Tag Archives: commodities

Consensus Forming: China Heading Back Into Financial Crisis, by John Rubino

At the end of debt binges, there is a massive increase in speculation, because that’s one of the few uses of borrowed funds that still offers the prospect (always overstated) of a positive return. Such is the case now in China. From John Rubino at dollarcollapse.com:

China’s historic post-2009 debt binge flew largely under the radar — fooling most observers into thinking the global economy was recovering rather than just re-leveraging.

Now Beijing is back at it, borrowing over $1 trillion in this year’s first quarter, buying up commodities and creating the illusion of global growth. But this time the scam hasn’t gone unnoticed. Reporters, editors and money managers seem, at last, to be catching on. Some representative headlines: [see original article for links]

George Soros warns of credit crisis in China

Chinese cities dive back into debt to fuel growth even as defaults rise

China debt climbs to US$25 trillion

China’s banks cut bad debt buffer as profits flatline

Doug Noland, meanwhile, goes to the heart of the problem in last night’s Credit Bubble Bulletin:

I recall an early-1998 Financial Times article highlighting the explosive growth in Russian ruble and bond derivatives. Not only had the “insurance” market for risk protection grown phenomenally, Russian banks had become major operators in what had evolved into a huge speculative Bubble in Russian debt exposures. That was never going to end well.

There was ample evidence suggesting Russia was a house of cards. Yet underpinning this Bubble was the market perception that the West would not allow a Russian collapse. With such faith and the accompanying explosion in speculative trading, leverage and a resulting massive derivatives overhang, any break in confidence would lead to illiquidity, panic and a devastating bust. Just such an outcome unfolded in August/September 1998.

From a recent Financial Times article: “The [Chinese] market for pledge-style repos — short-term, bond-backed loans — is currently bigger than the stock of outstanding debt”. Within this undramatic sentence exists the potential for a rather dramatic global financial crisis. And, to be sure, seemingly the entire world has operated under the assumption that Chinese officials (and global policymakers in general) have zero tolerance for crisis – let alone a collapse. So Credit, speculation and leverage have been accommodated – and they combined to run absolute roughshod.

The Financial Times article includes a chart worthy of color printing and thumbtacking to the wall: “China’s Use of Bonds as Loan Collateral Rises Sharply”. The pink line shows “Onshore Market Bonds” having almost doubled since mid-2011 to about 40 TN rmb ($6.17 TN). The Red Line – “Pledge-Style Repos” – has ballooned four-fold since just early 2014 to surpass 40 TN rmb. So basically, in this popular market for inter-bank borrowings, borrowing banks have pledged bond positions larger than the entire market as collateral for their (perceived safe) short-term borrowing needs.

To continue reading: Consensus Forming: China Heading Back Into Financial Crisis


Do Any of the Current Rallies Pass “The Sniff Test”? No. by Charles Hugh Smith

From Charles Hugh Smith at oftwominds.com:

But you can’t tame the monster of speculative, legalized looting and financialization.

Everything from iron ore to copper to the Baltic Dry Index to stocks to bat guano is rallying. The problem is not a single rally passes “the sniff test:” is the rally the result of changing fundamentals, or is it merely short-covering and/or speculative hot money leaping from one rally to the next?

Every one of these rallies is bogus, a travesty of a mockery of a sham of price discovery, supposedly the core function of markets. What shift in fundamentals drove this rally? Higher profits? No, profits are declining, especially once the phony adjustments are stripped away. Is the global economy strengthening? Don’t make us laugh!

To continue reading: Do Any of the Current Rallies Pass “The Sniff Test”? No.

Debt, Deterioration, Deflation, Depression, and Disorder Are Here, by Robert Gore

A SLL article discussed “The Economics of Debt, Deterioration, Deflation, Depression, and Disorder.” Instead of individual postings that confirm the presence of all of the above, self-explanatory titles are linked to the articles for those who want all the gory details. By the way, one of the reasons you read SLL is because the above referenced SLL article was posted November 17, 2014, when the Dow and S&P highs were still in the future and economists and Wall Street seers were projecting strong growth and investment gains in 2015. If you have to wait for the headlines to figure out what’s going on, you will, assuredly, always be a day late and a dollar short. The headlines and links:

Can We See a Bubble If We’re Inside the Bubble? by Charles Hugh Smith

No Hiding From Debt Slump, by Lisa Ambramowicz at Bloomberg

Saudi Debt Risk on Par With Junk-Rated Portugal as Oil Slides, by Ahmed A. Manatalla and Abigail Moses at Bloomberg

Crude Falls Below $30 a Barrel for the First Time in 12 Years, by Mark Shenk at Bloomberg

Copper Breaks $2 Level, Sags to Six-Year Low As Barclays Cuts Forecasts on China, Joe Deaux and Eddi Van Der Walt at Bloomberg

Crop Surplus Is Bad News for America’s Farms, by Alan Bjerga and Jeff Wilson

Maybe Valuations Do Matter, from The Burning Platform

OK, I Get it, this is Going to be a Mess: Standard & Poor’s Lowers Boom at Worst Possible Time, by Wolf Richter at Wolf Street

Amazon And The Fantastic FANGs——A Bubblicious Breakfast Of Unicorns And Slippery Accounting, by David Stockman at David Stockman’s Contra Corner

And this was only a representative sample of articles!




What Will China Dump Next, After Treasuries, to Keep Control? by Wolf Richter

From Wolf Richter at wolfstreet.com:

“Practically boundless” future capital outflows.

“Beneath all of the financial turbulence there lurks, in my view, a credit crisis; I fear the worst now,” UBS economic adviser George Magnus told Bloomberg TV today. The reform agenda “has stalled,” he said, and “things are looking much bleaker for China going forward.”

And so on Monday, we got another flavor of it.

The Shanghai Composite index plunged 5.3%, to 3016, down 15% so far this year. The Shenzhen Composite fell 6.6%. Hong Kong’s Hang Seng fell 2.8% to 19888, below 20000 for the first time since June 2013, and down 30% from its April high.

Everyone had hoped that China’s “National Team” would jump into the fray and bail everyone else out, but it didn’t. And the People’s Bank of China didn’t offer any big new remedies either. But it did stabilize the yuan after it had dropped 1.5% against the dollar last week, and about 6% since mid-August.

In Hong Kong, interbank yuan lending rates broke all records since the Treasury Markets Association started compiling the data in June 2013, with the overnight Hong Kong Interbank Offered Rate spiking 939 basis points to 13.4%.

And copper did it again, ratting on China’s real economy. Copper goes into anything from skyscrapers to smartphones. China is the world’s largest copper consumer, accounting for over 40% of global demand. And on Monday, copper dropped 2.6% to $1.97 per pound, the lowest level since May 2009.

Buffeted by, among other things, fears about slowing demand from the industrial sector in China, oil plunged – with WTI down 6.1% to $31.13 a barrel

To prop up the yuan and counter the impact of capital flight, China had dumped $510 billion of foreign exchange reserves last year, drawing them down to a three-year low of $3.33 trillion. And that was just the beginning.

To continue reading: What Will China Dump Next?

Junk-Bond Risk Gauge Jumps as China Meltdown Adds to Energy Rout, by Sridhar Natarajhan and Michelle Davis

From Sridhar Natarajan and Michelle Davis at blomberg.com:

Premium on high-yield debt approaching most in three years

The goal is to `avoid land mines’ with oil at 12-year low

Junk-bond investors coming off their first losing year since 2008 are in the crosshairs again, as a stock-market meltdown in China and a plunge in oil prices cloud the outlook for debt sold by the least credit-worthy companies.

The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, surged as much as 21 basis points to 516 basis points, rising toward the highest mark in three years. The average borrowing costs for the riskiest portion of the high-yield market surged to 18.4 percent, Bank of America Merrill Lynch index data show, a level not seen since 2009.

“The whole world’s interrelated and you can’t get around that,” said Andrew Brenner, head of international fixed income for National Alliance Capital Markets in New York. “High-yield’s going to be under pressure just because oil’s under pressure. And you’re having this whole risk-off situation.”

The price of crude has plunged 10 percent this week and touched its lowest level since 2009, pushing the relative yield on energy-company debt to more than 13.5 percentage points, Bloomberg indexes show. The industry, which is clocking its worst performance on record, makes up about 15 percent of the junk-bond gauge.

‘Pointing Negative’

“With commodities, there are 10 things that can go right or wrong, and right now almost all of them are pointing negative,” said John McClain, a portfolio manager at Diamond Hill Capital Management Inc., in Columbus, Ohio, which oversees about $17 billion. “You want to avoid land mines in this market. You don’t want to be a hero. It’s not a time to reach.”

The People’s Bank of China cut the yuan’s reference rate against the dollar by 0.5 percent on Thursday, the biggest since Aug. 13, two days after a surprise devaluation. The Shanghai Composite Index tumbled 7.3 percent before trading was halted by new circuit-breakers that some criticized for exacerbating declines.

Later, the nation’s regulator said it was suspending the circuit-breakers.
China’s central bank further spooked the market when it announced that foreign-exchange reserves posted the first annual drop since 1992, spurring concern that capital flight from the world’s second-largest economy is accelerating.

To continue reading: Junk-Bond Risk Gauge Jumps 

Now Comes The Great Unwind—-How Evaporating Commodity Wealth Will Slam The Casino, by David Stockman

Happy New Year! From David Stockman at davidstockmanscontracorner.com:

The giant credit fueled boom of the last 20 years has deformed the global economy in ways that are both visible and less visible. As to the former, it only needs be pointed out that an economy based on actual savings from real production and income and a modicum of financial market discipline would not build 65 million empty apartment units based on the theory that their price will rise forever as long as they remain unoccupied!

That’s the Red Ponzi at work in China and its replicated all across the land in similar wasteful investments in unused or under-used shopping malls, factories, coal mines, airports, highways, bridges and much, much more.

But the point here is that China is not some kind of one-off aberration. In fact, the less visible aspects of the credit ponzi exist throughout the global economy and they are becoming more visible by the day as the Great Deflation gathers force.

As we have regularly insisted, there is nothing in previous financial history like the $185 trillion of worldwide credit expansion over the last two decades. When this central bank fueled credit bubble finally reached its apogee in the past year or so, global credit had expanded by nearly 4X the gain in worldwide GDP.

Moreover, no small part of the latter was simply the pass-through into the Keynesian-style GDP accounting ledgers of fixed asset investment (spending) that is destined to become a write-off or public sector white elephant (wealth destruction) in the years ahead.

The credit bubble, in turn, led to booming demand for commodities and CapEx. And in these unsustainable eruptions layers and layers of distortion and inefficiency cascaded into the world economy and financial system.

To continue reading: Here Comes The Great Unwind

Dislocation Watch: Getting Run Over on Third Avenue, by Pater Tenebrarum

This is a good article that amplifies some of the points made in Crisis Progress Report (14): Global Margin Call. From Pater Tenebrarum at davidstockmanscontracorner.com:

It has become clear now that the troubles in the oil patch and the junk bond market are beginning to spread beyond their source – just as we have always argued would eventually happen. Readers are probably aware that today was an abysmal day for “risk assets”. A variety of triggers can be discerned for this: the Chinese yuan fell to a new low for the move; the Fed’s planned rate hike is just days away; the selling in junk bonds has begun to become “disorderly”.

Recently we said that JNK [a junk bond ETF] looked like it may be close to a short term low (we essentially thought it might bounce for a few days or weeks before resuming its downtrend). We were obviously wrong. Instead it was close to what is beginning to look like some sort of mini crash wave:

To be sure, such a big move lower on vastly expanding volume after what has already been an extended decline often does manage to establish a short to medium term low. There are however exceptions to this “rule” – namely when something important breaks in the system and a sudden general rush toward liquidity begins.

As we have often stressed, we see the corporate bond market, and especially its junk component, as the major Achilles heel of the echo bubble. One of its characteristics is that there are many instruments, such as ETFs and assorted bond funds, the prices of which are keying off these bonds and which are at least superficially far more liquid than their underlying assets. This has created the potential for a huge dislocation.

We would also like to remind readers that it is not relevant that the main source of the problems in the high yield market is “just” the oil patch. In 2006-2007 it was “just” the sub-prime sector of the mortgage market. In 2000 it was “just” the technology sector. Malinvestment during a boom is always concentrated in certain sectors (in the recent echo boom the situation has been more diffuse than it was during the real estate bubble, but the oil patch is certainly one of the most important focal points of malinvestment and unsound credit in the current bubble era).

To continue reading: Dislocation Watch: Getting Run Over on Third Avenue