December 25th, 2011
“I am the punishment of God...If you had not committed great sins, God would not have sent a punishment like me upon you.”--Genghis Kahn
Remember, back in the day, when a bankruptcy was simply called a bankruptcy? Naturally, this was well before ISDA came on the scene and footnoted the living feces out of everything by claiming that a bankruptcy is never a bankruptcy, as long as the creditors agree to 99.999% losses at gunpoint, with electrodes strapped to their testicles, submerged in a tank full of rabid piranhas, it they just sign a piece of paper (preferably in their own blood) saying the vaseline-free gang abuse was consensual. Well, now we learn that as the global insolvency wave finally moves to China, a bankruptcy is now called something even less scary: "deferred loan payments" (and also explains why suddenly Japan is going to have to bail China out and buy its bonds, because somehow when China fails, it is the turn of the country that started the whole deflationary collapse to step to the plate). After all, who in their right mind would want to scare the public that the entire world is now broke. Certainly not SWIFT. And certainly not that paragon of 8%+ annual growth, where no matter how many layers of lipstick are applied, the piggyness of it all is shining through ever more acutely. Because here are the facts, from China Daily, and they speaks for themselves: "China's biggest provincial borrowers are deferring payment on their loans just two months after the country's regulator said some local government companies would be allowed to do so....Hunan Provincial Expressway Construction Group is delaying payment on 3.11 billion yuan in interest, documents governing the securities show this month. Guangdong Provincial Communications Group Co, the second-largest debtor, is following suit. So are two others among the biggest 11 debtors, for a total of 30.16 billion yuan, according to bond prospectuses from 55 local authorities that have raised money in capital markets since the beginning of November." So not even two months in and companies are already becoming serial defaulters, pardon, "loan payment deferrers?" And China is supposed to bail out the world? Ironically, in a world in which can kicking is now an art form, China will show everyone just how it is done, by effectively upturning the capital structure and saying that paying interest is, well, optional. In the immortal words of the comrade from Georgia, "no coupon, no problem."
To all who still think that in the war of attrition between the USD and the EUR (because contrary to what some have "discovered" only recently, currency wars have been going on for a long, long time and will continue to do so, before morphing into trade and real wars), in which both currencies are doomed, and where the winner takes it all, if only for a few minutes, we bring to your attention the following most recent update out of the Pacific Rim (where incidentally the Shanghai Composite has resumed its relentless track lower with the obvious intention of closing 2011 at its 52 week low) in which we find i) that the dollar's hegemonic control over the world is ending, and ii) that the mercantilist relationship so long sustained between China and the US, may be shifting and reversing, and in its next metamorphosis will see Japan buying the bonds of... China (although probably not for long - see next post). As Bloomberg reports, "Japan and China will promote direct trading of yen and yuan without using dollars and will encourage the development of a market for the exchange, to cut costs for companies, the Japanese government said. Japan will also apply to buy Chinese bonds next year, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday." And before someone blows it off as merely more foreign relations posturing, "“Given the huge size of the trade volume between the Asia’s two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations,” said Ren Xianfang, a Beijing-based economist with IHS Global Insight Ltd." As for China's reverse mercantilist move, one which will stun anyone who believes that Yuan is still undervalued, "Finance Minister Jun Azumi said Dec. 20 buying of Chinese bonds would be beneficial for Japan because it would help reveal more information about financial markets in China, the world’s largest holder of foreign currency reserves." Speaking of, has Albert Edwards gloated yet that given enough time, he always ends up being proven right, in this case about the CNY's upcoming devaluation?
Things sure have changed in the past 30 years...
Three years ago, when it first became largely adopted by the mass investing population as a hedge to a collapsing market, the 3x levered ETF known as the Direxion Daily Financial Bear 3X Shares, or FAZ in short, was the hottest thing since sliced bread. Subsequently, it has transitioned form being an object of affection to one of infinite scorn, hatred and outright homicidal urges, for one simple reason: it, like many of its other levered bearish peers, is anything but a way to profit from a collapsing market. In fact, as a recent proxy filing by Direxion indicates, it is virtually impossible to make money in the long-term using FAZ... or medium-term... or, as many would say, even intraday as well. The reason for this is simple: while nobody gets the true inner workings of these inverse x-levered ETFs, certainly not the "experts" who post three times a day on Seeking Alpha, one thing everyone should understand is what the following table straight from Direxion is saying: namely that even if the market collapses by 60%, one could lose up to 96.1% of their entire investment in the FAZ, if for some ungoldy reason, annualized vol surges to 100%. Because, you know, vol only occasionally rises when the S&P plunges by more than half. The same is applicable on any time frame: in essence the FAZ only works if the two massively contradictory Venn diagrams overlap: a market plunge and not rise in vol. Uhm, maybe they should have disclosed that a little bit sooner...
Goldman's Jim O'Neill said in a recent interview that the world's future prosperity depends on China's growth. If he's is right, then don't count on that much world prosperity, at least in 2012.
While we have long known that the drachma, and recently the lira, have seen significant "when issued" interest by institutional clients desiring to hedge their currency collapse exposure, and thus early markets by various trading desks, little did we realize just how destabilizing this fact to the system would be, at least according to SWIFT. According to the WSJ, this organization, best known for making an abrupt appearance any time one wishes to do a wire transfer, then promptly disappearing until the next such instance, ended up promptly shutting down any Plan B optionality when "at least two global banks took steps to install back-up technology systems that could handle trades in old European currencies like drachmas, escudos and lire... quickly found, is not so easy in a financial world that is trying to both exhibit confidence in the ailing euro and—just in case—plan for its possible demise. Technology managers at the banks contacted Swift, the Belgium-based consortium that manages the network used in financial transactions, said people familiar with the matter. The banks wanted Swift's technology support and the currency codes that would be necessary to set up the backup systems." And got promptly rejected: "Swift declined to provide some information for such contingency planning, including whether old codes could be used in the system, said the people familiar with the matter." The reason is that in Europe, the mere admission that Plan B is a possibility, apparently set off a chain of events that makes Plan B an inevitability: "...officials there feared that releasing the information could fuel further doubts and instability in the euro zone."... And the kicker: '"As soon as you start contingency planning . . . it can become a foregone conclusion," said Alastair Newton, senior political analyst at Nomura PLC. "But if things go wrong and you don't have plans in place, you're in trouble."
A new era of increasing instability is opening in East Asia.
Often times we are asked "why does Zero Hedge prefer to provide information in piecemeal increments and isolated snapshots (of irregularity) rather than write comprehensive articles (or even a book) that explain, from beginning to end why everything is broken - the end?" There are two answers - a short and a long one. The short answer is that finance, more so than any other field, changes so rapidly that the nuances are always and constantly on the margin, which in turn is stable only for the period of time that it is observed, and then it becomes part of "technical analysis." (Indeed, the Schrodinger wave function collapse is just as alive and well in finance as it is in the quantum arena). As such, we adhere to the paradigm describing the distinction between giving a man a fish and teaching a man to fish: we believe that it is far more useful to demonstrate all that ways in which the market (and global economy) works, or rather doesn't, than engage in extended exercises of vanity, which serve as much to stroke the author's ego, and demonstrate one's knowledge of SAT words, as they do to elucidate the matter at hand. By sharing our own views of events as they transpire in real time, be they right or wrong, we hope to provide our readers with the "connect the dots" patchwork required to evaluate relevant financial events as they occur in real time, instead of describing them in the in vitro vacuum of moody brooding. (As for a book, we are more than confident enough "independent" bloggers out there will succumb to the very system their protest against, and pen a few hundred pages on the goal-seeked topic of their choosing - the last thing the vast upcoming book pyre needs is our own intellectual self-pleasuring). The long answer is far longer, and, ironically, deserves a post of its own. But this is neither the time nor the place. What then is the purpose of this post is to break away from our tradition, but also not to recreate the wheel, as many others find delight in doing. Instead, as a special present to our readers, we share the seminal analysis by Citigroup's Matt King from September 5, 2008, titled "Are The Brokers Broken?" which in one place explains, better than anyone else has ever done, why the system is terminally broken, and why the best anyone can hope for is to keep kicking the can down the road until it all comes crashing down.
A contribution after the jump.
The folks at mapsofworld.com have been kind enough to compile a list of the top events of 2011 broken down by country, coupled with a fully interactive drill down. Furthermore, they have compiled a list of the top 5 events of 2011 based on popular voting (open to anyone). We were surprised (or maybe not) to find that while in our little microcosm we focus on the nuances of the financial world, and occasionally branch out into its nexus of geopolitics, people in the real world appear to have a whole different set of priorities. Confirming this is the fact that 3 of the top 5 most important events are i) the recognition of LGBT rights by the UN; ii) the launch of Google Plus and iii) the 100th anniversary of the IBM - three developments that have received precisely zero coverage on Zero Hedge. At least the top two events are somewhat relevant to both the world and our readers, namely the Tunisian Revolution aka the Arab Spring, and the Japan Earthquake. Oddly enough such earthshaking events as the loss of the US' AAA rating (which as documented here before led to the terminal break of the stock market), is barely in the top 5, while the "Greek Crisis" and the aftermath that is the European insolvency crisis, whose escalation in our humble opinion was the event of 2011, is relevant to exactly... nobody. And there you have this nation's priorities in a nutshell.
Stratfor Hacked, 200GB Of Emails, Credit Cards Stolen, Client List Released, Includes MF Global, Rockefeller FoundationSubmitted by Tyler Durden on 12/24/2011 21:10 -0500
This Christmas will not be a happy one for George Friedman (who incidentally was the focus of John Mauldin's latest book promotion email blast) and his Stratfor Global Intelligence service, because as of a few hours ago, hacking collective Anonymous disclosed that not only has it hacked the Stratfor website (since confirmed by Friedman himself), but has also obtained the full client list of over 4000 individuals and corporations, including their credit cards (which supposedly have been used to make $1 million in "donations"), as well as over 200 GB of email correspondence. And since the leaked client list is the who is who of intelligence, and capital management, including such names as Goldman Sachs, the Rockefeller Foundation and, yep, MF Global, we are certain that not only Stratfor and its clients will be waiting with bated breath to see just what additional troves of information are unleashed, but virtually everyone else, in this very sensitive time from a geopolitical point of view. And incidentally, we can't help but notice that Anonymous may have finally ventured into the foreign relations arena. We can only assume, for now, that this is not a formal (or informal) statement of allegiance with any specific ideology as otherwise the wargames in the Straits of Hormuz may soon be very inappropriately named (or halfway so).
Inspired by recent work at the China Economics Seminar, we were shocked at the recent shifts in USDCNY. While all has been calmly proceeding in the right direction from US perspectives with CNY appreciation (though maybe not fast enough for Chuck Schumer's liking), under the surface there is what appears to be a fierce battle between market participants and the PBoC. By breaking down the cumulative shift in USDCNY into intraday 'market/trading' movements (from fixing to close) and interday 'government-assisted' movements (from prior close to fixing), we can draw some perspective on what the market is trying to do and what the government is doing. Evidently from the chart, the outward appearance that CNY appreciation is slowly but surely occurring (the green line) is misleading, the clear signal is a market trading the USD higher (helped by European angst) and a PBoC massively intervening. Incredibly, since the fixings began consistently in Jan 2006, intraday cumulative moves are now exactly ZERO at the close on Friday, with the entire move higher in CNY now accounted for over the past five years by the PBoC's actions. Furthermore, the shifts of the last four months are on a scale we have not seen before making us wonder just how many USD are being sold out of Chinese reserves into the market to stabilize the CNY?
The compare and contrast discussions of Keynes and Hayek have wended their way over the last few years from learned academic texts to YouTube sensationalist rap videos. We have to say we have our preference among those two extremes. However, in a recent interview with Nicholas Wapshott of Reuters, INETeconomics pulls back the veil a little more of the borrow-and-spend short-termist optimism of Keynes versus the 'if it can go wrong, it will' pragmatist pessimism of Hayek. Unfortunately, it seems we are rapidly unlearning a number of the lessons of the eternal optimist - fixing the world right now in favor of solving the underlying problems and furthermore as Wapshott notes, civilization is a lot more fragile than one can imagine. Starting from the perspective that Hayek was engaged by the LSE to take on the establishment Cambridgian, their very different personal experiences of post-war, post-depression life set them looking for solutions from very different perspectives. While their public arguments were seen as ungentlemanly at the time, though published in journals, it became clear that Hayek faced an uphill battle, and perhaps only now, thanks to the collapsing capabilities (or willingness) of governments to borrow-and-spend, are we able to 'mess with the Keynesians'. While avoiding extreme politics and authoritarianism may be a common-sense raison d'etre, the ongoing devaluation wars could perhaps be as capable of pushing the world to these limits as any non-Keynesian solution ever was.