Baltic Dry Index. 1271 -51
LIR Gold Target in 2019: $30,000. Revised due to QE programs.
“But it (the boom) could not last forever
even if inflation and credit expansion were to go on endlessly. It would then
encounter the barriers which prevent the boundless expansion of circulation
credit. It would lead to the crack-up boom and the breakdown of the whole monetary
system.”
Ludwig Von Mises
Is China
about to allow its first trust default since 1998, on January 31st?
All the signs are that they will. At roughly $500 million and supposedly funded
by some 700 sophisticated investors, does it matter if China does allow its first
trust default in years? At first sight it shouldn’t make many waves. The 700
unfortunates should hardly notice the loss, and anyway, so the story goes, the
trust lent the money to a coal mining company that never got its mining
licences, but started mining anyway before getting closed down, which is why
the mines owner is currently sitting in a Chinese jail. A lesson for all in
moral hazard and not bailing out illegality. Besides the whole Chinese trust
sector is relatively new and small. Investors in the future will just have to
be more cautious and discerning. At just under USD500 million, it’s hardly the
next Lehman after all.
But chaos
theory suggests that enough butterflies flapping their wings in Mexico can set
off a typhoon in the Pacific, so what might a first Chinese trust default on
the first day of the Chinese Lunar New Year, bring? Well higher interest rates paid by future
trusts for one, as future trust investors will lose the one way street of an
implicit state guarantee of no loss of capital. Future investors will be fewer
and require a higher reward for the increased risk. But the shock will extend
far beyond just the Chinese trust sector. Higher interest rates will roll out into the far much larger, and
less sophisticated, Wealth Management Product sector. A sector already under
interest rate stress from the excesses of the China’s shadow banking system.
China has just seven days to a) allow a default, b) arrange a bailout rescue,
either directly or indirectly, or c) allow a partial default and a partial
rescue, either directly or indirectly.
Whichever
way the Middle Kingdom decides, there are no really good outcomes, though c) would
seem to be the worst of all options. China’s wobble seems to be getting worse.
Higher interest rates are coming. Somehow the Fed doesn’t seem in control as
much as before.
"Gold would have value if for no other reason than that it enables a citizen to fashion his financial escape from the state."
William F. Rickenbacker
China Bank Regulator Said to Issue Alert on Coal Mine Loans
Jan 24,
2014 5:50 AM GMT
China’s banking regulator
ordered its regional offices to increase scrutiny of credit risks in the
coal-mining industry, said two people with knowledge of the matter, signaling
government concern about possible defaults. The China Banking Regulatory Commission’s order didn’t mention concerns that a 3 billion yuan ($496 million) trust product distributed by Industrial & Commercial Bank of China Ltd. may default after the coal miner that borrowed the funds collapsed, said the people, who asked not to be identified as the matter isn’t public. Regional CBRC offices were told to also closely monitor risks from trust and wealth management products, they said.
The regulator issues such alerts for matters that it judges may pose significant risks to banks and not on a regular basis, the people said.
Analysts at Bank of America Corp. and Deutsche Bank AG are among those to say in the past week that the possibility of defaults in China is increasing as authorities take measures to rein in shadow banking and economic growth slows. Investors in the trust product distributed by ICBC met with officials from the bank yesterday in Shanghai, demanding their money ahead of the Jan. 31 maturity date.
The market is “quite worried” about the coal sector after concerns rose that the trust product distributed by ICBC may default, Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp., said by telephone today. “Coal is a pillar industry in the economy and banks’ exposure to the sector should be quite substantial.”
More
China Trust Products Gone Awry Evoke Soros ’08 Crisis Echoes
Jan 24, 2014 5:09 AM GMT
The story of how a 3 billion-yuan ($496 million) Chinese trust investment
wound up on the brink of default shows what billionaire investor George Soros
has called the “eerie resemblances” between the 2008 global financial crisis
and the nation’s debt market. Industrial & Commercial Bank of China Ltd., the world’s most profitable bank, is rejecting entreaties to compensate holders of the financing, which was structured by China Credit Trust Co. to raise funds for a coal miner. New York-based Moody’s Investors Service says it is typical of financial products that have kept debt off banks’ balance sheets. The borrower, Shanxi Zhenfu Energy Group, collapsed in 2012 after leading shareholder Wang Pingyan was arrested for illegal deposit-taking. Payment on the three-year, so-called Credit Equals Gold No. 1 product is due Jan. 31.
China’s $4.8 trillion in shadow-banking debt, arranged by trusts and fund managers with less transparency than commercial-bank loans, was equivalent to as much as 55 percent of the nation’s 2012 economic output at the end of that year, according to Moody’s latest estimate. Investors argued their case in a meeting at an ICBC Shanghai branch yesterday, an echo of savers’ appeals to Hong Kong lenders after Lehman Brothers Holdings Inc.’s failure undermined securities called minibonds.
The woes in China’s trust industry
underscore concerns that a wave of debt defaults might weigh on the global
economy just as the recovery in the U.S. and Europe accelerates.
One-third of investors surveyed in a Bloomberg Global Poll this month said
China’s economic slowdown is the world’s major risk, up from 26 percent in
November.
----Goldman Sachs Group Inc. Chief Economist Andrew Tilton wrote in a Jan. 22 report that trusts are similar to structured investment vehicles prominent in the 2008 crisis in their “linkages with banks, the off-balance-sheet nature of the trusts” and the long-term projects funded by short-dated funds.
Goldman Sachs estimates the 2 trillion yuan in lending by trusts last year accounted for 10 percent of financing in the economy and a removal of credit flows from trusts would knock 0.8 of a percentage point off the nation’s growth rate. Gross domestic product will expand 7.45 percent this year, the slowest since 1990, a Bloomberg survey of economists signals.
The first default of a trust product in at least a decade would shake investors’ faith in their implicit guarantees and spur outflows that may trigger a “credit crunch,” according to David Cui, China strategist at Bank of America Merrill Lynch in Hong Kong. The government and state banks may bail out a significant portion of bad debt “to prevent a financial crisis,” he said. Guangdong International Trust & Investment Corp. failed to pay Yankee notes in 1998, the nation’s first default since the People’s Republic of China’s founding in 1949.
China Credit Trust, whose largest shareholder is the state-owned People’s Insurance Company (Group) of China Ltd., sold Credit Equals Gold with an indicated annual rate of return of 9.5 percent to 11 percent for different investment amounts, according to a sales document.
More
UBS Says Market Wants Default as Risks to Pile Up: China Credit
Jan 24, 2014 2:31 AM GMT
UBS AG’s China
securities unit, the leading foreign underwriter of debt sales in the country,
says the market wants policy makers to allow the first onshore bond default to
reduce long-term hazards to the financial system. “Systematic risk will pile up without any default happening,” Bi Xuewen, head of China debt capital markets at UBS Securities Co., said in an interview in Shanghai. “Market participants would like to see a default in China’s bonds. Only after defaults can the overall risk pricing system be normalized.”
Bi, who has led the bond underwriting unit at UBS since 2010, said he doubts there will be a note default in China this year, following previous cases in which local authorities stepped in to avert non-payment. The yield premium on five-year AA- rated corporate bonds over similar-maturity sovereign securities jumped to 404 basis points this week, the highest since May 2012, as concern mounts about trust defaults.
More
Aussie Drops Below 87 U.S. Cents on China Concerns, RBA Comments
Jan 24,
2014 6:34 AM GMT
The Australian dollar dropped below 87 U.S. cents for the first time since
July 2010 after China’s
bank regulator ordered regional offices to increase scrutiny of credit risks in
the coal-mining industry, according to people with knowledge of the matter. The Aussie slid versus all 16 major peers after the Wall Street Journal cited central bank board member Heather Ridout as saying around 80 cents would be a fair deal for everybody. The nation’s three-year bond yield slid by the most in four months amid increased demand for the relative safety of sovereign bonds. New Zealand’s dollar also fell.
Both stories have “combined to hurt the Aussie,” said Greg Gibbs, a Singapore-based strategist at Royal Bank of Scotland Group Plc. “The Australian dollar is going to be treated as low-risk insurance against possible financial stress in China.”
----The China Banking Regulatory Commission’s order didn’t mention concerns that a 3 billion yuan ($496 million) trust product distributed by Industrial & Commercial Bank of China Ltd. may default after the coal miner that borrowed the funds collapsed, said the people, who asked not to be identified because the matter isn’t public. Regional CBRC offices were told to also closely monitor risks
from trust and wealth management products, they said.
China is Australia’s largest trading partner.
More
Asian Stocks Extend Loss as Emerging Currencies Decline
Jan 24,
2014 7:28 AM GMT
Asian
stocks fell, with declines in Japanese and Hong Kong equities putting the
regional index on track for its longest run of weekly losses in more than 18
months. Russia’s ruble touched its lowest level in almost five years, extending
a rout in emerging currencies. The MSCI Asia Pacific Index lost 1.2 percent by 7:17 a.m. in London, set for a fourth week of decline. Japan’s Topix (TPX) index sank 1.8 percent after the yen jumped yesterday. Euro Stoxx 50 Index futures and contracts on the Standard & Poor’s 500 Index were little changed. Australia’s dollar fell 0.7 percent. The ruble slumped 0.7 percent while Korea’s won lost 0.6 percent. The cost of insuring Asian debt from default headed for the highest in three months. Gas climbed.
Global stocks
have retreated this week as mixed company earnings and signs of weakness in China’s
economy added to concern that cuts to U.S. Federal Reserve stimulus will
destabilize emerging markets.
----“A correction could occur,” Shane Oliver,
the Sydney-based head of investment strategy at AMP Capital Investors Ltd.,
which oversees $131 billion, said by e-mail. “We have to expect more
volatility. Shares are no longer dirt cheap, meaning the easy gains are behind
us and we are now more dependent on rising earnings coming through.”
More
"The secret of life is honesty and fair dealing. If you can
fake that, you've got it made."
Groucho Marx
Groucho Marx
At the Comex
silver depositories Thursday
final figures were: Registered 50.08 Moz, Eligible 126.90 Moz, Total 176.98 Moz.
Crooks and Scoundrels Corner
The bent, the seriously bent, and the totally
doubled over.
Today, as someone famously didn’t quite say, “play it again, Sam.” Basket case Argentina gets ready to collapse again. Will the Argentines ever wise up to stop electing Latin America’s version of President Hollande?
The trouble with socialism is that eventually you run out of other people’s money.Margaret Thatcher.
Argentine peso suffers biggest fall for 12 years
Argentina's central bank appeared to stop trying to defend the currency amid mounting capital flight
7:28PM GMT 23 Jan 2014
The Argentine peso has plunged
11.1pc against the US dollar, the sharpest one-day fall since 2002, as the
central bank appeared to stop trying to defend the currency amid mounting
capital flight.
The peso fell to 8.01 to the US
dollar from 7.1, and followed Wednesday's 3.2pc loss.
That took the currency's
depreciation so far this year to nearly 19pc, creating deeper challenges for a
government wrestling with falling foreign reserves and mounting inflation.
The Central Bank of Argentina
stayed out of the market again on Thursday, after having spent about $120m to
defend the currency on Tuesday.
The central bank had rigidly
enforced an official exchange rate over the past 10 years, but the peso has
slid steadily since last year.
Meanwhile, the country's foreign
exchange reserves have plummeted, down from $52bn in 2011 to $29bn today.
The bank has tried to stem
currency flight in the face of surging inflation that, according to private
sector estimates, rose to 28.4pc last year.
"What we are seeing is a change
in strategy which aims to dramatically accelerate the devaluation, in more of a
'shock' style rather than gradually," said Abeceb.com analyst Juan Pablo
Rondero.
On Wednesday, the government
announced tighter controls on shopping abroad via the internet to prevent more
outflow of dollars from the country.
It said Argentines could only
make two purchases a year worth no more than $25 each, otherwise they will be
taxed at a 50pc rate.
http://www.telegraph.co.uk/finance/currency/10593363/Argentine-peso-suffers-biggest-fall-for-12-years.html
More trouble on voodoo economics ahead next week. Stay long physical
precious metals against the day that the Great Nixonian Error of fiat currency
ends. Have a great weekend everyone.
"I want us to do even more to encourage the risk
takers"
Gordon Brown. 2004.
“Prime Minister Gordon Brown called yesterday for the Financial Services Authority to start an inquiry, saying he was “shocked” at the “moral bankruptcy” indicated in the suit.”
Gordon Brown. 2010.
Gordon Brown. 2004.
“Prime Minister Gordon Brown called yesterday for the Financial Services Authority to start an inquiry, saying he was “shocked” at the “moral bankruptcy” indicated in the suit.”
Gordon Brown. 2010.
The monthly Coppock Indicators finished December and 2013.
DJIA: +204 Up. NASDAQ: +311 Up. SP500: +247 Up.
The new Fed bubble continues, but for how much longer?
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