inflating prices of goods with low supply flexibility.
The perception of slowing inflation in late 2011 was due to declining oil prices, as economic growth slowed and the euro debt crisis intensified. But the force of global monetary expansion has the final say on oil prices. As the price of oil is back to its 2011 peak, inflation will climb again.
The final leg in monetary inflation is wage inflation — wages rising much faster than productivity. It is occurring in China due to a tight labor market. It will work into pockets of skilled labor in Europe and the United States.
The Fed has tripled its balance sheet since the 2008 financial crisis began and is talking about the prospect of QE3. China’s broad money has been rising at above 20% per annum. The European Central Bank (ECB) has done over 1 trillion euros ($1.33 trillion) in back-door quantitative easing through fixed-rate, long-term loans to its banking system. The Bank of Japan (BOJ) is finally joining the game through unsterilized intervention in the currency market. Various parts of the global economy are experiencing quantitative easing simultaneously.
The tight correlation between money and inflation is causal. Short-term factors may temporarily slow the process, but cannot forever change the causal relationship between money and inflation. There has been no exception to rapid monetary growth leading to inflation.
More
http://www.marketwatch.com/story/slow-cooking-inflation-as-a-global-problem-2012-03-20
So who will be right? I suspect both. In long wave terms, the west probably peaked somewhere in 2007-2011 with 2008 probably favourite. In the east, China is probably peaking 2011-2012. Steel usage is down, electric power consumption flat to down, house prices falling, shipbuilding in a bust. America is committing a slow national suicide, over extended by discretionary wars without end, debasing the value of the dollar at an increasingly faster rate in a vain attempt to maintain an unsustainable lifestyle. China is rising and will eventually become the dominant power of the eastern Pacific, although slower I suspect than many fear. As many readers know, I also write for the Graphite blog, covering the rise and rise of graphite and our new super material graphene. Massive technologic innovation is at hand which will fuel the next expansion phase of the Kondratieff cycle.
Yet the view from Asia is also correct. Wages are rising in general across Asia, while the global error of fiat currency has created a rising Asian middle and super class, increasingly consuming like European and Americans. China is already the 5th largest consumer of wine, on its way to 4th, 3rd and 2nd. Counterfeiting top of the line French wine is now rampant. Endless fiat money creation is already creating a scramble for food and energy access. I believe the world’s energy problem will be solved by developments in graphene and the rare earth elements. Food price inflation, however, will be with us as long as the world stays on a failing fiat currency system.
We end for today with China. Is the hard landing here?
Mining giants warn that China’s demand is cooling
Tuesday, Mar. 20, 2012
By James Regan and Rebekah Kebede
PERTH — Australian iron ore miners, key beneficiaries of China’s modern-day industrial revolution, on Tuesday signalled demand growth was finally slowing in response to Beijing’s moves to cool its economy.
It was the strongest indication yet from an industry closest to China’s phenomenal industrial growth over the last decade that the boom times, if not over, are tempering.
China has drawn iron ore from all over the world to feed its steel mills, offsetting a paltry home endowment of ore, but nowhere as much as Australia, where output has gone from 80 million tonnes a decade ago to nearly 500 million tonnes now.
BHP Billiton, the world’s biggest miner, said it was seeing signs of “flattening” iron ore demand from China, though for now it was pushing ahead with ambitious plans to expand production even further.
Rival Rio Tinto said it too was sticking with plans to lift capacity from its mines in Western Australia’s Pilbara iron ore belt, betting on a soft landing for the Chinese economy.
“The (Chinese) economy is shifting, it’s changing. Steel growth rates will flatten and they have flattened,” Ian Ashby, president of BHP’s iron ore division, said ahead of the Global Iron Ore & Steel Forecast Conference in Perth.
China’s demand for iron ore, a key steelmaking ingredient, will slow to single digit growth, but the country’s annual steel output will still rise by some 60% by 2025, Ashby said.
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"Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money."
Daniel Webster
At the Comex silver depositories Tuesday final figures were: Registered 34.86 Moz, Eligible 98.25 Moz, Total 133.11 Moz.
Crooks and Scoundrels Corner
The bent, the seriously bent, and the totally doubled over.
Today, welcome to modern China. Diogenes and his lamp are sorely needed.
It’s morally wrong to let a sucker keep his money.
W. C. Fields. Wall Street Ethicist.
Fool's Gold Behind Beijing Loan Guarantees
A credit guarantee firm is accused of using 'wealth management' schemes in a game its clients and banks also played
By staff reporters Yang Na and Ma Yuan 03.20.2012 14:44
The domino effect began in January when bankers reacted to rumors of a liquidity crunch at one of Beijing's most prominent loan-guarantee firms, Zhongdan Investment Credit Guarantee Co. Ltd.
Several banks that cooperated with Zhongdan smelled trouble and started calling loans they had issued to companies backed by the firm.
At the time, Zhongdan counted more than 300 clients and 3.3 billion yuan worth of loan guarantee contracts, according to the firm's President Liu Hui.
The next domino fell when the creditor companies, seeking to appease the banks, turned to Zhongdan for help repaying the called loans.
But Zhongdan executives balked, and the domino effect accelerated as companies teetered under bank pressure and the city's business community shuddered with credit freeze fears.
---- Caixin learned from sources close to the case that Zhongdan's managers convinced executives at many small and mid-sized companies to participate in its so-called wealth-management investment schemes, using their borrowed money.
Under the arrangement, a participating company would take out a bank loan and give some of the money to Zhongdan for investing in high interest-paying wealth management products for a month or more.
The firm then apparently put those funds to work by buying stakes in small companies such as pawnshops and investment consulting firms, according to the sources. Some of the funds went toward a U.S. consultancy that later failed.
This complicated, gray-zone money game ended with a bang when banks started calling the company loans. Most loans the firm's customers owed to banks were scheduled to mature before summer. But as of early March, some were already overdue.
---- In hopes of resolving the subsequent disputes between Zhongdan, its clients and banks, officials at the financial bureaus recently met with heads of 18 affected banks and Zhongdan executives.
"Of first importance is to determine the depth of the hole," Beijing Finance Bureau Deputy Director Li Zhigang said at the meeting. "If there are no new investors and no new liquidity replenishments, Zhongdan won't be able to repay."
For now, banks have frozen Zhongdan's deposits. A source at one bank said there may be no choice but to file a lawsuit against the firm.
---- But some of the firm's customers admit to playing Zhongdan's game, aware of the underhanded tactics, in hopes of turning a tidy profit.
An executive for a building materials manufacturer that signed a contract with a Zhongdan subsidiary, for example, said the guarantor forged documents to obtain bank loans.
To nail one loan, he said, Zhongdan formed a shell building materials supplier and wrote a fake contract between the supplier and his company. The document was presented to the bank, which approved the loan. Zhongdan later de-registered the phony supplier.
Another business owner surnamed Fang told Caixin most of Zhongdan's clients willingly participated in its wealth management schemes, sometimes letting the firm use every bit of the borrowed money to invest and earn up to 18 percent interest. Investment targets were not specified.
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Why did I take up stealing? To live better, to own things I couldn't afford, to acquire this good taste that you now enjoy and which I should be very reluctant to give up.
Zhongdan, with apologies to Cary Grant. To Catch A Thief.
The monthly Coppock Indicators finished February:
DJIA: +106 Down. NASDAQ: +108 Down. SP500: +78 Down. If I didn’t know better, I’d say the stock market was rigged. Old indicators no longer reflect the actuality in the market. High frequency front running perhaps? Ebenezer Squid taking candy from babies?
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