Hong Kong

There are signs that China's economy may have a short-term uptick but that shouldn't detract from what remains a poor long-term outlook.

it is no secret that for years, one of the most useful features of the Bloomberg terminal (if only for other users of Bloomberg), has been the ubiquitous red or green user dot, showing if a given user is online (such as NY Fed Analyst/Trader Kevin Henry before Zero Hedge exposure) or gray i.e., invisible, circle such as Kevin Henry after Zero Hedge exposure. Because to some there is nothing more informative than knowing if the object of their stalking ambitions is currently sitting next to a PC. As it turns out, it is not just clients of Bloomberg that found this functionality useful, but Bloomberg journalists too, who until recently at least, it turns out had much more access than just the "dot" including information on when a subscriber had most recently logged onto the service, when they had first become a subscriber and a tally of the types of functions they were accessing through the terminal. That is, at least until Goldman Sachs complained.

The legal claims on physical gold far exceed the amount of physical gold that the banks actually have by a very, very wide margin.  And right now the bankers are scared out of their wits because their warehouses are being drained of physical gold at a frightening rate.  So what happens when their physical gold is gone but they still have lots and lots of people with legal claims to gold?  When that moment arrives, it will represent the end of the paper gold scam. Many believe that the recent takedown of the price of paper gold was a desperate attempt by the bankers to put off that day of reckoning, but it appears to have greatly backfired on them.  Instead of cooling off demand for precious metals, it has unleashed a massive "gold rush" all over the globe. This is creating havoc in the financial community, and at least one major international bank has already declared that it will only be settling those accounts in cash from now on.  The paper gold scam is starting to unravel, and by the time this is all over it is going to be a complete and total nightmare for global financial markets. For years it has been widely known that the promises that banks have made regarding their gold far exceed their actual ability to deliver, but we have never reached a moment of such crisis before.

In what must be an inexplicable move to momentum-chasers everywhere, as gold continued to decline in price in March, and long before its targeted smash in April, China was not backing off its gold purchases of the yellow product. Quite the contrary: as export data released by the Hong Kong Census and Statistics Department overnight showed, Chinese gold imports in March exploded to an all time record high of 223.5 tons. This follows 97.1 tons in February, and brings the total imports for the first quarter of 2013, or 372 tons, on par with what China imported in the entire first half. It also means that since January 2012, China has imported an absolutely stunning 1,206 tons of gold. Putting this number in context, this is 20% more than the entire reporter official gold holdings of 1054 tons, and represents roughly half of the total 2500 tons of gold mined every year.

The main source of hot money going into China appears to be coming from Chinese businesses- banks and exporters. US is a net importer of capital. Japan has been net sellers of foreign bonds. Europe is experiencing net inflows.

All Chinese economic data is manipulated: that much is known. So is its trade data. However, the manipulation has become so grossly evident, some wonder if there is a far bigger problem behind the scenes. Turns out there is: a $60 billion per month "hot capital" inflow problem, and an economy on the very of bursting at the inflationary seams.

The Cypriot deposit confiscation has come and gone (and in a parallel world in which the global Bernanke-put never existed and in which bank shareholders were not untouchable, this is precisely how real-time bank restructurings should have taken place), but fears remain that the country's "resolution" mechanism will be the template for future instances of "resolving" insolvent banks. That may or may not be the case: the only way to know for sure is during the next European bank bailout, but one thing is certain - Cyprus was certainly a template when it comes to how a world full of insolvent sovereigns (all engaged in currency warfare), where easing, quantitative or otherwise no longer works to boost the economy, will approach what is the last chance for monetary replenishment - taxation of financial assets, just as we warned first back in 2011. Specifically, Cyprus showed the "template" for confiscating Russian oligarch billionaire "ill-gotten", untaxed cash, which many in Germany demanded should be the quid for ongoing German-funded quo. And here's the rub. There is more where said "ill-gotten" cash has come from. Much more... $32 trillion more.

The euro continues to not get the memo. After days and days of attempted jawboning by Draghi and his marry FX trading men, doing all they can to push the euro down, cutting interest rates and even threatening to use the nuclear option and push the deposit rate into the red, someone continues to buy EURs (coughjapancough) or, worse, generate major short squeezes such as during today's event deficient trading session, when after France reported a miss in both its manufacturing and industrial production numbers (-1.0% and -0.9%, on expectations of -0.5% and -0.3%, from priors of 0.8% and 0.7%) did absolutely nothing for the EUR pairs, it was up to Germany to put an end to the party, and announce March factory orders which beat expectations of a -0.5% solidly, and remained unchanged at 2.2%, the same as in February. And since the current regime is one in which Germany is happy and beggaring its neighbors's exports (France) with a stronger EUR, Merkel will be delighted with the outcome while all other European exporters will once again come back to Draghi and demand more jawboning, which they will certainly get. Expect more headlines out of the ECB cautioning that the EUR is still too high.

• Lesson From Buffett: Doubt Yourself (WSJ)
• Gold Bulls Split With Buffett as Traders Say Sell (BBG)
• Apple Misses IPhone Customers as Global Carriers Balk (BBG)
• Russia extends Cypriot loan by 2 years, cuts interest: troika document (Reuters)
• Tax Rewrite in Play in Capitol (WSJ)
• No early warning for U.S. on Israeli strikes in Syria (Reuters)
• Germany riveted at start of neo-Nazi murder trial (Reuters)
• JPMorgan Investors Urged to Split Chairman Role, Oust Directors (BBG)
• Leniency for Offshore Cheats (WSJ)
• Brussels steps up efforts over tax avoidance (FT)
• Ambulance chasing: Mesothelioma Doctors, Lawyers Join Hunt for Valuable Asbestos Cases (WSJ)
• Web Sales-Tax Bill Set to Face Bumps (WSJ)
• Colleges Cut Prices by Providing More Financial Aid (WSJ)

We toyed with titling this post "Lies, Damned Lies, And Chinese Statistics" but perhaps that is a little harsh, though one glance at the chart below and one instantly comprehends the efforts that are being undertaken to 'show' the world that China's transition is on target (and crumbling into collapse). As we recently noted, it is actually unlikely that China can complete this transition to organic (as opposed to investment-led) growth (with moderate growth the exception not the rule), and China's recent trade data does not pass the smell test. As GREED & Fear's Chris Wood notes, with the Hong Kong trade data being released last week, it is worth noting a growing discrepancy between the data on China’s exports to Hong Kong reported by mainland’s customs department and the corresponding data on Hong Kong’s imports from China reported by Hong Kong’s Census and Statistics Department in March. Such inconsistency in China’s export numbers relative to the imports data from its trading partners has generated growing speculation about the credibility of China’s trade figures. Various explanations have been put forward (below) but the divergence would seem far too large to be simply explained by "different statistical methods" as the Chinese government's official line notes.

While Harvard historian Niall Ferguson's off-the-cuff remarks during the Q&A were in his words "as stupid as they were insensitive", the core message of his presentation was clear: the party of the last 20 years is now over and the longer we fail to address the real issues the bigger the hangover will be in the future. The central question Ferguson asks is whether our institutions, corporations and governments, are degenerating. As Lance Roberts of Street Talk Live notes Ferguson believes that without addressing the structural problems that plague the economy from production to employment – stimulus will fail. The reality is that the 'punch bowl' won't fix employment growth, economic growth or the rule of law.

We discussed previously the slowing of the global economy and the drag on global trade and it appears that despite some hope-ridden headline data from China, things are definitely troubling under the surface. As Bloomberg Brief's Michael McDonough notes, while superficially, export growth was a rare bright spot in the first quarter, it may have been exaggerated by exporters inflating invoices. Excluding exports to Hong Kong, March’s export growth would have fallen 4.8 percent year-on-year compared with the reported 10 percent. China’s exports to 14 of its top 20 trading partners declined in March year-on-year. Tepid global demand may continue to weigh on China’s exports and domestic economy - and in its vicious cycle manner, feed back into global growth (and stain the US 'clean' shirt).

There continues to be difficulty in securing physical bullion in large volumes, particularly in the small coin and bar market and particularly in the silver market. 

In a remarkably candid interview, the President and Executive Chairman of CME Group Inc, Terrence Duffy,  told Bloomberg TV that today gold buyers "don’t want certificates ... They want the real product".  

"What’s interesting about gold, when we had that big break two weeks ago we saw all the gold stocks trade down significantly, we saw all the gold products trade down significantly, but one thing that did not trade down, was gold coins, tangible real  gold.  That’s going to show you, people don’t want certificates, they don’t want anything else.  They want the real product."

Australia’s Perth Mint, the largest refinery in Australia and one of the largest in the world, said that demand has jumped to the highest level since the Lehman crisis in 2008. Demand has been robust due to currency devaluation concerns and then the 15% price fall led to a massive surge in demand as store of wealth buyers leapt at the chance to acquire physical bullion at much cheaper prices. This led to the Perth Mint which refines nearly all of the nation’s bullion, having to stay open over the weekend to meet orders. There’s been strong interest, including from the U.S., with buyers confident that the metal will rebound from the decline, Ron Currie, sales and marketing director, told Bloomberg in a phone interview from Perth.  “We haven’t seen levels like this since the 2008 global financial crisis,” Currie said yesterday. “Compared to March sales, April sales have doubled or tripled,” he said. “We worked all weekend to keep the factory running to make more stock and that was only to fill orders,” Currie said from the facility founded in 1899. “We’re being inundated with people buying products.”