China Refuses To Confirm Trade Deal As Local Media Stays Dead Silent

Markets are closed in Beijing, the workday is over, and there no official reports in local media of an actual trade deal, that is because, as we explained on Thursday night, the language of the deal will never be made public and there would be no signing event between President Trump and President Xi. One may ask if there is even a "deal"?

As the WSJ writes this morning, China indicated that a near-term trade agreement with the U.S. has yet to be completed despite President Trump’s signoff, highlighting the unpredictability of a negotiation process that has rattled global markets and businesses.

Trump on Thursday approved a so-called phase-one trade pact that will scale back existing tariffs on Chinese imports and eliminate new levies scheduled to take effect on Sunday, in exchange for a written pledge from Beijing to buy tens of billions of dollars worth of U.S. farm products, among other concessions.

While Mr. Trump was “upbeat and enthusiastic about this breakthrough,” in the words of Michael Pillsbury, an adviser to the president during the trade talks, the mood in Beijing has been decidedly more sober.

As noted above, none of China’s state-owned media outlets or economic agencies involved in the trade negotiations made any public statement on Friday about the deal which according to Trump was finalized.

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Hashrate Domination: China Controls Two-Thirds Of The World's Crypto Network's Processing Power

A new report from Reuters, citing CoinShares, indicates that China's Bitcoin miners now control a whopping 66% of the world's crypto network's processing power. This could be bad news for US miners as it signals China is quickly advancing.

Also known as "hashrate," it's the speed at which a computer is performing an operation in Bitcoin code to unlock coins, China has been steadily gaining hashrate share this year.

In June, China's Bitcoin miners controlled 60% of the global hashrate, and now the figure is up to 66% in December.

Chris Bendkisen, head of research at CoinShares, believes the rapid increase in the Chinese share of hashrate could be due to the deployment of advanced mining technology.

"This is beneficial to the Chinese mining industry," said Bendiksen. "If you are the first to increase your proportion of the hashrate, and you can do that before your competitors, that's generally good."

Mining crypto has become more difficult over the last several years as profitability sags. The overall Bitcoin hashrate has risen 80% since June, which in recent times, has created stronger profitability for miners who have access to cheap energy.

With China controlling more and more of the world's Bitcoin hashrate, some worry that the US could be falling behind the crypto curve, as Beijing is making a state effort to be a leader in blockchain.

Xiao Wunan, an executive vice-chairman of the China-backed Asia Pacific Exchange and Co-operation Foundation (APECF), recently told CNBC that Beijing's crypto initiatives are strategically important to the communist party.

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Aramco Stock Soars Limit Up In Debut After Saudis Force Locals To Buy

Is Jamie Dimon about to get the old bonesaw for leaving $180BN on the table?

Saudi Arabia's oil company Aramco soared 10% limit up on its first day of trading, reaching a valuation of $1.88 trillion, higher than any other publicly traded company in the world. This means that after pricing its IPO at $1.7 trillion, Jamie Dimon left about $180 billion on the table, which will hardly impress the Crown Prince.

The record valuation reflects an oversubscribed book of mostly local investors who bought shares on the Saudi Tadawul stock exchange after they were forced by Riyadh to pump the stock. 

Aramco only sold a tiny 1.5% sliver in the company, meaning that the kingdom and Public Investment Fund of Saudi Arabia (PIF) could easily manipulate the price with such a small fraction of the stock public. Aramco listed on the Tadawul exchange because of other international exchanges and their investors found it hard to value the oil company near the $2 trillion levels. 

"They have had to launch the IPO on their own stock exchange as the valuation was unlikely to be achieved elsewhere," said John Colley, associate dean at Warwick Business School in the U.K, who spoke with Reuters. 

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Small Business Optimism Surges As Plans To Raise Worker Compensation Soar Most In 30 Years

After stagnating for much of the past year following its 2018 all time highs, small business optimism posted the largest month-over-month gain in 19 months, since May 2018, rising 2.3 points to 104.7 in November, up from 102.4, and beating the consensus estimate of 103.0.

The "exceptional" Optimism Index reading was bolstered by seven of the 10 Index components advancing, led by a 10-point improvement in earnings.

Owners reporting it is a good time to expand increased by 6 points and those expecting better business conditions increased by 3 points. The NFIB Uncertainty Index fell 6 points in November to 72, adding to the 4-point drop in October and the lowest reading since May 2018.

In other words, US small business were swept by the same euphoria they felt when Trump was first elected.

“This historic run may defy the expectations of many, but it comes as no surprise to small business owners who understand what a supportive tax and regulatory environment can do for their companies,” said NFIB Chief Economist William Dunkelberg, who added what will come as music to Trump's ears: “As the two-year anniversary of the Tax Cuts and Jobs Act’s passage approaches this month, small businesses, the world’s third largest economy, are using those savings to power the American economy.”

Earnings, or the frequency that owners report positive profit trends, rose 10 points, 1 point below the record set in May 2018, to a net 2 percent reporting quarter on quarter profit improvements.

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The Next Pearl Harbour? China's Gold-Backed Crypto Currency Will Blindside US Dollar

Indeed, this weekend marks the 78th anniversary of the attack on Pearl Harbor in Hawaii, which opened the door for the United States to enter World War II. Turn on your TV and you will see military mavens rambling on, pontificating about ‘the defense of the realm’, all the while completely aloof and unaware of the American empire’s real Achilles heel.

Recent, financial pundit and TV host Max Keiser outlined such a scenario, and warned that the US will be blind-sided the day that China introduces its gold-backed crypto currency – an absolute game changer which would create a “catastrophic trapdoor opening underneath the US economy,” said Keiser.

Not surprisingly, very few mainstream financial pundits in the West are willing to admit that China possesses gold reserves in excess of 20,000 tons, and by introducing a gold-backed cryptocurrency, it has the ability to “kill the US dollar deader than a door nail …. a new Pearl Harbor-type event and it’s coming in the next six to nine months.”

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Shale's Debt-Fueled Drilling Boom Is Coming To An End

The financial struggles of the U.S. shale industry are becoming increasingly hard to ignore, but drillers in Appalachia are in particularly bad shape.

The Permian has recently seen job losses, and for the first time since 2016, the hottest shale basin in the world has seen job growth lag the broader Texas economy. The industry is cutting back amid heightened financial scrutiny from investors, as debt-fueled drilling has become increasingly hard to justify.


But E&P companies focused almost exclusively on gas, such as those in the Marcellus and Utica shales, are in even worse shape. An IEEFA analysis found that seven of the largest producers in Appalachia burned through about a half billion dollars in the third quarter.

Gas production continues to rise, but profits remain elusive. “Despite booming gas output, Appalachian oil and gas companies consistently failed to produce positive cash flow over the past five quarters,” the authors of the IEEFA report said.

Of the seven companies analyzed, five had negative cash flow, including Antero Resources, Chesapeake Energy, EQT, Range Resources, and Southwestern Energy. Only Cabot Oil & Gas and Gulfport Energy had positive cash flow in the third quarter.

The sector was weighed down but a sharp drop in natural gas prices, with Henry Hub off by 18 percent compared to a year earlier. But the losses are highly problematic. After all, we are more than a decade into the shale revolution and the industry is still not really able to post positive cash flow. Worse, these are not the laggards; these are the largest producers in the region.

The outlook is not encouraging. The gas glut is expected to stick around for a few years. Bank of America Merrill Lynch has repeatedly warned that unless there is an unusually frigid winter, which could lead to higher-than-expected demand, the gas market is headed for trouble. “A mild winter across the northern hemisphere or a worsening macro backdrop could be catastrophic for gas prices in all regions,” Bank of America said in a note in October.

The problem for Appalachian drillers is that Permian producers are not really interested in all of the gas they are producing. That makes them unresponsive to price signals. Gas prices in the Permian have plunged close to zero, and have at times turned negative, but gas production in Texas really hinges on the industry’s interest in oil. This dynamic means that the gas glut becomes entrenched longer than it otherwise might. It’s a grim reality plaguing the gas-focused producers in Appalachia.

With capital markets growing less friendly, the only response for drillers is to cut back. IEEFA notes that drilling permits in Pennsylvania in October fell by half from the same month a year earlier. The number of rigs sidelined and the number of workers cut from payrolls also continues to pile up.

NEVER MISS THE

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China Set To Make History With Record Number Of Bond Defaults In 2019

While China is bracing for what may be a historic D-Day event on December 9, when the "unprecedented" default of state-owned, commodity-trading conglomerate Tewoo with $38 billion in assets may take place, it has already been a banner year for Chinese bankruptcies.

According to Bloomberg data, China is set to hit another dismal milestone in 2019 when a record amount of onshore bonds are set to default, confirming that something is indeed cracking in China's financial system and "testing the government’s ability to keep financial markets stable as the economy slows and companies struggle to cope with unprecedented levels of debt."

After a brief lull in the third quarter, a burst of at least 15 new defaults since the start of November have sent the year’s total to 120.4 billion yuan ($17.1 billion), and set to eclipse the 121.9 billion yuan annual record in 2018.

The good news is that this number still represents a tiny fraction of China’s $4.4 trillion onshore corporate bond market; the bad news is that the rapidly rising number is approaching a tipping point that could unleash a default cascade, and in the process fueling concerns of potential contagion as investors struggle to gauge which companies have Beijing’s support. As Bloomberg notes, policy makers have been walking a tightrope as they try to roll back the implicit guarantees that have long distorted Chinese debt markets, without dragging down an economy already weakened by the trade war and tepid global growth.

"The authorities have found it hard to rescue all the companies," said Wang Ying, a Shanghai-based analyst at Fitch Ratings, perhaps envisioning at least two banks that have experienced depositor runs in the month of November in the aftermath of an unprecedented succession of bank failures earlier in the year.

It's not just banks however: this year’s debt woes have spread to a broad array of industries, from property developers and steelmakers to new-energy firms and software makers. The types of borrowers facing repayment difficulties has also expanded from private companies and local state-run firms to business arms of universities, an obscure and loosely regulated corner of China’s corporate world.

China's two latest defaults involved just such a company; on Monday Peking University Founder Group shocked investors after failing to repay a 2 billion yuan bond. The same day, Tunghsu Optoelectronic Technology, a maker of photoelectric display components, also failed to deliver early repayment on both interest and principal for a 1.7 billion yuan note.

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Russian Gas Mega-Pipeline To China Goes Online As Putin & Xi Hail Closer Ties

Late Monday Chinese President Xi Jinping and Russia's Vladimir Putin jointly launched the major unprecedented cooperative project that had been years in the making called the 'Power of Siberia' gas pipeline.

The China-Russia east-route pipeline is now providing China with Russian natural gas, which according to Chinese state media is expected to reach 5 billion cubic meters in 2020 and increase to 38 billion cubic meters annually from 2024.

Crucially, S&P Global Platts estimates that total sales through the pipeline is projected to meet nearly 10% of China's entire gas supply by 2022, ensuring vital energy security as Beijing continues to feel the pressure and uncertainty of the trade war with Washington. 

The ceremony to officially bring the pipeline online was held as a video call between Xi and Putin was underway. Xi told Putin: "The East-route natural gas pipeline is a landmark project of China-Russia energy cooperation and a paradigm of deep convergence of both countries' interests and win-win cooperation."

The deal had been cemented in May 2014 when Russian gas giant Gazprom signed a 30-year contract with China National Petroleum Corp, after which the pipeline agreements were signed with both leaders present in Shanghai in later 2014.

Gazprom CEO Alexei Miller announced to both leaders that the pipeline had been opened via video link. "Gas is flowing to the gas transmission system of the People's Republic of China," he said.

A 30-year deal was signed by Putin and Xi in 2014, and while a final figure has not been announced, it is believed to be worth more than $400 billion. — CNN

Gazprom will oversee operation of the mammoth pipeline which runs more than 8,100 kilometers (5,000 miles) across the two countries.


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The Problem With "Green" Monetary Policy

As an alarming new United Nations report shows, climate change is probably the biggest challenge of our time. But should central banks also be worrying about the issue? If so, what should they be doing about it?

Central-bank representatives who do decide to make public speeches about climate change cannot deny the scale and scope of the problem; to do so would be to risk their own credibility. But the same is true when central bankers feel obliged to discuss the distribution of income and wealth, rising crime rates, or any other newsworthy topic. The more that central banks’ communications strategy focuses on trying to make themselves “popular” in the public’s eyes, the greater the temptation to address topics outside their primary remit.

Beyond communicating with the public, the question, of course, is whether central banks should try to account for environmental considerations when shaping monetary policy. Obviously, climate change and corresponding government policies in response to it can have powerful effects on economic development. These consequences are reflected in all kinds of variables – growth, inflation, employment levels – that will in turn affect central-bank forecasts and influence monetary-policy decisions.

Likewise, natural disasters and other environmental events – actual or potential – can pose implicit risks to entire classes of financial assets. Regulators and supervisors charged with assessing risk and associated capital needs must take this environmental dimension into account. At a minimum, the high uncertainty stemming from these risks implies a huge challenge for assessing the stability of the financial system and corresponding macroprudential measures. And these risk factors are also increasingly relevant for monetary-policy decisions, such as when central banks should buy bonds or (in some cases) equities.

But the growing public demand that central banks contribute more actively to the fight against climate change leads to a different dimension. In theory, central banks could introduce preferential interest rates for “green” activities – thus driving up the prices of “green bonds” – while adopting a more negative attitude toward noxious assets, such as those tied to fossil fuels. And yet, assessing whether and to what extent an asset is environmentally harmful or helpful would be extremely difficult.

Putting aside these more technical issues, the broader question remains: Should central banks assume responsibility for implementing policies to combat climate change? A number of prominent central bankers have already argued that they should. And current proposals for extending central banks’ mandate have come on top of growing concerns about income distribution and other issues tangentially related to monetary policy.

One is reminded of an ironic comment by the great Chicago School economist Jacob Viner.

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How Inflation, Prudence, And Fundamentals Are Setting Up Gold To Soar

International Man: Governments around the world, including the United States, are printing trillions of currency units. This will continue to significantly devalue these paper currencies and create inflation.

Doug Casey recently said:

With all the money that’s been created by governments and central banks, the chances are excellent we’re going to have a gigantic bull market. Maybe the last one, since I expect the world is going back to using gold as money—at which point we’ll have a stable gold price.

In the meantime, I think mining stocks could go absolutely insane. The prices will have no relation to fundamentals, because everybody will want to own them.

How do you think the situation is going to play out for gold and precious metals?

Dave Forest: Inflation is a given. I see it every day in commodities, although many mainstream investors don’t recognize it. Yet.

In the 2000s, investors were over the moon when gold broke above $1,000 per ounce and copper passed $1.50 per pound. During the previous commodities bear market, those levels were unthinkable.

But now, $1,000 gold is peanuts. Hardcore bullion investors were distraught in 2016 when gold “plunged” close to $1,000. That’s seen as a depressed and unsustainable price.

Same with copper. That sector’s been in the doldrums, because the price fell below $2.50 per pound. If you’d told a copper miner in 1999 they’d have $2.50 copper, they would have popped the champagne! Today, it’s seen as scraping the bottom of the barrel.

The thing is, back in the “old” days, you could mine and process an ounce of gold for $100. Today, production costs are more like $600 per ounce. Closer to $1,000 per ounce if you add in sustaining and expansion capital.

That’s the real reason metals, including gold, have to go higher. The gold price isn’t arbitrary. The price must exceed production costs—or mines will shut down and supply will run out.

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Global Auto Sales Expected To Crash More Than After The Financial Crisis

The global auto industry continues to deteriorate, namely due to broke consumers after a decade of low-interest rates and endless incentives. 

The auto slowdown has sparked manufacturing recessions across the world, including manufacturing hubs in the US, Germany, India, and China. A prolonged downturn will likely result in stagnate global growth as world trade continues to decelerate into 2020. 

The Fitch Ratings economics team published a new report earlier this week, first reported by CNBC, outlining how global auto sales are expected to crash at a rate not seen since the last financial crisis. 

Global auto sales fell to 80.6 million in 2018 from 81.8 million in 2017, which was the first annual decline in nearly a decade. 2019 sales are likely to fall by 3.1 million, or 4%, to 77.5 million, the most significant drop since 2008. The slowdown in auto sales has been one of the largest contributors to the global manufacturing recession. 

"The downturn in the global car market since the middle of 2018 has been a key force behind the slump in global manufacturing, and the car sales picture is turning out a lot worse than we expected back in May," Brian Coulton, Fitch Chief Economist, said in a statement. 

China has been labeled as the primary source of falling demand. YTD auto sales in the country are down 11% versus the first ten months of 2018. There are no signs that a recovery in the industry will be seen in 2020. The US and Western Europe are expected to see declines of 2% this year. Brazil, Russia, and India are expected to record a drop of at least 5.5% YTD. 

"Structurally, environmental concerns about diesel cars — and anticipated regulatory responses — and the growth of ride-hailing and car-sharing schemes are weighing on auto demand," Coulton told CNBC.

Fitch also warned that the global auto industry won't rebound in 2020, and it's also likely the industry has entered a low growth period. 

"While we don't see a further sharp decline in global manufacturing in 2020, the auto outlook is pointing to stabilization at best rather than any sharp rebound," Coulton said.

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European Central Banks Are Slowly Preparing For Plan B: Gold

It was long believed in the gold space that Western central banks are against gold, but things have changed, for quite some years now. Instead of discouraging people from buying gold, or convincing them that gold is an irrelevant asset, many of these central banks are increasingly honest about the true properties of this monetary metal. Stating that gold is the ultimate store of value, that it preserves its purchasing power through time and is a global means of payment. Such statements, combined with actions that will be discussed below, reveal that more and more central banks are preparing for plan B.

The Bundesbank (the German central bank) published a book last year named Germany’s Gold. In the introduction, written by the President of the Bundesbank Jens Weidmann, the view of this bank leaves no room for interpretation. Weidmann writes (emphasis mine):

Ask anyone in Germany what they associate with gold and, more often than not, they will say that it is synonymous with enduring value and economic prosperity.

Ask us at the Bundesbank what our gold holdings mean for us and we will tell you that, first and foremost, they make up a very large share of Germany’s reserve assets ... [and they] are a major anchor underpinning confidence in the intrinsic value of the Bundesbank’s balance sheet.

The Bundesbank produced this publication to give a detailed account, the first of its kind, of how gold has grown in importance over the course of history, first as medium of payment, later as the bedrock of stability for the international monetary system.

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Futures Fade After Algos Sell Latest Burst Of "Trade Deal Optimism"

Is the oldest trick in the Trump market manipulation book finally coming to an end?

12 hours after futures spiked by 10 points to a a new record high, after algos reacted as if stung to the following China headline:

CHINA, U.S. HELD CALL TODAY; AGREED TO CONTINUE PHASE-1 TALKS
... and which said that China’s Vice Premier Liu He, Robert Lighthizer and Steven Mnuchin held a phone call in which they "reached consensus on properly resolving relevant issues" and agreed to stay in contact on the remaining points for a “phase one” trade deal during a phone, yet which if one thinks about it said absolutely nothing new - the US and China agreed to continue talks to reach a deal which Trump already announced back on October 11? - futures have faded the entire move higher and as in danger of rolling over as it suddenly appears that algos are no longer responding to the daily injections of artificial "trade deal optimism."


China's Global Times tweeted later that topics in the call may have included tariff removal, agricultural purchase and a possible face-to-face meeting citing experts close to trade talks. Furthermore, Global Times later reiterated that China and the US have basically reached broad consensus on a phase one trade deal including the removal of tariffs, although some differences remain over how much tariffs should be rolled back citing experts close to the talks. Yet if that is the case why did the two sides agree to continue the talks, and is this just a charade to keep stocks high, Trump happy, and China free to intervene in HK without angering the US president?

"We take any positive pronouncements on a trade deal with healthy skepticism given how long this has dragged out," Rabobank strategists wrote in a note Tuesday. "It would seem that any major progress on the trade deal front will be hindered by the ongoing unrest in Hong Kong." Perhaps this skepticism is starting to rub off on the algos too?

The following "flow" chart shows the most notable moments and comments in the past year of the US-China trade war, whose end continues to remain "just around the corner":

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China's 'Official' Virtual Currency Could Be Arriving "Quite Soon" To "Challenge The U.S."

As if the trade war - and soon to be currency war - between China and the U.S. needed another wrench thrown in its gears...

China sent cryptocurrencies tumbling on Friday after re-cracking-down on exchanges that are operating illegally against authorities' ban.

On Nov. 22, authorities in Shenzhen have identified a total of 39 exchanges falling foul of China’s cryptocurrency trading ban, according to local news outlet Sanyan Finance. 

It remains unknown what consequences the exchanges will face, with Sanyan highlighting a desire to crack down on liquidity.

It appears that China's blockade on non-government-sanctioned crypto trading, could be on its way to launching its own digital currency within the next 6 to 12 months, according to fund manager Edith Yeung, who recently appeared on CNBC. 

The Chinese government has been researching the idea over the last few years and has reportedly identified entities to use for a potential rollout, Yeung says. 

“It’s really been something (that’s) been in the works for the last few years,” she said on Wednesday during an interview. Yeung is a partner at blockchain-focused venture capital fund Proof of Capital. 

When she was asked how long it might be before the launch becomes reality, she responded "Quite soon. So I definitely think within the next 6 to 12 months."

And China has recently embraced blockchain, with state media reporting that President Xi Jinping said the country should look to "take a lead" in the technology. 

Wendy Liu, head of China strategy for UBS, also said that there was greater willingness to work with blockchain and 5G in China because they will help facilitate and manage the world's biggest country by population. 

Liu commented: “Due to its own needs, (China) is going to push in that direction and you see this willingness to back these technologies more so than anywhere else.”

Meanwhile, tensions between China and the U.S. continue to hit new fever pitches, as the trade war standoff between the two countries continues. Yeung says that even thought the dollar remains the world's reserve currency, the wider use of the Yuan could "challenge the U.S."

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UBS Has No Choice In Passing Negative Rate Pain To Customers

There's been talk that the Federal Reserve will slam interest rates to zero or even negative when the next recession strikes. President Trump's support for negative interest rates has quickly increased in the last several months as the latest tracking estimates for Q4 GDP have tumbled to sub 0.4%. 

It seems that policy rates in the US are too high -- and will likely conform to the rest of the world, which is near zero to negative territory. This has undoubtedly alarmed UBS CEO Sergio Ermotti, who said banks have "no choice" but to pass on the negative rate pain to customers. 

Ermotti said UBS "will not pass negative rates to smaller clients, the personal banking clients," that's because if UBS and other EU banks actually passed along negative rates to poor and middle-class families -- that would quickly spark unwanted social unrest that could crash the entire system. 

"Right now, the threshold is very high still," Ermotti said. "It's difficult to make a prediction right now, but we are quite convinced it's not going to go down to smaller investors."

And of course, banking elites are smart enough not to pass on negative rates to poor people, but as per the Bloomberg interview, Ermotti will be targeting high-net-worth investors with more than 500,000 euros or 2 million Swiss francs. 

G4 policy rates are near zero, with the exclusion of the US. But with the Federal Reserve embarking on a new interest rate cut cycle in response to collapsing global growth, it seems that policy rates across the world could go deeper into the negative territory through 2020. 

The ECB and SNB have slammed rates into negative territory in recent years in hopes to stimulate domestic and regional growth by charging banks to deposit funds, rather than lending to consumers or businesses, Bloomberg noted. 

Negative interest rates have been in an absolute disaster in Europe, with Germany teetering on the edge of a recession. 

Though Trump on Twitter has been begging for negative rates for the last several months as the US economy grinds to halt in Q4. Trump could see negative rates, but it will be for all the wrong reasons, and then US banks will have to make the decision that European banks are currently going through, which is how to pass along negative rates to customers. 

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