- Silver Flash in the Pan, Report 10 Jan, 2016
by Keith Weiner
No doubt, many people were excited on Thursday to see a spike in the silver price. The big news almost seemed like it would be a spike in the silver price. We were not quite so exuberant, tweeting (follow us on Twitter @Monetary_Metals):
“What happened to silver supply and demand fundamentals this morning?!”
We expected it to be a teaser for today’s Report. However, the silver market took back the entire price move, and more, in about 13 hours. Here is a close-up, showing Thursday morning (Arizona time) through Friday around noon.
The Silver Price Spike
On a light note, last week we encouraged readers not to necessarily expect a price move just because we make or reiterate a price call. Our headline even mentioned Murphy’s Law. So it is of course that the price of gold jumped +$43 this week.
The price of silver gained only 9 cents, so the gold-silver ratio moved up sharply to over 79. Another call we have been making is for a rising ratio.
So what did happen in silver fundamentals on Thursday? Or indeed the whole week for both metals? Read on for the only true look at the supply and demand of gold and silver…
But first, here’s the graph of the metals’ prices.
The Prices of Gold and Silver
We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.
One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.
Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production (stocks to flows) can be measured in months. The world just does not keep much inventory in wheat or oil.
With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio jumped up this week.
The Ratio of the Gold Price to the Silver Price
For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.
Here is the gold graph.
The Gold Basis and Cobasis and the Dollar Price
The tracking between the red and green lines is uncanny! Red is our scarcity indicator. Green is the price of the dollar in gold (which is the inverse of the price of gold in dollars). So what does this mean?
It means the more that the dollar goes down (i.e. the price of gold goes up), the less scarce gold becomes in the market. Higher prices are discouraging buyers and encouraging sellers. And by buyers and sellers here, we mean of metal.
This is normal, though not especially a sign of an imminent skyrocketing of the gold price.
Our calculated fundamental price of gold is up about ten bucks this week. In other words, it’s stable even in the face of a significant price move. Also normal (assuming it’s a reasonable indicator). The fundamental is over $150 above the market.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
It should be immediately apparent that conditions in the silver are different. Despite a strong dollar (i.e. low price of silver, measured in dollars) silver became a bit less scarce.
We don’t show a close-up of the silver basis and cobasis around the move on Thu-Fri. But we can just say that the price move was accompanied by the opposite cobasis move. It was speculators trying to front-run the market, and ending up only front-running themselves.
The fundamental price for silver fell again this week, though by less than a dime. We consider silver to be within the margin of error from its fair price at the moment.
This means the fundamental price of the gold-silver ratio went up again. We will look at this in more depth, in our Outlook 2016. Stay tuned!
© 2016 Monetary Metals
- "Neoconned"
Authored by Paul Craig Roberts,
The Proof Is In: The US Government Is The Most Complete Criminal Organization In Human History
Unique among the countries on earth, the US government insists that its laws and dictates take precedence over the sovereignty of nations. Washington asserts the power of US courts over foreign nationals and claims extra-territorial jurisdiction of US courts over foreign activities of which Washington or American interest groups disapprove. Perhaps the worst results of Washington’s disregard for the sovereignty of countries is the power Washington has exercised over foreign nationals solely on the basis of terrorism charges devoid of any evidence.
Consider a few examples…
Washington first forced the Swiss government to violate its own banking laws. Then Washington forced Switzerland to repeal its bank secrecy laws. Allegedly, Switzerland is a democracy, but the country’s laws are determined in Washington by people not elected by the Swiss to represent them.
Consider the “soccer scandal” that Washington concocted, apparently for the purpose of embarrassing Russia. The soccer organization’s home is Switzerland, but this did not stop Washington from sending FBI agents into Switzerland to arrest Swiss citizens. Try to imagine Switzerland sending Swiss federal agents into the US to arrest Americans.
Consider the $9 billion fine that Washington imposed on a French bank for failure to fully comply with Washington’s sanctions against Iran. This assertion of Washington’s control over a foreign financial institution is even more audaciously illegal in view of the fact that the sanctions Washington imposed on Iran and requires other sovereign countries to obey are themselves strictly illegal. Indeed, in this case we have a case of triple illegality as the sanctions were imposed on the basis of concocted and fabricated charges that were lies.
Or consider that Washington asserted its authority over the contract between a French shipbuilder and the Russian government and forced the French company to violate a contract at the expense of billions of dollars to the French company and a large number of jobs to the French economy. This was a part of Washington teaching the Russians a lesson for not following Washington’s orders in Crimea.
Try to imagine a world in which every country asserted the extra-territoriality of its law. The planet would be in permanent chaos with world GDP expended in legal and military battles.
Neoconned Washington claims that as History chose America to exercise its hegemony over the world, no other law is relevant. Only Washington’s will counts. Law itself is not even needed as Washington often substitutes orders for laws as when Richard Armitage, Deputy Secretary of State (an unelected position) told the President of Pakistan to do as he is told or “we will bomb you into the stone age.”
Try to imagine the Presidents of Russia or China giving such an order to a sovereign nation.
In fact, Washington did bomb large areas of Pakistan, murdering thousands of women, children, and village elders. Washington’s justification was the assertion of the extra-territoriality of US military actions in other countries with which Washington is not at war.
As horrendous as all of this is, the worst of Washington’s crimes against other peoples is when Washington kidnaps citizens of other countries and renditions them to Guantanamo in Cuba or to secret dungeons in criminal states such as Egypt and Poland to be held and tortured in violation both of US law and international law. These egregious crimes prove beyond any doubt that the US government is the worst criminal enterprise that has ever existed on Earth.
When the criminal neoconservative George W. Bush regime launched its illegal invasion of Afghanistan, the criminal regime in Washington desperately needed “terrorists” in order to provide a justification for an illegal invasion that constitutes a war crime under international law. However, there were not any terrorists. So Washington dropped leaflets over warlord territories offering thousands in dollars in bounty money for “terrorists.” The warlords responded to the opportunity and captured every unprotected person and sold them to the Americans for the bounty.
The only evidence that the “terrorists” were terrorists is that the innocent people were sold to the Americans by warlords as “terrorists.”
Yesterday Fayez Mohammed Ahmed Al-Kandari was released after 14 years of torture by “freedom and democracy America.” The United States military officer, Col. Barry Wingard, who represented Al-Kandari said that “there simply is no evidence other than he is a Muslim in Afghanistan at the wrong time, other than double and triple hearsay statements, something I have never seen as justification for incarceration.” Much less, said Col. Wingard, was there cause for a litany of multi-year torture in an effort to force a confession to the alleged offenses.
Do not expect the Western prostitute media to report these facts to you. To find out, you must go to RT or to Stephen Lendman.
The presstitute Western media are part of Washington’s criminal operation.
- Here Comes The Yuantervention
Somebody had to do something…
Offshore Yuan ripped 14 handles stronger after early weakness on PBOC’s “stable” fix…
And Chinese stocks lifted elegantly back to unchanged to prove its not fundamentals…
Just “psychological panic.”
Panic at paying 64x valuations perhaps?
- Noble Group's "Margin Call" Part II: The Enron Moment
“Our balance sheet – the strongest in recent history – represents a significant advantage as we continue to identify high value growth opportunities across the products and geographies we operate in. Maintaining our investment grade rating with the international rating agencies is a vital part of this strategy.”
– Noble Group 2014 Annual Report, p. 27
* * * * *
“Moody’s Investors Service has downgraded Noble Group Limited’s senior unsecured bond ratings to Ba1 from Baa3 and the provisional rating on its senior unsecured MTN program to (P)Ba1 from (P)Baa3.”
– Moody’s, December 29, 2015
* * * * *
“Noble Group Downgraded To ‘BB+’ On Weakened Liquidity; Notes Lowered To ‘BB’; Ratings Still On CreditWatch Negative”
– Standard & Poors, January 7, 2016
Noble’s “Margin Call” Part II – The Enron Moment
The story of Noble is worth writing a book, mostly of how not to run your business.
If they are in this mess, it is a in large part because the management was comprised predominantly of traders who were predisposed to defending their books.
Noble has been desperately trying to revive their image by hiring former Goldman, JP. Morgan, Trafigura executives etc. By doing so they were looking for a form of credibility collateral.
It didn’t work well for the new employees as they rapidly found out that they inherited from the liabiliaties of one decade of Noble’s poor decision making of the hard-core asset guys like William J. Randall and ex-Goldman Sach banker Yusuf Alireza.
In the part II of this analysis we will review the gap between the liquidity headroom and the debt maturity profile of the trader and explain how Noble Group will have its Enron moment.
The fatal mistake that Noble Group did was to deliberately mislead the market about their financial performance using accounting devices.
During last November, Noble Group’s chief financial officer Robert van der Zalm has stepped down from his position after taking a leave of absence for “health reasons”.
Two months later, Moody’s downgraded Noble Group.
In a very awaited decision, Standard & Poor’s has finally lowered Noble Group’s to junk, placing Asia’s largest commodity trader on watch for further possible as the rating agency remains skeptical about the liquidity headroom of the trader.
According to Noble Group, on September 30th 2015, the company had $15.5bn banking facilities and $1.669B in RMI (ready marketable inventories).
- $11.1bn of these $15.5bn banking facilities is uncommitted and are contingent on ability of maintaining investment-grade rating in the future.
- Noble claims to have $900M of cash and 1.669B$ in RMI (ready and marketable inventories).
- Their 1.669B$ in RMI have claims on related- party notes that are under collateralized by their commodity merchant activity and therefore should be excluded from their liquidity headroom.
- Noble Group currently uses $3.4B of borrowing facilities that are uncommitted.
Noble Group is left with only 1B$ of unutilized committed borrowing facilities and $900M of cash ready available to meet $2.966B of debt scheduled in the next 12 months.
Source: Noble Group MD&A Q-3 2015
Moreover, Noble Group counts on the completion of the Noble Agri stake divesture to reap $750M, a transaction which may not be completed by February 2016.
Adding the 1B$ of unused uncommitted borrowing facilities plus the $750M of Noble Agri and the $900M of cash that Noble claims to have, Noble is still short by $316M.
With the S&P downgrade, the total collateral margin call on Noble Group could be as much as $3.4B, banking facilities that are uncommitted and contingent on the ability of maintaining their investment-grade rating.
Noble will have its Enron Moment.
Enron’s bankruptcy occurred on November 2001 and was triggered by S&P’s downgrade of its debt below investment grade, activating a call provision in some loan indentures with principal amounts totaling $4 billion, cash and liquidity that suddenly Enron didn’t have.
After the quick sale of Noble Agri, Noble’s core business remains its coal & energy – two very depressed commodities for the foreseeable future, and with no cash-flows to pay its debt and a sudden tightening of the credit, the trader is a cancer patient on the forward curve.
- Germany Erupts Into Chaos As Protesters Declare "Rapefugees Not Welcome"
Anger over a wave of sexual assaults that occurred across the EU on New Year’s Eve reached a boiling point in Germany on Saturday when some 1,700 people attended a rally organized by the anti-Muslim PEGIDA movement.
PEGIDA, which nearly fizzled early last year, gained in popularity as hundreds of thousands of Mid-East asylum seekers responded to Angela Merkel’s open-door refugee policy by flooding across Germany’s borders. Initially, many Germans met the the migrants with hugs and gifts, but as the months wore on, sentiment gradually soured and attendance at PEGIDA rallies once again spiked with as many as 20,000 people showing up for an October demonstration.
Seeking to capitalize off the assaults that were allegedly perpetrated by groups of marauding Arab refugees in Cologne, PEGIDA took to the streets this weekend and predictably, clashes with riot police ensued.
“Demonstrators, some of whom bore tattoos with far-right symbols such as a skull in a German soldier’s helmet, had chanted ‘Merkel must go’ and ‘this is the march of the national resistance’”, Reuters writes. Another banner read: “Rapefugees not welcome.”
Ultimately, police rolled out the water cannons to disperse the crowd, which authorities say was at least partially comprised of “known hooligans” – whatever that means.
Some protesters hurled firecrackers and bottles at officers and in a testament to just how divided the country has become, dozens of counter demonstrators massed to protest the PEGIDA protest. Here’s a short clip which depicts the chaos:
The rallies came as Merkel signaled the German government may soon move to deport offenders. “The right to asylum can be lost if someone is convicted, on probation or jailed,” Merkel said following a meeting of the CDU’s top brass. “Merkel’s remarks on Saturday were in stark contrast to her earlier optimism about the influx to Germany, which has taken in far more migrants than any other European country,” Reuters remarked.
As we wrote on Saturday, “how TIME’s person of the year responds may ultimately determine how the world remembers one of the most indelible and revered politicians in European history.”
Indeed, some among the crowd openly called for the Iron Chancellor’s head (figuratively speaking). “Merkel has become a danger to our country. Merkel must go,” a speaker told the crowd which, as Reuters goes on to note, “loudly echoed the call, expressing their anger at Germany’s 1.1-million-strong migrant influx last year.”
“These women who fell victim will have to live with it for a long time. I feel like my freedom has been robbed,” one mother of four said.
The anger was just as palpable on the opposite side as many Germans see PEGIDA’s growing support as a dangerous blast from the country’s troubled past. Some 1,300 leftist demonstrators from the counter-protest shouted “Nazis raus!” (Nazis out!), while holding signs that read “There is nothing right about Nazi propaganda,” and “Fascism is not an opinion, it is a crime”.
“We are there to tell them to shut up. It is unacceptable for PEGIDA to exploit this horrible sexual violence perpetrated here on New Year’s day and to spread their racist nonsense,” one counter-protester said.
Meanwhile, in an eerie twist of fate, the seven decade ban on publication of Mein Kampf expired this month in Germany. Although anyone is now techinically free to publish Hitler’s manifesto, the definitive edition will be a 2,000 page annotated volume published by the Institute for Contemporary History in Munich.
Ronald Lauder, president of the World Jewish Congress, says it “‘would be best to leave ‘Mein Kampf’ where it belongs: the poison cabinet of history.'” “‘Unlike other works that truly deserve to be republished as annotated editions, ‘Mein Kampf’ does not,'” he adds. ICH director Andreas Wirsching said the following of the new edition in an interview with Deutsche Welle:
Our edition is particularly aimed at historical researchers. It can’t be denied that Hitler’s “Mein Kampf” is certainly an important historical document. The book is a source for information on his life, his thinking and most importantly, the history of National Socialism as a whole, and therefore it’s meant for research purposes.
But I’m certain that with this edition’s styling, we will reach an even wider audience due to the great interest in this topic. The commentaries are in part brief academic annotations, and we have added a detailed index to easily access the content. Public interest in this topic is so vast, and so we hope that maybe a few non-experts will also take a look at our edition.
While we can’t say for sure whether the buyers are “non-experts,” some people are indeed “taking a look.” As The Daily Mail reports, the new edition “was an instant sellout when it hit bookstores in Germany for the first time since the Second World War.” Like a unicorn tech IPO, the launch was oversubscribed as there were nearly four times as many orders as available copies. “More than 15,000 advance orders were placed, despite the initial print of 4,000 copies,” The Mail continues, adding that “one copy [was] even put up for resale on Amazon.de for €9,999.99.
And so, it would appear that PEGIDA leader Lutz Bachmann was indeed correct last year when he posted the following picture of himself on Facebook with the caption “He’s back.”
- Oregon Standoff: Isolated Event Or Sign Of Things To Come?
Submitted by Ron Paul via The Ron Paul Institute for Peace & Prosperity,
The nation's attention turned to Oregon this week when a group calling itself Citizens for Constitutional Freedom seized control of part of a federal wildlife refuge. The citizens were protesting the harsh sentences given to members of the Hammond ranching family. The Hammonds were accused of allowing fires set on their property to spread onto federal land.
The Hammonds were prosecuted under a federal terrorism statute. This may seem odd, but many prosecutors are stretching the definition of terrorism in order to, as was the case here, apply the mandatory minimum sentences or otherwise violate defendants’ constitutional rights. The first judge to hear the case refused to grant the government’s sentencing request, saying his conscience was shocked by the thought of applying the mandatory minimums to the Hammonds. Fortunately for the government, it was able to appeal the decision to judges whose consciences were not shocked by draconian sentences.
Sadly, but not surprisingly, some progressives who normally support civil liberties have called for the government to use deadly force to end the occupation at the refuge. These progressives are the mirror image of conservatives who (properly) attack gun control and the PATRIOT Act as tyrannical, yet support the use of police-state tactics against unpopular groups such as Muslims.
Even some libertarians have joined the attacks on the ranchers. These libertarians say ranchers like the Hammonds are “corporate welfare queens” because they graze their cattle on federal lands. However, since the federal government is the largest landholder in many western states, the ranchers may not have other viable alternatives. As the Oregon standoff shows, ranchers hardly have the same type of cozy relationship with the government that is enjoyed by true corporate welfare queens like military contractors and big banks. Many ranchers actually want control of federally-held land returned to the states or sold to private owners.
Situations like the one in Oregon could become commonplace as the continued failure of Keynesian economics and militaristic foreign policy is used to justify expanding government power. These new power grabs will increase the threats to our personal and economic security. The resulting chaos will cause many more Americans to resist government policies, with some even turning to violence, while the burden of government regulations and taxes will lead to a growing black market. The government will respond by becoming even more authoritarian, which will lead to further unrest.
Fortunately, we still have time to reverse course. The Internet makes it easier than ever to spark the ideas of liberty and grow the liberty movement. Spreading the truth and making sure we can care for ourselves and our families in the event of an economic collapse must be our priorities.
We must help more progressives understand that allowing the government to run the economy not only leads to authoritarianism, it impoverishes the lower classes and enriches the elites. We must also show conservatives that militarism abroad inevitably leads to tyranny at home. We also need to continue exposing how the Federal Reserve feeds the welfare-warfare state while increasing economic instability and income inequality. This week’s Senate vote on Audit the Fed is important to our efforts to help the American people learn the full truth about our monetary system.
One thing my years in Washington taught me is that most politicians are followers, not leaders. Therefore we should not waste time and resources trying to educate politicians. Politicians will not support individual liberty and limited government unless and until they are forced to do so by the people.
- Fed's Williams: "We Got It Wrong"
In late 2014 and early 2015, we tried to warn anyone who cared to listen time and time and time again that crashing crude prices are unambiguously bad for the economy and the market, contrary to what every Keynesian hack, tenured economist, Larry Kudlow and, naturally, central banker repeated – like a broken – record day after day: that the glorious benefits of the “gas savings tax cut” would unveil themselves any minute now, and unleash a new golden ago economic prosperity and push the US economy into 3%+ growth.
Indeed, it was less than a year ago, on January 30 2015, when St. Louis Fed president Jim Bullard told Bloomberg TV that the oil price drop is unambiguously positive for the US.
It wasn’t, and the predicted spending surge never happened.
However, while that outcome was not surprising at all, what we were shocked by is that on Friday, following a speech to the California Bankers Association in Santa Barbara, during the subsequent Q&A, San Fran Fed president John Williams actually admitted the truth.
The Fed got it wrong when it predicted a drop in oil prices would be a big boon for the economy. It turned out the world had changed; the US has a lot of jobs connected to the oil industry.
And there you have it: these are the people micromanaging not only the S&P500 but the US, and thus, the global economy – by implication they have to be the smartest people not only in the room, but in the world. As it turns out, they are about as clueless as it gets because the single biggest alleged positive driver of the US economy, as defined by the Fed, ended up being the single biggest drag to the economy, as a “doom and gloomish conspiracy blog” repeatedly said, and as the Fed subsequently admitted.
At this point we would have been the first to give Williams, and the Fed, props for admitting what in retrospect amounts to an epic mistake, and perhaps cheer a Fed which has changed its mind as the facts changed… and then we listened a little further into the interview only to find that not only has the Fed not learned anything at all, but is now openly lying to justify its mistake. To wit:
I would argue that we are seeing [the benefits of lower oil]. We are seeing them where we would expect to see them: consumer spending has been growing faster than you would otherwise expect.
Actually John, no, you are not seeing consumer spending growing faster at all; you are seeing consumer spending collapse as a cursory 5 second check at your very own St. Louis Fed chart depository will reveal:
But the absolute cherry on top proving once and for all just how clueless the Fed remains despite its alleged epiphany, was Wiliams “conclusion” that consumers will finally change their behavior because having expected the gas drop to be temporary, now that gas prices have been low for “over a year” when responding to surveys, US consumers now expect oil to remain here, and as a result will splurge. So what Williams is saying is… short every energy company and prepare for mass defaults because oil will not rebound contrary to what the equity market is discounting.
We can’t wait for Williams to explain in January 2017 how he was wrong – again – that a tsunami of energy defaults would be “unambiguously good” for the US economy.
Full audio recording below.
- The EU Bail-In Directive: Dark Clouds Are Gathering
Submitted by Pater Tenebrarum via Acting-Man.com,
Portugal’s Rickety Banking System
After the unseemly bankruptcy of the Espirito Santo Group and the associated bank, then Portugal’s second biggest (likely a result of not praying enough, see: “Big Portuguese Bank Gets Into Trouble” and “Fears Over Banco Espirito Santo Escalate” for the gory details), Portugal’s state-run deposit insurance fund basically ran out of money.
It turns out that Europe’s new Bank Recovery and Resolution Directive (BRRD for short) came just in time for Portugal. At the end of 2015, another Portuguese bank bit the dust, the country’s seventh largest lender by assets, Banif. Portugal’s government once again decided to bail the bank out, but with strings attached. Subordinated bondholders and shareholders were essentially wiped out, which is as it should be.
Banif SA, weekly. Although this is hard to see on this linear chart, the stock rose by 40% today, to €0.002. Shareholders are allegedly planning to throw a wild party in Lisbon over the weekend (we were unable to confirm this rumor) – click to enlarge.
Senior bondholders and depositors were spared however, with Portugal’s overburdened taxpayers once again footing the bill. According to the FT:
Portugal has agreed a €2.2bn state rescue for Banco International do Funchal (Banif), splitting the Madeira-based lender into “good” and “bad” banks and selling its healthy assets to Spain’s Santander for €150m in the country’s second bank bailout in less than 18 months.
António Costa, Portugal’s new socialist prime minister, said the bailout would involve “a high cost for taxpayers” but had the advantage of being “a definitive solution”. Branches would open normally on Monday, he said. The rescue, which “bails in” shareholders and subordinated creditors, follows the €4.9bn bailout in August last year of Banco Espírito Santo, once Portugal’s largest listed bank, whose healthy assets, split off into Novo Banco, remain unsold.
In a statement late on Sunday night, the Bank of Portugal said the rescue of Banif would involve “total public support” estimated at €2.25bn to cover “future contingencies”, of which €1.76bn would come directly from the state and €489m from a bank resolution fund, to which all banks contribute. The bailout protects depositors and senior creditors and ensures that Banif’s operations, transferred to Santander Totta, the Spanish group’s Portuguese subsidiary, will continue to “function normally”, the central bank said.
Shareholders and subordinated creditors would be left in Banif, retaining “a very restricted group of assets” that are to be liquidated, the Bank of Portugal said. “Problematic assets” would be transferred to a special asset management vehicle. The rescue partly mirrors the 2014 bailout of BES, which was split into “good” and “bad” banks after its profits were hit by exposure to the heavily indebted Espírito Santo family business empire.
Banif is Portugal’s seventh largest lender with total assets valued at €12.8bn in June, equivalent to about 7 per cent of Portugal’s gross domestic product, and deposits totalling €6.3bn. The bank is the dominant lender in the Portuguese islands of Madeira and the Azores, where it accounts for more than 30 per cent of total deposits.”
(emphasis added)
Since no deposits were wiped out as a result of the bail-out, Portugal’s money supply won’t be affected. However, Banif’s downfall is a reminder that Portugal’s banking system remains quite rickety. We dimly remember someone saying that the bail-out of BES would be the last such problem. Evidently it wasn’t.
Still, there is nothing overly unusual here – the socialist prime minister decided that it would be better to spare senior bondholders and depositors and let taxpayers eat the losses, but at least it was decided to bail someone in. However, what happened next was a lot less benign.
Governments Trying to Subvert the Law
The first euro area government that has tried to subvert the law governing the relations between creditors and borrowers was that of Austria. It was recently ignominiously stopped from doing so by the country’s Constitutional Court, which declared the so-called “Hypo Alpe Adria Special Law” unconstitutional.
What the government tried to do in this case was to stiff certain classes of creditors in spite of the fact that their bonds had been guaranteed by the now essentially insolvent province of Carinthia. As one can easily imagine, this decision didn’t go down well with the affected creditors and they sued the government. Austria’s Constitutional Court rightly concluded that the government had attempted to subvert essential legal principles and repealed the law in its entirety.
Specifically, the court cited in its ruling that reversing the guarantees to bondholders was in conflict with the constitution, that the law represented an unacceptable breach of property rights and that it treated creditors holding guarantees unfairly by dividing them into different classes, in spite of the fact that they should be treated pari passu.
As deeply embarrassing as this ruling was for Austria’s government, the attendant sighs of relief of bondholders could be heard across Europe. By desperately trying to avert a bankruptcy of the province of Carinthia (an event for which no legal provisions exist!), the government had created a huge question mark over government debt guarantees all over Europe. If one government could get away with suspending them by legislative fiat, couldn’t all of them expected to do so if push came to shove?
The fancy HQ of the former Hypo Alpe Adria Group (now known as “Heta Asset Resolution”, which isn’t merely a “bad bank” but easily the “worst bank” ever) in Klagenfurt, Carinthia.
As a first test of the BRRD, the HAA special law turned out to be a costly failure. The cost cannot simply be measured in terms of the additional amounts the country’s taxpayers are now forced to fork over – the real cost is hidden, and comes in the form of lost trust. As the FT noted at the time:
“Germany’s VOeB association of public banks said that the law would have led to incalculable costs by undermining investor confidence in Austria. The country now faced “the considerable task of winning back the lost trust of national and international investors — which could be regarded as a Herculean task”, said Liane Buchholz, the VOeB’s managing director.”
Giving it Another Try in Portugal
But we know governments. We have already seen the lengths to which assorted Greek governments and the government of Argentina have gone in recent years to stiff their creditors. More recently, Ukraine got in on the act as well. So given the fact that the banking system, governments and central banks are engaged in a complex three-card Monte designed to fund welfare/warfare statism by issuing mountains of unsound and unpayable debt that “backs” an equally fast growing mountain of irredeemable “money”, we knew it would only be a question of time before someone tried to pull the same stunt again.
Who better suited for this task than Portugal’s new socialist government? Remember the bailout of BES and the creation of a “good bank” and a “bad bank”? Take a gander at the following chart from Bloomberg:
Five senior BES bonds that had hitherto been assigned to the “good bank” are reassigned overnight, without warning, to the “bad bank”. Bondholders lost 80% of their money between the evening of December 29 and the morning of December 30 – click to enlarge.
As Bloomberg notes, this is “setting a dangerous precedent” – indeed, it is not much different from the precedent almost set by Austria’s government. Here is the problem in a nutshell: the government, or rather the ECB, suddenly “discovered” – and this shouldn’t really surprise anyone – that the financial hole that has been torn into BES is actually gaping a lot wider than had been hitherto assumed. According to Bloomberg, this caused Portugal’s government to opt for instant expropriation – a new year’s surprise present for BES bondholders, so to speak:
“If you owned any of those five bonds on Tuesday, you were owed money by Novo Banco, the good bank. On Wednesday, you were told that your bonds had been transferred to BES, the bad bank. The Portuguese central bank selected five of Novo Banco’s 52 senior bonds, worth about 1.95 billion euros ($2.1 billion), and reassigned them — thus backfilling a 1.4 billion-euro hole in the “good” bank’s balance sheet that had been revealed in November by the European Central Bank’s stress tests of the institution.”
The core problem with this decision should be glaringly obvious: once again, the government is arbitrarily picking winners and losers. Senior bondholders are no longer treated pari passu – certain types of bonds suddenly seem to confer different property rights than others – in spite of the fact that all these bonds are part of the class of “senior bank bonds”.
There is in principle absolutely nothing wrong with bailing in bondholders – in fact, this is precisely the way to go. However, the essential principle that creditors holding instruments of the same seniority have to be treated equally is something the bond markets of the whole world are relying on. Without this principle, what point is there in creating different levels of seniority, which are attended by different levels of risk and hence involve different costs and rewards?
One wonders of course on what grounds precisely these five bond issues were selected and not any of the others. That’s simple, actually – as Bloomberg explains:
“It seems likely that Portugal’s choice of bonds wasn’t completely arbitrary; the documentation for the selected securities says they are governed by Portuguese law, rather than U.K. or U.S. law.”
In short, the government already knows it would lose its case in London and New York courts – because, naturally, the bondholders are preparing to sue. So it has picked bonds the covenants of which are governed by Portuguese law, in the hope that the courts in Lisbon will be sympathetic to acts of selective expropriation by the Portuguese government.
As Bloomberg remarks, the consequences of this decision are nigh incalculable – and bank bondholders across Europe are likely to once again hold their collective breath:
“Portugal isn’t the only country refurbishing its banking industry. Germany’s savings banks will need to bolster their capital in the coming months under the new EU rules, and the fourfold increase in bad loans held by Italy’s banks since 2008 means the central bank there has some housecleaning of its own to do. Consolidation — in the form of forced intermingling of stronger and weaker banks — is likely in both countries. Investors who own debt issued by German or Italian banks will no doubt reflect carefully on what just happened in Portugal.”
(emphasis added)
If we were holding any of these bonds, we’d shoot first and ask questions later. Surely if ever there was a time to get out of Dodge, this is it.
Conclusion
In principle, the BRRD, or “bail-in directive” as it is also known, is quite a good idea. The fact that lending money to fractionally reserved banks or even merely depositing it with them, involves risks needed to be firmly reestablished. One simply cannot expect that banks and their creditors will be bailed out by taxpayers at every opportunity. Besides, the admission that there are risks in banking that have hitherto been glossed over or have even been lied about was long overdue. However, Europe’s governments are now likely to find out that the current monetary system with its fractionally reserved banks is actually incompatible with this admission, so to speak.
By arbitrarily meting out unequal treatment to similar classes of creditors, they are unwittingly hastening this process of recognition. In that sense, we actually welcome the Portuguese government’s attempt to stiff certain BES bondholders (although we still regard the case as such as plainly illegal and contemptible). It will now become even more difficult to keep assorted banking zombies on artificial life support. A lot of unsound credit is likely to be liquidated faster than had been expected to date. Artificial credit expansion is going to become even harder to implement. Unfortunately none of this is going to keep governments from trying to confiscate as much wealth as possible in a doomed attempt to keep the unworkable system of “third way” socialist regulatory statism going.
In this context, we want to leave you with a few quotes by Ludwig von Mises, which go to the heart of matter and some of which we are convinced will once again turn out to be prophetic – especially the ones that proclaim that the so-called “mixed economy” is just as certain to fail as the communist economies were. (from: Bureaucracy, The Anti-Capitalistic Mentality, Human Action, Planned Chaos and Planning for Freedom).
“Sorry boys and girls, you will have to choose. You can either have capitalism, freedom, prosperity and personal responsibility,or you can have socialism, tyranny, poverty and ‘security’. You cannot have both.”
“The Welfare State is merely a method for transforming the market economy step by step into socialism.”
“An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.”
“The issue is always the same: the government or the market. There is no third solution.”
“Capitalism and socialism are two distinct patterns of social organization. Private control of the means of production and public control are contradictory notions and not merely contrary notions. There is no such thing as a mixed economy, a system that would stand midway between capitalism and socialism.”
“Contrary to a popular fallacy there is no middle way, no third system possible as a pattern of a permanent social order. The citizens must choose between capitalism and socialism.”
(emphasis added)
Amen.
- Shared Sacrifice? 1 In 3 Americans Slash Staples Spending To 'Afford' Obamacare
Health insurers are in panic mode as the Obama administration, ever eager maximize coverage optics for Obamacare, has, as The NY Times reports, allowed large numbers of people to sign up for insurance after the deadlines in the last two years, destabilizing insurance markets and driving up premiums. This surge in costs, from unintended consequences, has left 1 in 5 Americans with health insurance is having problems paying medical bills; and, as a new poll finds, more than one in three Americans, or 35 percent, said they were unable to pay for basic necessities such as food, heat, and housing because of medical bill problems…
Among people with health insurance, one in five (20%) working-age Americans report having problems paying medical bills in the past year that often cause serious financial challenges and changes in employment and lifestyle, finds a comprehensive new Kaiser Family Foundation/New York Times survey. As expected, the situation is even worse among people who are uninsured: half (53%) face problems with medical bills, bringing the overall total to 26 percent.
While insurance can protect people from problem medical bills, the survey suggests that those with employer coverage or other insurance suffer similar consequences as the uninsured once such problems occur. Among those facing problems with medical bills, almost identical shares of the insured (44%) and uninsured (45%) say the bills had a major impact on their families.
People with insurance who face problem medical bills also report a wide range of consequences and sacrifices during the past year as a result, including delaying vacations or major household purchases (77%), spending less on food, clothing and basic household items (75%), using up most or all their savings (63%), taking an extra job or working more hours (42%), increasing their credit card debt (38%), borrowing money from family or friends (37%), changing their living situation (14%), and seeking the aid of a charity (11%). These shares generally are as large as or larger than the shares among uninsured people with problem medical bills.
Overall, 62 percent of those who had medical bill problems say the bills were incurred by someone who had health coverage at the time (most often through an employer). Of those who were insured when the bills were incurred, three-quarters (75%) say that the amount they had to pay for their insurance copays, deductibles, or coinsurance was more than they could afford.
And it is not about to get better any time soon, as The NY Times reports, it appears the liberal-leaning establishment will never learn the real "unintended consequences" of
tinkeringcentral-planning…The administration has created more than 30 “special enrollment” categories and sent emails to millions of Americans last year urging them to see if they might be able to sign up after the annual open enrollment deadline. But, insurers and state officials said, the federal government did little to verify whether late arrivals were eligible.
That has allowed people to wait until they become ill or need medical services to sign up, driving up costs broadly, insurers have told federal health officials.
“Individuals enrolled through special enrollment periods are utilizing up to 55 percent more services than their open enrollment counterparts” who sign up in the regular period, the Blue Cross and Blue Shield Association, whose local member companies operate in every state, told the administration.
Of course, Enroll America, a nonprofit group with close ties to the Obama administration, said the government “should not tighten eligibility or verification standards in ways that could place an undue burden on consumers.”
Because – "it's fair…" – though The Iron Lady had it right…
- MacroStrategy Explains Why Most Stocks Have Already "Crossed The Rubicon"
As we have reported on numerous prior occasions, the biggest marginal buyer of stocks in both 2014 and 2015 (and forecast to remain in 2016), are corporations themselves, using debt-funded buybacks to push their stocks to record highs, allowing the smart money to sell in record amounts.
But what happens when companies are so levered that they can’t possibly afford to issue any more debt, virtually all of which has been used to repurchase stocks, as we have shown before…
… especially in a time when yields on Investment Grade bonds are rising courtesy of the first Fed rate hike in nearly a decade, and when cash flows are sliding faster with every passing year?
For another version of the answer we have provided many times before, we go to MacroStrategy’s Julien Garran, who informs us that as credit & returns deteriorate, an increasing number of stocks are crossing the “Rubicon.” By Rubicon he means the “cut-off point where corporates can no longer justify gearing up to do buybacks. In 2013, 60% of my sample could justify buybacks. Since then, US corporates have raised debt by US$1.1trn and bought back US$1.1trn of stock. But now, with debt levels & costs up, and returns down, only 35% make the grade.” That, in his view is also the key to the narrowing breadth in the market. His conclusion: breadth is now set to narrow to the point where the whole market turns down in 2016.
Some more details on Crossing the Rubicon:
Why does breadth decline? In my view, corporates’ ability to gear-up and buy-back stock is critical to the story.
From the start of 2014, US corporates covered their entire capex budgets from internal funds. They then raised US$1.1trn of debt to do US$1.1trn of corporate buybacks (Data from the Fed’s Z1 report & Factset).
The combination of rising debt, deteriorating returns and a rising cost of debt means that, increasingly, corporate’s debt levels threaten their credit ratings, or their marginal cost of debt deteriorates relative to their cashflow yields. Both threaten their ability to gear up to buy back stock. And both threaten the value of their equity.
As more companies cross the Rubicon out of the buyback zone, the bid for their equity shrivels. The key to trading the topping process is to sell the sectors which will see their margin cost of debt rise above the free cashflow from new business. Clearly the extractive industries, the utilities, and several industrial and retail companies have already crossed the line. I think that the leveraged buyout firms in the US are likely the next to go, as their cost of funding continues to blow out.
To show the process, I have taken 50 S&P companies from 10 sectors (excluding financials). I’ve put them in a matrix with net debt/EBITDA on the horizontal axis and the free cashflow yield less the cost of debt on the vertical axis. The zone to the left and above the red line show the prime opportunities for gearing up for buybacks. That’s because free cashflow yields are well above the current marginal cost of debt, and net debt to EBITDA is contained. The zone to the right & below the red line shows stocks that will struggle to gear up for buybacks – either because their cost of debt is up to or above their free-cashflow yields, or because the net debt to EBITDA is too high.
For the 2013 financial year, 60% of stocks in my sample were in good shape to gear-up for buybacks.
By the end of 2015, just 35% of the sample were in good shape to do buybacks.
I estimate that the liquidity shortfall will expand further in 2016, to US$750bn. Against that backdrop, I expect more pressure on credit, returns & growth, more corporates will cross the Rubicon. And as that continues I expect that buyback activity will fade further, and the net bid for equities will likely evaporate.
The conclusion:
My recommendations are; Short US indices, long the US$, long gold & gold equities & short the leveraged buyout sector in the US.
So is 2016 the year it all falls apart? Stay tuned for the follow up comments from Garran because if he is right, the answer is a resounding yes.
- This Is What Gold Does In A Currency Crisis, China Edition
Submitted by John Rubino via DollarCollapse.com,
As China’s leaders figure out that pegging the yuan to the dollar while quintupling their debt in five years was a colossal mistake, they are, apparently, concluding that the only way out is a sudden, sharp currency devaluation. As Reuters reports...
China's central bank is under increasing pressure from policy advisers to let the yuan currency fall quickly and sharply, by as much as 10-15 percent, as its recent gradual softening is thought to be doing more harm than good.
The People's Bank of China (PBOC) has spent billions of dollars buying yuan over recent months to defend the exchange rate, but has failed to stabilize market sentiment. The currency has steadily lost another 2.6 percent against the U.S. dollar even after the bank sprung a surprise devaluation of nearly 2 percent in August.
That gradual, managed depreciation makes the yuan a one-way bet for investors who see the currency weaken even as the central bank intervenes to prop it up.
Policy insiders are now calling for a quick and sharp yuan depreciation, backed by tighter capital controls to curb speculation and the flight of money out of the country.
"We should let the yuan have a considerable depreciation, but we should have a bottom line; it cannot create a big impact on the economy and the financial system, and big panic in the capital market," an influential government economist told Reuters, suggesting the yuan be allowed to depreciate by 10-15 percent over an unspecified timeframe.
Letting the yuan fall sharply and quickly could help cushion many of China's debt-laden companies as the government pursues far-reaching structural reforms. Beijing is keen to restructure industry through "supply side" reform, especially reducing industrial over-capacity, but fears the corporate sector is too weak to handle that.
[ZH:However, one needs to ask whether that is the goal for China… after all – Exports have been rising with a stronger Yuan?
Or maybe it is as we previously noted – policy…
Finally, the real purpose of the PBOC's exercise in FX management today was, just like in August, to fire a warning shot at the Fed's rate-hiking plans. Only this time the warning shot is far, far louder.
In September the Fed postponed its rate hike as a result of China's devaluation. Will it do the same again next week? Because if China is about to unleash a 15% deval of the CNY against the entire world, expect a flood of Chinese FX reserves as the PBOC tries to control the glidepath of its currency, and avoid an all out collapse driven by soaring capital outflows.
In other words, we are now right back where we were in mid-August, just before the bottom fell out of the market.]
"The biggest risk in China is not really the economy," said Qian Wang, senior Asia economist for Vanguard Investments Hong Kong. "The real risk is, number one; the policy uncertainty, and number two; the currency. China is walking on eggshells."
* * *
Chinese citizens, meanwhile, are anxiously awaiting tomorrow’s market open while mentally repeating the same three lines:
- Sure am glad I bought that gold last year.
- Wish I’d bought more gold last year.
- Wonder what I’ll have to pay for gold next week…
Here’s what that looks like in graphical form:
If China does spring a 15% devaluation on the already-wound-too-tight leveraged speculating community, the impact should be, well, amusing for sure, but otherwise a little hard to predict. About the only thing that can be said with near-certainty is that the above chart will have to be updated with much higher left and right axes.
- China Contagion Spills Over To Hong Kong Banks As HIBOR Explodes To Record High, Stocks Tumble
Chinese stocks are trading at the lows of the day after Overnight HIBOR rates (Hong Kong's interbank borrowing rate) exploded a stunning 939bps to a record high 13.4%. It is clear that banks are utterly desperate for liquidity and/or are extremely concerned about one another's counterparty risk. This has dragged HSCEI down 5% (to its lowest since Oct 2011).
Something just snapped…
Evidently the pressure between On- and Off-shore Yuan was too much for banks to bear…
Smashing Hang Seng China Enterprise Index down 5% to its lowest since October 2011
Chinese Default/Devaluation risk just jumpe dback above 120bps (highest since August collapse)
As we explained earlier, as Asian markets opened (ahead of the Yuan fix), they were in turmoil with FX markets crashing (JPY rallying as carry trades unwound), equity markets tumbling (Dow, Nikkei, and China A50), commodity carnage (crude and copper carnage) as Gold and bonds were bid. With offshore Yuan sliding ahead of the fix (and Onshore Yuan 3 handles cheap to Friday's fix), CFETS RMB Index dropping below 100 for the first time, and following Friday's 'token' stability, The PBOC decided to hold Yuan Fix practically unchanged for the second day. USDJPY and equity markets jumped on the news, then quickly faded.
We have seen this "stability" before…
Asian stocks collapse to lowest since October 2011…
Chinese media is pushing rumors of rate cuts and urging people that they do not need USD (despite the lines we noted earlier) demanding theyhave more patience… (via People's Daily)
More patience is needed for the Chinese economy which is in a transition period, as it transfers from old to new economic growth drivers while also facing a backdrop of a slowing global economy, the People's Daily reports citing academics. It would be too opinionated to judge that the Chinese economy would suffer a hard landing based on short-term fluctuations as many factors have had an impact on the yuan's recent depreciation and the stock market's falls.
"The fundamentals of many economic crises is the psychological panic problem, and we need to take good care of the market and foster new drivers; conclusions on the Chinese economy can't be made in a rush based on the short-term or partial changes," said Zhang Tiegang, professor at the Central University of Finance and Economics.
Yeah – all psychological.
Offshore Yuan was tumbling before the Fix…
As were Chinese stocks:
- *FTSE CHINA A50 JANUARY FUTURES SLIDE 3%
Of course, The Keynesian have a solution for all this…
- *STIGLITZ: RECENT CHINA MARKET VOLATILITY ISN'T CATACLYSMIC
- *STIGLITZ: CHINA NEEDS DEMAND BOOST TO AVOID DEEPER DOWNTURN
It's that simple eh?!
The reaction to PBOC "stability" is not good:
- *MSCI ASIA PACIFIC EX-JAPAN INDEX DROPS 1.7%, EXTENDING LOSS
- *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.7% TO 3,131.85
And Dow futures jumped 80 point and then dumped 100…
Chinese stocks are tumbling…
And ChiNext is now down over 21% YTD…
* * *
As we detailed earlier, markets were turmoiling into the China Fix…
China ripples may be turning into tsunamis. As FX markets creep open, something serious must have snapped. The South African Rand just crashed 10% – the biggest single-day drop since Lehman – to new record lows. At the same time, carry trades are being unwound en masse, smashing USDJPY down to 116.75 (strongest Yen in a year). Somebody do something!!!
The South African Rand crashed 10% to a record low against the USD of 17.9169. This 10% collapse is the largest on record outside of the immediate post-Lehman move…
Don't forget – As goes the South African Rand, so goes The World?
Korean Won plunges to its lowest since July 2010…
And Yen is surging…
Smashing Nikkei futures down over 500 points from Japan's close….
As USDJPY tumbles so US Equity markets are slumping…
And crude is carnaging…
Copper flash-crashed at the open and is now retesting…
It appears people were expecting some Chinese intervention over the weekend… and so far have been disappointed.
For now, Gold is bid as a safe haven…
Charts: Bloomberg
- PRePare YouRSeLVeS…
- The Other (More Worrisome) "H" Bomb
- The Biggest (And Possibly Most Terrifying) Company You've Never Heard Of
Submitted by AnonWatcher via TheAntiMedia.org,
Serco. Chances are you’ve never heard of the company. If you have heard of the company, chances are you misunderstand the shear enormity of the global company and their contracts.
From transport to air traffic control, getting your license in Canada, to running all 7 immigration detention centers in Australia, private prisons in the UK, military base presence, running nuclear arsenals, and running all state schools in Bradford, Serco, somewhere, has played a part in moving, educating, or detaining people.
New contracts awarded to Serco include a Saudi Railway Company, further air traffic control in the US and also IT support services for various European agencies. You can read more on their future projects below.
Serco HY15 Results SEA 11 August 2015
A Very Brief History
Serco’s history began in 1929 as a UK subsidiary, RCA Services Limited to support the cinema industry.
In the 1960s the company made a leap into military contracts to maintain the UK Air Force base Ballistic Missile Early Warning System. From there, the company continues to grow.
Now trading as Serco Group, 2015 trading as of August 11 2015, maintained a revenue of £3.5 billion, and an underlying trading profit of £90 million. The data was presented at JPMorgan in London.
In 2013 Serco was considered a potential risk, and became a representation of the dangers of outsourcing. The U.K. government developed contingency plans in case Serco went bankrupt. When the concerns came to light, Serco faced bans (along with G4S, another outsourcing contractor) from further bidding on new U.K. government work for six months. It wasn’t until Rupert Soames OBE – Sir Winston Churchill’s grandson – took on the job as Serco’s Chief Executive in 2014, that Serco turned a new corner of profit growth.
Serco Today
Serco today is one of the biggest global companies to exist. They have contracts with:
Alliant – the vehicle for IT services across the Federal IT market;
National Security Personnel System (NSPS) – For “(NSPS) training and facilitating services throughout the Department of Defense (DoD) and agencies that needs NSPS training and implementation services;”
Seaport – The NAVSEA SEAPORT Multiple Award contract focuses on “engineering, technical, and programmatic support services for the Warfare Centers.” This is inclusive of Homeland Security and Force Protection, Strategic Weapons Systems, and multiple warfare systems.
CIP-SP3 Services and Solutions (Cost $20 Billion, expiration date 2022) – biomedical-related IT services with the National Institutes of Health (NIH) with the main objective focused on Biomedical Research and Health Sciences extending to information systems throughout the federal government. Also implementation in several key areas of Biomedical Sciences including legislation and critical infrastructure protection.
The few contracts listed above are among the vast array of transport, detention center and private prison contracts.
Serco, the biggest company you’ve never heard of:
- Meanwhile In Shanghai Residents Form Lines To Sell Yuan, Buy Dollars
On Thursday, as the world was focusing on the collapsing Chinese exchange rate, we noted that in a more troubling development, in December Chinese FX reserves declined by a record $108 billion, bringing the total drop for 2015 to over half a trillion, and the cumulative decline since Chinese reserves starting dropping in mid-2014 to just shy of $1 trillion.
But why if China has been so keen on devaluing its currency – at least since the formal start of the devaluation on August 11 – was it selling so many USD-denominated assets? The answer: because if the PBOC did not step in and halt the decline (by liquidating reserves) the drop would have been even greater, suggesting that the capital outflow from China is orders of magnitude worse than either Beijing, or Chinese analysts would like to admit.
One thing is certain: there is much more depreciation to go. As we reminded readers yesterday, one month ago we predicted at least another 15% in CNY devaluation, something Bloomberg agreed with over the weekend. And as China devalues more, it will face even more outflows: at least $670 billion which will drastically cut the country’s pile of FX reserves at the worst possible time – just as China’s banks are forced to begin recognizing the huge pile of non-performing loans as a result of a tsunami of pent up corporate defaults mostly in the commodity sector.
All that assume a continuation of the smooth devaluation seen since the August 11 shocker.
As SocGen points in a note today, “press reports at the end of last week suggested that senior policy advisors would like to see a sharp one-off depreciation of the CNY. The theory is that once such a move had been accomplished, the domestic capital outflows, that are putting additional pressure on China’s financial system and draining the FX reserve, would stop. The same policy advisors, however, recognise the dangers of such a strategy. First, domestic savers may not believe a “one-and-done” strategy, risking further capital outflows. Second, China’s political standing in the G20 group could well suffer as a result, which is important point to the current administration. Finally, the potential disruption to financial stability outside China, and with the risk of an Asian currency war, would ultimately feedback negatively to China.
The first point is one we broadly mocked back in August when one after another PBOC speaker swore that the devaluation is over. We were correct in pointing out that it had only just begun.As such it is logical why the local population no longer believes a single word uttered by officials.
Which brings us to another key point by SocGen:
While China is willing to spend some of its FX reserves to manage the pace of currency depreciation, we believe that the authorities would step in with further capital controls should this be deemed necessary rather than risk an accelerated run down of reserves. Already last week saw some further tightening of the existing rules; Chinese citizens are still allowed to convert $50,000 annually (resetting on January 1), but a maximum daily limit of $5,000 has now been set unless an in-person appointment is made, in which case the cap is $10,000 and with a maximum of three meetings permitted per week. The irony is that expectations of further tightening of capital controls could add to outflow pressure.
Bingo.
Because as Ming Pao, the most influential Chinese newspaper in Hong Kong, reports that Shanghai residents are lining up at local banks to sell Yuan for Dollars over fears of even more Yuan devaluation.
Ming Pao: Shanghai residents are queuing at local banks to sell #RMB for #USD amid fears about more RMB depreciation pic.twitter.com/WbjMUU6WEE
— George Chen (@george_chen) January 10, 2016
The good news: there may be lines, but they aren’t long. Which is good: the last time we say long lines was in December 2014 when the ruble imploded and the local population was rushing to exchange their rapidly devaluing pieces of paper into dollars or hard assets.
More on the current sentiment on the ground in China, google translated from Ming Pao, according to which to avoid long lines forming, China Merchants Bank is urging people to seek personal appointments or be limited in how much they can convert:
China Merchants Bank yesterday to purchase foreign exchange business can be seen in public not long lines, but bank employees significantly increased the number refers to the earlier exchange, cash dollar now the best appointments, but she said that did not change in swap lines. Mainland exchange regulations limit $ 50,000 per day for a year, to be exchanged for cash the same day, the maximum limit of $ 10,000.
Not helping matters was a comment by Chen Xuebin, Professor in the Institute for financial studies at Fudan University, in which he said that based on past experience, the currency devaluation may cause a short-term panic effect. The silver lining: during last year’s 6% depreciation, there were no bank runs, so he is not too worried this time either.
This time may be different, as SocGen points out:
To our minds, the most significant change on China since the equity market first crashed last summer is the perception that the Chinese administration holds much less control over the economy and financial system than what was previously perceived. Part of this is the natural consequence of reform, and not least in the financial sector. Less than apt communication and somewhat confusing policy initiatives have unhelpful, to say the least. This does not mean, however, that the administration is without control.
That is certainly the case, and over the next several weeks and months we will find out just how much, or little, control China’s administration still has left.
- ISIS Attacks On Libyan Oil Facilities Visible from Space
Submitted by Charles Kennedy of OilPrice.com
ISIS militants in Libya continue to attack key oil infrastructure in the country.
The two large oil export terminals at Es Sider and Ras Lanuf came under ISIS attacks on January 4-6. Some oil storage tanks exploded after suffering damage from machine gun fire.
NASA just published some shocking photos that clearly show the smoke plumes from the oil storage tanks are visible by satellite. The smoke blew east and northeast, blanketing Libya’s Mediterranean Coast. News reports suggest that at least five oil storage tanks are burning, each thought to have the capacity to hold 420,000 to 460,000 barrels of oil. Four of them are located at Es Sider and one at Ras Lanuf.
A spokesperson for the National Oil Company in Libya said that seven storage tanks were burning.
The attacks came as the oil company issued a “cry for help” on its website, calling on the Libyan people “of this homeland to hurry to rescue what is left from our resources before it is too late.”
Libya’s rival governing factions have taken steps to patch up their differences, signing a UN-backed power-sharing agreement in December. The attacks from ISIS threaten to inflict lasting damage on the heart of Libya’s economy: its oil infrastructure.
Take a look at the stunning NASA images below:
* * *
For the full backstory on ISIS and Libya’s oil infrastructure, see here
- It Begins: FXCM Doubles Yuan Margins, Warns Of Market "Disruption And Highly Illiquid Conditions"
The last time FX brokers, still hurting from the Swiss National Bank’s revaluation shocker from last January which forced brand names such as FXCM to seek an urgent bailout, scramble to hike margins was in late June just ahead of the Greek “event risk” weekend, when numerous brokers either hiked margins on EUR positions or went to “close only” mode due to “uncertainty surrounding the Greek debt negotiations… that could lead to high volatility on the market.”
So, barely one week into the new year, one which has seen the stock market suffer its worst ever first week of trading, some FX brokers are not taking chances, and in the aftermath of the aggressive plunge in the Yuan (one we warned about a month ago), have decided to minimize client stop-out risk by hiking margins.
Case in point, here is FXCM with a just released warning about upcoming “highly illiquid conditions” leading to a doubling in Yuan margins:
Dear Client,
We believe there is a chance of disruption and highly illiquid conditions in the forex market during the coming weeks (and/or months). Please be aware that market gaps tend to occur over the weekend – that is, currencies trade at prices considerably distant from previous levels.
*IMPORTANT UPDATE*
Margin requirements will double on the USD/CNH pair after market close on January 15, 2016. See a Complete List of New Margin Requirements
Please review your account to ensure that you have enough available margin to support any new positions. You may deposit additional funds at www.myfxcm.com or close positions as needed.
Follows the traditional disclaime which FXCM itself probably should have taken to heart one year ago when after the SNB’s de-pegging the firm suffered tremendous losses:
Remember that forex trading can result in losses that could exceed your deposited funds and therefore may not be suitable for everyone, so please ensure that you fully understand the high level of risk involved.
The paradox here is that pre-emptive, if correct, warnings such as this one, tend to quickly become self-fulfilling prophecies as other brokers immediately follow suit and likewise increase margin requirements, which helps mitigate total loss potential but just as quickly soaks up liquidity from the market, leading to an even more fragmented market, prone to sudden, and quite dramatic moves.
The full list of FXCM margin increases is shown below; expect every other FX brokerage to promptly jump on the bandwagon.
- If The High-Yield Bond Market Is "Fixed", Explain This…?
Remember a week ago when every TV anchor, pundit, asset-gatherer, and commission-taker stormed onto mainstream media and proclaimed the credit market collapse "fixed" because prices had 'stabilized' over the holiday period "proving that 3rd Avenue was a one off" and this dip was a buying opportunity? Yeah, well that was all complete crap… as Investment-Grade cost of funding hits a 3-year high, HY bond spreads blew out to cycle wides, 'triple-hooks' soared to their worst levels in almost 7 years, and credit protection costs rose by the most in years.
"Stabilized" (during the Christmas break) was the new "everything is awesome"… but now…
High Yield Bond ETFs are dumping…
The cost of high-yield credit protection is soaring…
Equity prices are starting to catch down to that reality…
As is the cost of equity risk protection (VIX following August's "wait what" reality-wake-up call path)…
And that means trouble for the only pillar of non-economic stock buying left… Investment-Grade credit risk just hit 3-year highs crushing the economics of any debt-funded shareholder-friendly activities…
And finally, where it all started – CCC 'triple-hooks' credit spreads have re-spiked to cycle wides…
But apart from that – yeah, credit is "fixed."
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