August 5, 2015

Chinese Stock Short Squeeze Stalls After IMF Delays Decision On Yuan SDR Inclusion

Yesterday afternoon's meltup short-squeeze in China - after regulators announced their latest restrictions on short-selling - has stalled in the early trading tonight following The IMF's decision to delay inclusion of Yuan in the SDR pending a review in September 2016. Though this will be a disappointment to the Chinese, the door is still open though given waringse from BMW and Toyota over "normalizing" auto sales, the market problems may be morphing quickly into economic problems.

Chinese stocks see a modest lift at the open...

The IMF has delayed its decision on including The Yuan in The SDR...
  • *IMF ISSUES REPORT ON CRITERIA FOR YUAN RESERVE-CURRENCY STATUS
  • *IMF STAFF PROPOSES DELAYING ANY CHANGE IN SDR TO SEPT. 2016
  • *IMF SAYS `SIGNIFICANT WORK REMAINS' ON REVIEW OF YUAN IN SDR
  • *IMF: OPERATIONAL ISSUES MUST BE RESOLVED IF YUAN PART OF SDR
  • *IMF: YUAN MADE `SUBSTANTIAL PROGRESS' ON INTL USE SINCE 2010
As Bloomberg reports, though there is a delay the endgame remains in sight...

August 4, 2015

Comex On The Edge? Paper Gold "Dilution" Hits A Record 124 For Every Ounce Of Physical

Over the few days, we got what was merely the latest confirmation that when it comes to sliding gold prices, consumers of physical gold just can't get enough.

As the Times of India reported over the weekend, India's gold imports shot up by 61% to 155 tonnes in the first two months of the current fiscal year "due to weak prices globally and the easing of restrictions by the Reserve Bank. In April-May of the last fiscal, gold imports had aggregated about 96 tonnes, an official said."

This follows confirmations previously that with the price of gold sliding, physical demand has been through the roof, case in point: "US Mint Sells Most Physical Gold In Two Years On Same Day Gold Price Hits Five Year Low", "Gold Bullion Demand Surges - Perth Mint and U.S. Mint Cannot Meet Demand", "Gold Tumbles Despite UK Mint Seeing Europeans Rush To Buy Bullion" and so on. Indicatively, as of Friday, the US Mint had sold 170,000 ounces of gold bullion in July: the fifth highest on record, and we expect today's month-end update to push that number even higher.

But while the dislocation between demand for physical and the price of paper gold has been extensively discussed here over the years, most recently in "Gold And The Silver Stand-Off: Is The Selling Of Paper Gold And Silver Finally Ending?", something unexpected happened at the CME on Friday afternoon which may be the most important observation yet.

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August 3, 2015

Obama’s Climate Fascism Is Another Nail In The Coffin For The U.S. Economy

Is Barack Obama trying to kill the economy on purpose?  On Sunday, we learned that Obama is imposing a nationwide 32 percent carbon dioxide emission reduction from 2005 levels by the year 2030.  When it was first proposed last year, Obama’s plan called for a 30 percent reduction, but the final version is even more dramatic.  The Obama administration admits that this is going to cost the U.S. economy billions of dollars a year and that electricity rates for many Americans are going to rise substantially.  And what Obama is not telling us is that this plan is going to kill what is left of our coal industry and will destroy countless numbers of American jobs.  The Republicans in Congress hate this plan, state governments across the country hate this plan, and thousands of business owners hate this plan.  But since Barack Obama has decided that this is a good idea, he is imposing it on all of us anyway.

So how can Obama get away with doing this without congressional approval?
Well, he is using the “regulatory power” of the Environmental Protection Agency.  Congress is increasingly becoming irrelevant as federal agencies issue thousands of new rules and regulations each and every year.  The IRS, for example, issues countless numbers of new rules and regulations each year without every consulting Congress.  Government bureaucracy has spun wildly out of control, and most Americans don’t even realize what is happening.

In the last 15 days of 2014 alone, 1,200 new government regulations were published.  We are literally being strangled with red tape, and it has gotten worse year after year no matter which political party has been in power.

These new greenhouse gas regulations are terrible.  The following is a summary of what Obama is now imposing on the entire country

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July 31, 2015

"Why Commodities Defaults Could Spread", UBS Explains

UBS has been keen to warn investors about just how perilous the situation in high yield has become - which works out nicely, because we’ve been saying precisely the same thing ever since it became readily apparent that between investors’ hunt for yield and energy producers’ desire to take advantage of low rates and forgiving capital markets in order to stay solvent, the market was setting up for a spectacular implosion. 

Lots of supply (hooray for record issuance!), a gullible retail crowd (bring on the secondaries and find me a junk bond ETF!), and a lack of liquidity in the secondary market (down with the prop traders!) have conspired to create a veritable nightmare scenario and with commodity prices (especially crude) set to remain in the doldrums for the foreseeable future, the question is not whether there will be defaults in HY energy, but rather what the fallout will be for the broader market. 

Or, as we put it in "The Junk Bond Heat Map Has Not Been This Red In A Long Time," at some point, investors (using other people's money) will tire of throwing good money after bad hoping to time the bottom tick in oil just right (and if oil tumbles in the $30, that may be just that moment) at which point the commodity capitulation which we noted previously, will spread away from just commodities and junk bonds, and spread to all sectors and products, including stocks. 

Here with more on the contagion risk from commodities defaults is UBS.

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July 30, 2015

Private Equity Shills Resort to Ludicrous Arguments to Try to Deflect “Carry Fee” Reporting Scandal

The scandal over CalPERS’ and CalSTRS’ failure to track private equity “carry fees” has the industry worried enough that it is offering up ludicrous rationalizations.

Perversely, the fact that private equity mouthpieces have escalated so quickly to strained arguments, particularly over a new, nothingburger threat, is a good sign. It shows both how threatened private equity firms are by the prospect of having their economics exposed, and how utterly incapable they are of making any sort of credible case for their long-standing secrecy practices.

By way of background, we broke the story on CalPERS’ failure to monitor its “carry fees” in early June. A mere month later, CalPERS was in full retreat. It was contacting all of its private equity managers to have them give the giant pension fund all the historical data on the “carry fees” CalPERS had paid on funds the general partners managed.

As an aside, “carry fees” are the largest fees that private equity limited partners like CalPERS pay across their private equity programs, unless they have the misfortune to invest only in really dodgy funds. In the prototypical fee schedule of “2 and 20,” 2% is the annual management fee (which typically scales down later in a fund’s life) and 20% is the participation in profits, usually after beating an 8% hurdle rate.

We’re also starting to put “carry fees” in quotes, since the term is a misnomer. It implies, incorrectly, that private equity firms have a “carried interest”. This term is also widely misdefined in layperson investor guides, a sign of the effectiveness of private equity propaganda efforts.

A true “carried interest” occurs when an investor allows another party to borrow from them in order to acquire a stake in the venture. Borrowing to obtain your participation means that the party with a true “carried interest” is at risk of loss. They eventually have to repay the lender the full amount borrowed, irrespective of whether the investment works out. If the borrower is the promoter, as the private equity funds are, a true “carried interest” exposes him to loss and thus aligns his incentives with those of his funders.

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July 29, 2015

China’s Stock Market Falling Off a Cliff: Why, and Why Care?

After putting up with a bear market for years, the Chinese stock market started to rally last autumn against the backdrop of a new easing cycle by the People’s Bank of China (PBoC). As if this were not enough in a largely liquidity driven market, the PBoC promoted stock market financing by easing margin credit conditions. As a result, the Shanghai stock market skyrocketed for about nine months until it suddenly moved into red to end up with a huge sell-off, which has wiped out one third of China’s stock market value.

The key questions I will address in this note are why all of this is happening and why we should care.

Why Did We Have a Bull Market to Start With?

The stock market rally was clearly sponsored by the Chinese government. It all started with the widely trumpeted announcement of the Shanghai – Hong Kong Stock Connect last year to help Chinese corporates raise equity beyond the Mainland, with the announcement of a huge number of IPOs following suite. The underlying reason for the Chinese to push the stock market at that time was that Chinese banks and corporations needed a venue to raise equity after an era of excessive leveraging. Yet neither the Shanghai nor the Hong Kong stock market was well placed after years in a bear market.

The need for Chinese corporations and banks to avail themselves of fresh equity cannot be underestimated. On the one hand, corporate debt has grown sixfold from 2005 levels. On the other hand, Chinese banks are not only heavily exposed to these corporates, being still their main source of financing, but also to local governments whose huge borrowing from banks is starting to be restructured. To make a long story short, China’s governments needed a bull stock market to transfer part of the cost of cleaning up its corporates’ and banks’ balance sheets from the state to private investors, including foreigners. The PBoC danced to the Government’s tune, easing monetary policy since November last year. This was done through several interest rate cuts and by lowering the liquidity ratio requirements. The problem with all of this liquidity is that it only fueled additional leveraging, including for gambling on the stock market. The demand for stocks was abundant for two main reasons: the real estate market was no longer a venue for quick gains and shadow banking is less accessible than before – not to talk about the even lower interest rates offered on bank deposits after monetary easing.

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July 28, 2015

Introducing "Trickle-Out Oligarch Economics" - How Over $21 Trillion In Wealth Fled Offshore

Before I get into the meat of this post, I want to make it clear that just because I point out the following doesn’t mean I like tax and think we need more of it. Rather, there are two main points I want to get across.

1) Oligarchs create tax loopholes for themselves. Oligarchs control the politicians who write legislation to suit oligarch needs. Whenever you hear politicians talk about taxing the wealthy they mean the suckers in the top 10% who are not politically-connected oligarchs. The super rich will never be touched by such legislation. They will always have loopholes available to them. This is why the statement “we need higher taxes on the rich” is basically a bullshit political talking point.

2) You’ll notice much of the wealth that has been moved offshore originated from dictators who bled their home countries dry of resources as their populations starved. Many of these dictators had the full support of the U.S. government throughout their decades in power, during which time they plundered and destroyed entire nations.

Just remember that the next time you hear a super rich person call for more taxes. They never mean on themselves. Second, understand that the root of the problem is systemic. There are no easy fixes, the entire system needs a total reboot.

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July 27, 2015

Gold's Two Stories: Paper Markets Collapse... While The Retail Public Buys At A Record Pace

We’ve seen some significant swings in precious metals over the last several years and if we are to believe the paper spot prices and recent value of mining shares, one would think that gold and silver are on their last leg. Last weekend precious metals took a massive hit to the downside, sending shock waves throughout the industry. But was the move really representative of what’s happening in precious metals markets around the world? Or, is there an effort by large financial institutions to keep prices suppressed? In an open letter to the Commodity Futures Trading Commission First Mining Finance CEO Keith Neumeyer argues that real producers and consumers don’t appear to be represented by the purported billion dollar moves on paper trading exchanges.

With China recently revealing that they have added some 600 tons of gold to their stockpiles and the U.S. mint having suspended sales of Silver Eagles due to extremely high demand in early July, how is it possible that prices are crashing?

As noted in Mike Gleason’s Weekly Market Wrap at Money Metals Exchange, while it appears that gold is currently one of the world’s most hated assets, the retail public continues to buy at a record pace:
The paper market is telling one story. But the actual physical bullion market is telling quite another.

The U.S. Mint has sold over 100,000 ounces of American Eagle gold coins so far in July. That’s the highest monthly demand volume registered since April 2013. And that’s just as of this week. There’s still another week left to go before the final sales tally for Gold Eagles comes in for the month of July. It could be one for the record books with 109,000 1-ounce Gold Eagles sold — with bargain hunters purchasing 6% of the U.S. Mint’s production from Money Metals Exchange.

As for Silver Eagles, the U.S. Mint has given up on trying to keep up with demand. After brisk sales during the first week of July, Mint officials suspended deliveries of Silver Eagles to dealers. Sales of the popular coins are set to resume next week. But we expect the Mint will be unable to get its act together and keep up with demand.
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July 24, 2015

State Officials Try to Hide Their Private Equity Oversight Failures by Asking the SEC to Exceed Its Authority

Nothing like elected officials using letter-writing to a weak agency and asking it to exceed its powers to hide the fact that they aren’t willing to do their jobs. And this shirking of duties is particularly grating since these officials, most important of all John Chiang, the State Treasurer of California, Thomas DiNapoli, the New York State Comptroller, and Scott Stringer, the New York City Comptroller, are powerfully positioned to propose legislation to solve the problem they are trying to fob off on the SEC.

The only good news in this pathetic case of responsibility three-cared monte by state and city officials is that it shows that they feel the need to be perceived to be Doing Something about private equity abuses.

Why the State Officials’ Letter to the SEC is a Joke

If you didn’t know better, and the tacit assumption is that the dumb chump public does in fact not know better, you might easily think a letter by state officials to SEC chairman Mary Jo White amounted to meaningful action. Here’s the overview from the Wall Street Journal; we’ve embedded a copy of the letter at the end of the post:
A group of states and cities said it intends to send a letter to the Securities and Exchange Commission late Tuesday asking for greater transparency and more frequent disclosures by private-equity funds. 
Around a dozen comptrollers and treasurers from New York to California want the SEC to demand private-equity funds make disclosures of fees and expenses more frequently than they do now…
This is patently ridiculous.

The SEC does not have the authority to order more frequent fee and expense disclosures. The information that the investors receive now is what they have obtained in their negotiations at the time they invest. They can calculate management fees from one of the documents they sign, the subscription agreement; they should be able to derive the so-called carry fees from annual audited fund financial statements. Those audited financial statements also contain fund-level expense information. 

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July 23, 2015

Commodities Collapsed Just Before The Last Stock Market Crash – So Guess What Is Happening Right Now?

If we were going to see a stock market crash in the United States in the fall of 2015 (to use a hypothetical example), we would expect to see commodity prices begin to crash a few months ahead of time.  This is precisely what happened just before the great financial crisis of 2008, and we are watching the exact same thing happen again right now.  On Wednesday, commodities got absolutely pummeled, and at this point the Bloomberg Commodity Index is down a whopping 26 percent over the past twelve months.  When global economic activity slows down, demand for raw materials sinks and prices drop.  So important global commodities such as copper, iron ore, aluminum, zinc, nickel, lead, tin and lumber are all considered to be key “leading indicators” that can tell us a lot about where things are heading next.  And what they are telling us right now is that we are rapidly approaching a global economic meltdown.

If the global economy was actually healthy and expanding, the demand for commodities would be increasing and that would tend to drive prices up.  But instead, prices continue to go down.

The Bloomberg Commodity Index just hit a brand new 13-year low.  That means that global commodity prices are already lower than they were during the worst moments of the last financial crisis

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July 22, 2015

China's Record Dumping Of US Treasuries Leaves Goldman Speechless

The big question is obviously what is driving these flows and how long they are likely to continue. We continue to take the view that a stock adjustment is at work, although it is clear that the turning point is yet to come. We will look at this in one of our next FX Views. In the interim, we think an easier question is what this means for G10 FX. This is because this shift in China’s balance of payments is sure to depress reserve accumulation across EM as a whole, such that reserve recycling – a factor associated with Euro strength in the past – is unlikely to be sizeable for quite some time.
In other words, for once Goldman is speechless, however it is quick to point out that what traditionally has been a major source of reserve reflow, the Chinese current and capital accounts, is no longer there.

It also means that what may have been one of the biggest drivers of DM FX strength in recent years, if only against the pegged Renminbi, is suddenly no longer present.

While the implications of this on the global FX scene are profound, they tie in to what we said last November when explaining the death of the petrodollar. For the most part, the country most and first impacted from this capital outflow will be China, something its stock market has already noticed in recent weeks.

But what is likely the take home message for non-Chinese readers from all of this, is that while there has been latent speculation over the years that China will dump US treasuries voluntarily because it wants to (as punishment or some other reason), suddenly China is forced to liquidate US Treasury paper even though it does not want to, merely to fund a capital outflow unlike anything it has seen in history. It still has a lot of 10 Year paper, aka FX reserves, left: about $1.3 trillion at last check, however this raises two critical questions: i) what happens to 10 Year rates when whoever has been absorbing China's Treasury dump no longer bids the paper and ii) how much more paper can China sell before the entire world starts paying attention, besides just JPM and Goldman... and this website of course.

Finally, if China's selling is only getting started, just what does this mean for future Fed strategy. Because one can easily forget a rate hike if in addition to rising short-term rates, China is about to dump a few hundred billion in paper on a vastly illiquid market.

Or let us paraphrase: how soon until QE 4?

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July 21, 2015

4 Things That Are Happening Today That Indicate That A Deflationary Financial Collapse Is Imminent

When financial markets crash, they do not do so in a vacuum.  There are always patterns, signs and indicators that tell us that something is about to happen.  In this article, I am going to share with you four patterns that are happening right now that also happened just prior to the great financial crisis of 2008.  These four signs are very strong evidence that a deflationary financial collapse is right around the corner.  Instead of the hyperinflationary crisis that so many have warned about, what we are about to experience is a collapse in asset prices, a massive credit crunch and a brief period of absolutely crippling deflation.  The response by national governments and global central banks to this horrific financial crisis will cause tremendous inflation down the road, but that comes later.  What comes first is a crisis that will initially look a lot like 2008, but will ultimately prove to be much worse.  The following are 4 things that are happening right now that indicate that a deflationary financial collapse is imminent…

#1 Commodities Are Crashing

#2 Oil Is Crashing

#3 Gold Is Crashing

#4 The U.S. Dollar Index Is Surging

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July 20, 2015

How The Fed And Wall Street Are Eating Their Seed Corn

When it comes to the stock market these days the overriding theme you hear from the financial media is “You’ve got to get in.” Another is, “Buy on the dips and average in.” Or, “You can’t profit if you aren’t in it” and more. So many more it would fill its own multi-volume set. However, there was some truth to many of those quips just a few years ago. Today, the amount of hidden reality to the actual destruction of one’s wealth is far more factual than any will let on. Let alone reveal.

I hear and speak to a lot of entrepreneurs who are absolutely mystified by not only the rise in the markets since the financial crisis in 2008. Rather, what many just can’t wrap their heads around is: “If the markets are a reflection of the economy. Then how in the world did we get up here?”  That line of thought I rendered down to be the overwhelming theme when discussing the current state of business affairs throughout the economy. This confusion is coming from a group of people who at one time would seek out Wall Street aficionados for insight or expertise. Today, they tend more to distrust what they hear. For what they lack in stock market expertise   – they make up in spades with an acutely precise B.S. meter honed by years of business acumen. And many confirm today; it’s off the charts far more than they can ever remember. So much so, as to avoid stepping in any of it – they just avoid it all together.

At one time entrepreneurs were not only sought out by Wall Street, rather, entrepreneurs did the same in kind. Before the advent of 401K plans and more it was entrepreneurs with the sale of their business, or profits from something else that fueled many a brokerage firms bottom line. And in many cases that relationship did well for both sides. There was true expertise needed to help one navigate the pitfalls of exactly how and where one was to put their money to work (usually a substantial amount such as after a business sale etc.) in relative safety as to finance the remainder of one’s years. Today, not only in much of that expertise gone – so too is the safety.

There’s probably no better example of this than what transpires at any bank branch today (those that are left that is). Opening a checking or savings account? You used to be incentivized to do so. But what this initial transaction is really designed for today is more along the lines of “a soft opening” to ask…”So, do you have a 401K account elsewhere?” Then the sales pitch is on by some seemingly just out of grad school quota seeking “financial adviser” with an array of pamphlets, jargon, and sales phrases anyone with any financial sense can see through. “Index this… diversify that…dividend paying yields ” and on and on. Along with whatever might be the latest tagline from the financial shows.

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July 17, 2015

The Bankruptcy Of The Planet Accelerates – 24 Nations Are Currently Facing A Debt Crisis

There has been so much attention on Greece in recent weeks, but the truth is that Greece represents only a very tiny fraction of an unprecedented global debt bomb which threatens to explode at any moment.  As you are about to see, there are 24 nations that are currently facing a full-blown debt crisis, and there are 14 more that are rapidly heading toward one.  Right now, the debt to GDP ratio for the entire planet is up to an all-time record high of 286 percent, and globally there is approximately 200 TRILLION dollars of debt on the books.  That breaks down to about $28,000 of debt for every man, woman and child on the entire planet.  And since close to half of the population of the world lives on less than 10 dollars a day, there is no way that all of this debt can ever be repaid.  The only “solution” under our current system is to kick the can down the road for as long as we can until this colossal debt pyramid finally collapses in upon itself.

As we are seeing in Greece, you can eventually accumulate so much debt that there is literally no way out.  The other European nations are attempting to find a way to give Greece a third bailout, but that is like paying one credit card with another credit card because virtually everyone in Europe is absolutely drowning in debt.

Even if some “permanent solution” could be crafted for Greece, that would only solve a very small fraction of the overall problem that we are facing.  The nations of the world have never been in this much debt before, and it gets worse with each passing day.

According to a new report from the Jubilee Debt Campaign, there are currently 24 countries in the world that are facing a full-blown debt crisis

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July 16, 2015

China-Led Bank Will "Keep America Honest," Provide Alternative To IMF, Nomura Says

The membership drive and subsequent launch of the Asian Infrastructure Investment Bank has been a favorite topic of ours since the UK threw its support behind the China-led venture in March.

London’s move to join the bank marked a diplomatic break with Washington, where fears about the potential for the new lender to supplant traditional US-dominated multilateral institutions prompted The White House to lead an absurdly transparent campaign aimed at deterring US allies from supporting Beijing by claiming that the AIIB would not adhere to international standards around governance and environmental protection. 

In the weeks and months following the UK’s decision, dozens of countries (including many traditional US allies) expressed interest in the new lender and by the time the bank officially launched late last month, the US and Japan (who dominate the IMF and ADB, respectively) were the only notable holdouts. 

As we never tire of discussing, the reason the AIIB matters is that it represents far more than a new foreign policy tool for Beijing to deploy on the way to cementing its status as regional hegemon.

The lender’s real significance lies in the degree to which it represents a shift away from the multilateral institutions that have dominated the post-war world economic order. In short, it’s a response not only to the IMF’s failure to provide the world’s most important emerging economies with representation that’s commensurate with their economic clout, but also to the perceived shortcomings of the IMF and ADB. The AIIB isn’t alone in this regard. Indeed, the BRICS bank can be viewed through a similar lens. 

It’s against this backdrop that we bring you the following insight from Nomura’s Richard Koo, who suggests that the Greek experience with the IMF shows how the institution sometimes fails to deliver and by extension, how important it is for the countries in need to have more than one option when it comes to securing crucial aid.

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