Archive - Jan 21, 2014

2013 was an absolutely seismic year for gold, but, as Grant Williams details in his latest letter, the way in which the tectonic plates shifted has yet to be fully understood. Simply put, the gold in every central bank's possession around the world is the property of the citizens of that country - not of the incumbent politicians or central bankers. Consequently, if the people want it audited, there shouldn't be any reason to say no ... unless... Williams firmly believes that in the years to come, when we look back at the great game being played in gold, we will pinpoint January 16, 2013, as the day when it all began to unravel - the day the Bundesbank blinked and demanded its gold...

As much as the “Controllers” in Huxley's Brave New World were indeed in control, the human spirit still managed to bubble to the surface. To the point that the controllers had to designate certain islands for the iconoclasts which inevitably emerged from within the “Alpha” class. All of the drugs, brainwashing and conditioning couldn’t totally break the human spirit. As such, it was a much more hopeful and nuanced novel than many expect it to be. Twenty six years after its publication, Huxley wrote Brave New World Revisited, in which he takes stock of the post World War II period. His analysis is grave. He saw the world progressing toward his nightmare much faster than he anticipated. Brave New World Revisited is a brilliant work of non-fiction and filled with almost incomprehensibly prescient predictions. It also provides a great deal of advice to future generations. Advice which we must immediately heed.

Despite Erdogan's paranoia over "an interest rate" lobby or blaming the Lira's collapse on the Fed, as Gavekal's Nick Andrews notes, Turkey is showing no signs of stabilization. As the sell-side scrambles to explain how this is all priced in and "contained," it is very apparent from the following chart just how vulnerable to contagion the world is if Turkey defaults. The country's liabilities have multipled dramatically in recent years with over $350 billion of foreign bank exposure to Turkey on an ultimate risk basis.

While last night's almost unprecedented reverse repo liquidty injection into the Chinese banking system stopped the bleeding of short-dated money-market rates briefly, the likelihood remains that a shadow-banking system default will occur: As CASS's Zhang noted:

*CHINA TRUSTS AND SHADOW BANKING TO SEE DEFAULTS IN 2014; DEFAULTS WOULD BE GOOD THING

Perhaps that explains why China's CDS spread remains at its highest since the summer credit crunch, barely budging on last night's cash drop. At double the default risk of Japan, China appears far from out of the contagion fire.

It is useful to remember that way back in 2006 U.S. President George Bush and Shinzo Abe, then in his first term as Japanese prime minister, each in their own way achieved far-reaching changes in their respective ties with India. While George Bush helped end the nuclear apartheid against India, Abe unambiguously declared (in 2007) that “a strong India is in the best interest of Japan and a strong Japan is in the best interest of India.” Since then, after the initial euphoria, India-U.S. ties have plummeted perhaps to their lowest level in the past two decades, not least because of the recent Khobragade affair. The relationship between India and Japan, on the other hand, has found new momentum in the past couple of years. It is no surprise to find that Shinzo Abe is at the helm in Tokyo again.

Two Las Vegas casinos will become the first known US gambling premises to accept the increasely popular cryptocurrency. The co-owned Golden Gate (Las Vegas' oldest casino) and The D Las Vegas Casino Hotel will begin accepting bitcoins on Wednesday as payment for hotel rooms and related purchases, but, as Bloomberg Businessweek reports, state regulators are unlikely to allow casinos to exchange chips for bitcoins any time soon, according to A.G. Burnett, chairman of the Nevada Gaming Control Board.

"Close relatives of China’s top leaders have held secretive offshore companies in tax havens that helped shroud the Communist elite’s wealth, a leaked cache of documents reveals" the ICIJ's latest offshore weawlth expose begins. In addition to the usual list of who, what, where, why and when, we learn that once again the two largest Swiss banks are about to be embroiled in yet another money laundering scandal, this time involving the parking of wealth belonging to China's aristocracy - including its princelings - in various Caribbean, mostly British Virgin Island, tax havens. What is notable, if not unexpected, is just how pervasive the parking of offshore capital has been, and confirms that it is not inflow of money that the PBOC has to be afraid of when its internationalizes the Yuan, it is the outflow that will be far more worrysome. But the biggest stunner is the sheer size of the wealth transfer: according to ICIJ estimate, up to $4 trillion in "untraced assets" may have left China since 2000. These are truly epic numbers.

With a government intent on growing its entitlements, welfare state, and implicitly it's debt load... what could be more terrifying than the future debt-serfs refusing to be born into existence. As the birth rate in the US tumbles to yet another multi-decade low, one has to ask how confident the young adult of today is and how, again, the Japanization of America continues to indicate a dark future ahead...

With all eyes gloating over Ireland's recent ability to issue debt in the capital markets once again (and now with 10Y trading only 40bps above US Treasuries), Europe's game of distraction continues. However, while spreads (and yields) tumble in all the PIIGS, with Italian yields at almost 7-year lows, it is perhaps surprising to some that Italian bad loan rates are at their highest on record. Having risen at a stunning 23% year-over-year - its fastest in 2 years, Italian gross non-performing loans (EUR149.6 billion) as a proportion of total lending rose to 7.8% in November (up from 6.1% a year earlier). As the Italian Banking Association admits in a statement today, deposits are declining (-1.9% YoY) and bonds sold to clients (-9.4% YoY) as Italy's bank clients with bad loans have more than doubled since 2008.

The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen.  Never before has so much private debt been accumulated in such a short period of time.  All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads.  In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone.  That is more than twice the amount that the U.S. government will pay in interest in 2014. So will a default event in China on January 31st be the next "Lehman Brothers moment" or will it be something else? In the end, it doesn't really matter.  The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years. It is just a matter of time.

Monsignor Nunzio Scarano - dubbed "Monsignor 500" after his favorite bank-note - who is already on trial for allegedly plotting to smuggle 20 million euros from Switzerland to Italy, was arrested Tuesday in a separate case for allegedly using his Vatican accounts to launder a further 7 million euros. As AP reports, police said they seized 6.5 million euros in real estate and bank accounts Tuesday, including Scarano's luxurious Salerno apartment, filled with gilt-framed oil paintings, ceramic vases and other fancy antiques. A local priest was also placed under house arrest and a notary public was suspended for alleged involvement in the money-laundering plot. Police said in all, 52 people were under investigation. Have no fear though, for his lawyer, "has good faith that the money came from legitimate donations."

The system is doomed to fail, because the resilience of natural complex systems requires freedom of action for its individual components. We do not observe resilient complex systems with central control. Yet central control is the dominant ideology of our present political and economic systems. Total control, with a vanishingly thin veneer of democracy, ephemeral as the morning dew.

Unlike their American counterparts in the world of "what to do with all the easy money sloshing around the market," it appears the Chinese learned their hard lesson in the collapse of stocks in 2007/8. As the following charts make abundantly clear, the (hidden) inflation that trillions of dollars worth of central bank largesse is creating has piled into real estate markets in China and not in stocks - a problem for the central planners who know the potential for social unrest from a nation unable to afford housing (especially in light of its reform policies). Chinese stocks are -13% YoY, while Chinese real estate is +20% YoY. In the US, of course, we have an always-willing-gamble public more than happy to throw their marginal dollar at all-time high equity and real-estate prices.

Fudging Non-GAAP numbers is nothing new: everyone does it, even if it means that real, operating earnings for IBM (and most other companies) are substantially lower, and sure enough IBM's real EPS was $5.73. But this is just the tip, because one has to look deep into the income statement to find just how it is that IBM, whose pre-tax income actually declined by 11% could post a 14% increase in non-GAAP EPS. The answer: taxes. And just like Bank of America, IBM decided to crater its Q4 tax rate, which was 25.5% in Q4 2012 and in Q4 2013 dropped to... 11.2%. Seriously IBM? Incidentally, this epic accounting gimmick is also why one should look at IBM's revenues which were a debacle: not only did they miss expectations of a $28.3 billion in Q4, printing at $27.7 billion, but were down 5%. And while most revenue items were weak, the piece de resistance was Systems and Tech revenue, which cratered 25%!

Physical gold for delivery at the Comex is at record lows. Demand for delivery of the precious metal may just push the gold price manipulation scheme over the precipice.