The CDS Wolfpack Is Now Coming After France... China

Tyler Durden's picture

A month ago, Sarkozy was pissed that Merkel had dared to take the initiative over him and to ban naked CDS trading. Being a stubborn reactionary, this action only prolonged his inevitable decision to do the same (because politicians, being the wise Ph.D's they are, realize fully all the nuances of screwing around with the financial ecosystem). However, looking at this week's DTCC data, we have a feeling he may accelerate his decision to join the CDS-ban team. With a total of 456 million in net notional derisking, France was the top entity in which protection was sought in the past week. In a very quiet week, where the 5th most active name did not even make it past the $100 mm threshold, France was more than double the number two sovereign - Mexico (we are unclear if this is some sort of contrarian move to the Yuan reval, which Goldman was pitching as MXN positive, which means traders likely hedged by loading up on Mexican CDS). But what is probably most notable, is the sudden and dramatic appearance of China in the top 3rd position. Welcome China! And after tonight's surprise PMI miss and the resulting market drubbing, we are confident within a week or two, China will promptly become a mainstay of the top 3, and will quickly rise to the top position, where it rightfully belongs. We are also confident those perennial Eastern European underdogs, Romania and Bulgaria will shyly make an entrance in the top 10 next week.

Some interesting action was also seen on the rerisking end, where Italy saw a whopping $1 billion+ in bearish positions get unwound. This is probably the single biggest weekly sov rerisking we have seen in months. Nonetheless, without any concrete news out of the boot, we assume this is merely profit taking after numerous week of consistent derisking. Greece, which nobody cares about, continues to see rerisking, which however in light of this week's new record wides in 5 Year CDS, was somewhat unexpected.

Not shown on the table, but certainly in need of noting, was our very own state of California, which with 377 million in net derisking, was the 3rd most shorted entity of all. Is the last bastion of "all is well" propaganda about to fall?

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Mako's picture

The Decouplers are the equilavent of the Loch Ness monster hunters.  China this, China that, China is going to do this, China is going to that.   Sorry, China will expand to max. capacity and implode just like the rest.   Actually they already have, they are playing bury their head in the sand just like the rest of the world.$ssec,pltawanrbo[pa][d][f1!3!!!2!20]&pnf=y$SPX,pltawanrbo[pa][d][f1!3!!!2!20]&pnf=y

China will be rolling out those tanks again on their own people, those tanks were never built and/or purchased to invade other lands, they were always there to keep their own people in line.

VK's picture

But, but, but I thought building 30 billion cubic feet of office space and having a 25-30% vacancy rate was a good thing? Oh and i'll throw in industrial overcapacity, empty cities, 500,000 needless bridges, home prices 12x median incomes and empty malls as well as having a totalitarian state without freedoms. Did I mention what the unimaginable to PhD economists a China crash would have on Australian home prices? :)

Mako's picture

Yeah, people don't even want to know what is behind that curtain, but in simple terms the system is not setup for what the decouplers choose to believe.  

I wouldn't be surprised to learn that some nutbag sitting in Europe in 1928 saying how the US would just decouple from the British Pound Sterling. 

DoChenRollingBearing's picture

Oh, poor Peru for being high up in the list. Until now, their economy has well withstood the calamities elsewhere.

As a big shareholder in small / medium sized Peruvian company (replacement autoparts) I have to keep my eyes on what's going on there as well.

Mako, I read your posts and try to fit them into my greater family's needs.

++++  for your touch of the negative realities that could affict us soon.

Mako's picture

For the record, I don't consider what I post as negative but I fully understand that people take it as negative. 

People are so dependent on the system they can't imagine the consequences of their actions and don't want to understand the full gravity of their choices made.  It's the "it's the bankers fault mentality".  They have no idea or do not wish to understand "they" are the banker.

The current system would crumble this second if everyone stopped, of course that is not going to eliminate the consequences of their prior actions, but virtually nobody has an interest in that occurring, someone is going to have to go.

"You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it." -Morpheus

Thanks for the comment BTW.

Muir's picture

Great stuff.

and Kudos for: "(because politicians, being the wise Ph.D's they are, realize fully all the nuances of screwing around with the financial ecosystem)."

sumo's picture

Yep, that's why politicans are in charge .. because they know so much. And because they act in the national interest.



AnAnonymous's picture

Great stuff so you understand it.

When I look at the rankings over the weeks, I see large disparities in rankings.

One that is number one (or ranking high) can be last (or ranking low) a few weeks later. Without one's fundamental situation being changed.

What's the use of such ranking?

All it states to me is there is a large giration between different agents, meaning that the risks are widely spread, indicating a resilience of the system as the stress does not bear on the same agent week in week out.

Therefore going against the premise of what is said on this site.

Who cares to explain?

Pamela Anderson's picture

Thanks a lot for all the postings and the hard work Zero Hedge!


The Franchise's picture



You talkin China?



Dan Duncan's picture

C'mon Franchise.  "Playoffs?" is supposed to read "Practice?"

You're mixing Alan Iverson with Jim Mora.  Talk about an unlikely pairing.  Although, Iverson's baratone voice coupled with Mora's screetching "Playoffs?!" does make for an amusing remix. 

dryam's picture

Anyone know why the, "China Financial Markets", website has been suspended?  By several accounts that was the best blog on the economy of China.

Paladin en passant's picture

I'm guessing he exceeded his monthly bandwidth allotment.

Itsalie's picture

Go to Shenyin Wanguo's HK website, Petis is spending alot more time nowadays with the financial industry as the chief strategist for Shenyin Wanguao Securities (HK), and touting chinese shares to your favorite mutual fund manager who flies into Asia, talk shop for a day in HK and Shanghai, and spends the rest of 2 weeks being entertained by Petis' colleagues in karaoke joints in Macau, Seoul and Bangkok's Ratchadaphisek.

torabora's picture

Does the gentleman get his second chakra released?

Instant Karma's picture

Altho one can trade credit default swaps, don't they only pay off upon default?

So the probability of one actually paying off is small?

Especially a sovereign?

Mako's picture

It has never made any sense on the large sovereigns.  Like taking out insurance if the Sun implodes but no potential scam of a scam can go unrewarded.

Call up State Farm, ask him how much they will cover you for your home if the Sun implodes, it would be funny to listen to them.

Pamela Anderson's picture

Hi Instant Karma,

The CDS is a derivative, this means that its value changes when the vaue of the bonds that the CDS is insuring changes. In simple terms is like buying some puts betting that GE stock is going to go down, you don't need GE stock to go to $0 in order to make money with your options, the same applies to the CDS.

If you have time read: "The Big Short: Inside the Doomsday Machine" by Michael Lewis, in case you don't have time buy the audio book.


tom's picture

In addition to what pamela has correctly written, CDS holders generally get to collect collateral from issuers when the security insured against deteriorates, according to pre-agreed criteria. 

pyite's picture

This is a great point - are any statistics available on how often or not they pay off?  Since the loser has to pay, I can imagine that the incentive to screw the winner is huge.  It is tough enough to collect a few grand from a deadbeat client, I can only imagine how hard it would be to squeeze $a few million out of AIG or Goldman Sachs.

Here is a good overview of the impact of non-paying derivatives on the economy:


Amish Hacker's picture

The other point to remember is that when you buy, say, a put on GE, there is a central clearing house holding the bets from both parties and paying the winner. With OTC derivatives, there is no neutral third party collecting from the loser and making the payout to the winner.

Ragnarok's picture

New kids on the block! Sweet...


Did anyone check out the widow's peak on the Nikkei? Painful.

moneymutt's picture

China will do a Malaysia plus 1000...will not be Soros-ed

John McCloy's picture

Regulated banks cannot compete with Hedge funds. They have learned the game..learned to ride the Fed pumps and are not subject to regulation. On top of that the Fed & Big Banks have laid out a blueprint for them to destroy TBTF in a coordinated fashion if they so choose and they have given Hedgies every tool necessary to do so and legalized it with dark pools.

The Flash Crash will go down as the day Wall Street put a gun to their own head and pulled the trigger. They showed every competitor and hedge fund that there is no bids and all prices in stocks are false and all that is needed to destroy the markets is SPY big block sales. 

Makes the algo pukes their guts, kills their churn profits, harms the bank assets and causes them to be under capitalized across the board the lower the market goes unless they choose to participate. And that is why strong financial reform is needed because everyone is aware that banks have only one option and that is to attempt to reflate the markets. When the S&P crashes below 666 as I swear it will eventually they are all done and the Fed is out of bullets.

dark pools of soros's picture

..and those SPY big blocks don't even have to exist to be sold!

John McCloy's picture

yup..these politicians are our heros regarding reform aren't they? How dark pools are still permitted is another mind boggler. 

Implicit simplicit's picture

Algorios-the only cerial killer that eats you when not fed.

frog's picture

so, does that say that Germany had the wolfpack after her a month ago ?

papaswamp's picture

Some ugly China data coming out...tomorrow might be brutal.


"The China Federation of Logistics & Purchasing said its purchasing managers' index fell to 52.1, compared to 53.9 in May. The result missed a 53.1 consensus forecast in a Reuters poll of economists, but managed to stay above the 50 mark separating expansion from contraction."

"A rival survey by HSBC in association with market research firm Markit, also released Thursday, reported its purchasing managers' index at 50.4 for the month, down from 52.7 in May."

DoChenRollingBearing's picture

Euroland keeps getting more complicated by the day.

QE 2 looks like it is going to happen here (USA).  Possibly there in Eurolandia too...?

Those who do NOT have physical gold (silver OK too), should THINK REAL HARD about buying the the physical Ancient Metal of Kings (Gold).  The ancient metal of retail commerce has been Silver, worth keeping at least 100 oz of silver per family on hand.

Everyone with real savings should have at least 3% - 5% (or more, I am at 6% heading to 7%) in gold or other PMs or be on track to have that SOON!  Some of my friends (Chumba) are near (or over!) 100% gold.  That is too extreme for me (diversification is my bottom line), but for me the extreme gold bulls are probably right.  Time is short...

EscapeKey's picture

I'm about 30% PM's, 40% cash, 20% stocks/options, and 10% hookers and coke.

zhandax's picture

That's my kind of diversification!

Fazzie's picture

 Sounds like JPMs holdings.

Doug's picture

Ok, when do they start coming after the U.S.?

Al Huxley's picture

As soon as everyone else is dead.  Don't worry, US will get its turn.

Sudden Debt's picture

They won't. If there is a risk, the Fed would just buy up all the bonds by printing dollars on all the available paper they can get their hands on.

old naughty's picture

Sooner than most think...

yabs's picture

I am amazed that when China implodes it will

be such a shock to so many

iyts obviously a ginat bubble built on the US bubble

the whole worlds economy was a bubble

AS mako says anyone using the global credit scheme will implode

there will be no place to hide

Lets Hang Parliament's picture

China in 3rd place must be Hugh Hendry "going short"!!

MarketFox's picture

Let's simplify this one....

Hey ....which country looks the most vulnerable this morning....

It will take about 90 days to pull it off...but it will be like shooting fish in a barrel...

Yeah...and Soros will be putting in the proper public talk...along with the play....

Hey....bonus time ....guys....

What "little people" ?

tom's picture

Given that there is no decent public domain data on the total extent of China's public debts (especially local), and that its entire banking sector credit is for most intents and purposes public debt (especially if a large amount goes bad at once), CDS's on Chinese public debt make a lot of sense.

The thing about that enormous pile of dollars, Treasuries and GSE paper, which a lot of people assume could be spent down to cover any debt crisis, is that the amount that China would bring in by selling some would be dwarfed by the amount China would lose in export income and valuation of its remaining dollars/Treasuries/GSE paper. China is afraid even to stop accumulating reserves, or in other words to truly free the yuan's exchange rates, as that would have a major impact on US and European sovereign debt markets. In the long run, in my opinion, free trade (of which China is the world's most ardent opponent) would be good medicine for everybody. But in the short run the financial adjustments would be highly disruptive, and in my opinion would touch off a new 2008-scale financial panic.

A lot of people have bought the completely bogus story that China is driving the global economic recovery. The reality is that other emerging markets and even the US have been driving the recovery. Keep in mind that a country can only drive recovery elsewhere in two ways: by investing its capital abroad, and by increasing imports.

China has dramatically increased imports, but from such a low base that it hardly matters compared to the US, Europe and Japan. Besides, China has mainly increased imports of raw materials, and largely by paying more for the same raw materials, as the government policies that restrict most imports while subsidizing raw materials imports drive up global raw materials prices. That has suppressed overall growth in the rest of the world, overwhelming the growth-driving effects of China's increases in imports of manufactured goods and services.

China's capital investments abroad are growing, but are also still too puny to matter to global growth - unless one counts China's accumulation of foreign currency and securities through its intervention in its domestic currency market as a form of capital investment abroad. But that accumulation is actually China sending the capital of purchasers of its exports back to their origin (roughly - generally part of the capital of European and Asian origin is instead sent to the US). China only controls such capital to the extent that other countries buy its exports, which means it is China's export markets, not China, that are doing the driving. By refusing to import those countries' goods in return, and instead lending its trade surplus back to those countries' governments and banks, China suppresses true growth among its export market countries. That suppression is invisible in GDP figures, however, as GDP is merely a measure of income, which can be inflated by foreign purchases of a country's currency and securities.


dan22's picture

China’s Food Price Inflation Is Starting To Affect the Rest Of the World

Corn futures surged nearly 8% after a U.S. government report cast a shadow over the outlook for supplies of the grain. The amount of corn stored on farms and in commercial facilities totaled 4.31 billion bushels as of June 1, according to the latest estimates from the U.S. Department of Agriculture. While that is up 1.1% from a year ago, it came in well below analysts' expectations.  The world's largest corn grower, the U.S. harvested 13.1 billion bushels last year.  Corn for July delivery recently traded up 25 cents, or 7.7%, at $3.50 a bushel on the Chicago Board of Trade. The most actively traded contract, for delivery of corn in December, jumped 7.8% to $3.7025. Most contracts opened the day's trading up 30 cents, the daily limit for moves in the price of corn in either direction.  The rally comes just one day after the grain hit nine-month lows on weather conditions in the Midwest that were favorable for crops.  The inventory figures and other acreage data "represent a significant bullish surprise for a corn market that appeared increasingly—and fundamentally perplexingly—bearish of late," said Lewis Hagedorn, an analyst with J.P. Morgan Chase.  The number of acres dedicated to corn planting this year totaled 87.872 million, also below forecasts. Collectively, the two reports reduced expectations for U.S. corn supplies by roughly 500 million bushels.  The USDA's estimates are "almost unbelievable," said Rich Feltes, senior vice president of research for MF Global. He said that corn futures prices probably have already established their lows for the summer. Wednesday's corn data could have implications for ethanol, a motor fuel that in the U.S. relies on corn as its main feedstock. 

Grand Supercycle's picture


EURUSD buying support detected for some time now, has returned again and the daily chart is now neutral to bullish.

Tartarus's picture

Of all those countries China is the only one where I see essentially zero chance of sovereign default.

Maud Ockley's picture

Good job, I like this article!!


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