The financial system is lurching towards the next round of the Great Crisis that began in 2007.
Is It Fair to compare this sell off to the Great Recession of 2008 and 2009?
In a secular rally, pullbacks will inevitably arise. Market participants, though, should not view all drops in the same light. In addition to the differences in the depth of the collapse, the magnitude of the changes of critical investor sentiment statistics may differ greatly. Assessing the current retracement is a difficult prospect as we may have yet to reach its terminus. Based on the initial sentiment statistics, the current decline has more similarity to the most significant historic collapses.
It appears wherever one looks in the markets there are the skidmarks of PIMCO adjusting to life after Bill Gross. First it was MBS (and related derivatives), then CDS indices adjusted as redemption expectations raised risk premia, and now it is the short-end of the Treasury curve. As The FT notes, 3-month Eurodollar futures (instruments enabling traders to bet on the front-end of the yield curve and thus more accurately pinpoint their bets on Fed actions) saw asset managers (cough PIMCO cough) liquidate a record 868,853 contracts in the week to September 30 – the largest one-week change on record (each contract has a notional value of $1m). This dramatic shift suggests both a disagreement with Gross' "new normal" view of rates lower for longer (since liquidation is concentrated around the 2-year maturities) and a need to meet liquidity requirements from redemption requests.
In the mid 1970's ,“experts” warned that gold would fall as interest rates rose. The opposite happened and as interest rates rose, gold rose more than 8 times in 3 years and 4 months - from $100/oz in 1976 to $850/oz in January 1980 (see chart). History does not repeat, but it frequently rhymes ...
When is the U.S. banking system going to crash? We can sum it up in three words. Watch the derivatives. It used to be only four, but now there are five "too big to fail" banks in the United States that each have more than 40 trillion dollars in exposure to derivatives.
If you said shares of BABA, you'd be wrong. According to the Telegraph, the exodus out of paper wealth and into hard assets is reaching a fever pitch as the "super-rich are looking to protect their wealth through buying record numbers of "Italian job" style gold bars, according to bullion experts." The numbers cited by the paper are impressive: the number of 12.5kg gold bars being bought by wealthy customers has increased 243% so far this year, when compared to the same period last year, said Rob Halliday-Stein founder of BullionByPost. "These gold bars are usually stored in the vaults of central banks and are the same ones you see in the film 'The Italian Job'," added David Cousins, bullion executive from London based ATS Bullion.
Despite Krugman's “Mission Accomplished” Announcement, the Giant Banks Are Worse Than Ever
From 1998 to 2013, Barclays and Deutsche Bank sold 199 basket options to hedge funds which used them to conduct more than $100 billion in trades. The subcommittee focused on options involving two of the largest basket option users, Renaissance Technology Corp. LLC (“RenTec”) and George Weiss Associates. The hedge funds often exercised the options shortly after the one-year mark and claimed the trading profits were eligible for the lower income tax rate that applies to long-term capital gains on assets held for at least a year. RenTec claimed it could treat the trading profits as long term gains, even though it executed an average of 26 to 39 million trades per year and held many positions for mere seconds. Data provided by the participants indicates that basket options produced about $34 billion in trading profits for RenTec alone, and more than $1 billion in financing and trading fees for the two banks.
At the heart of the China Commodity Financing Deals (CCFD) is the ability to leverage a letter of credit on the basis that there was some collateral somewhere that backed the risk of this rehypothecatable 'money'. Until now, the biggest concern has been "where's my copper, nickel, gold, etc..?" as the Qingdao ponzi scheme is unveiled; but, as Metal Bulletin reports, the contagion from the exposure of CCFDs ponzi has now hit Western banks. At least one western bank has stopped discount financing of copper into China after Industrial & Commercial Bank of China (ICBC) applied for the right not to settle a letter of credit it issued earlier this year, as a result of the Qingdao investigations. In other words the collateral chains were just snapped...
For all the theoretical explanations about China's profound commodity rehypothecation problems, the one thing that was missing was an empirical case study framing just how substantial the problem is. After all, it is one thing to say banks expect "X millions in losses", but totally different to see the rehypothecation dominoes falling in practice. Today, courtesy of Bloomberg we got just such an example.
Meet Decheng Mining.
While we noted last week the death of the Japanese bond market as government intervention has killed the largest bond market in the world; it is now becoming increasingly clear that the dearth of trading volumes is not only spreading to equity markets but also to all major global markets as investors rotate to derivatives in order to find any liquidity. Central planners removal of increasing amounts of assets from the capital markets (bonds and now we find out stocks), thus reducing collateral availability, leaves traders lamenting "liquidity is becoming a serious issue." While there are 'trade-less' sessions now in Japanese bonds, the lack of liquidity is becoming a growing problem in US Treasuries (where the Fed owns 1/3rd of the market) and Europe where as JPMorgan warns, "some of this liquidity may be more superficial than really deep." The instability this lack of liquidity creates is extremely worrisome and likely another reason the Fed wants to Taper asap as DoubleLine warns, this is "the sort of thing that rears its ugly head when it is least welcome -- when it’s the greatest problem."
The numbers that you are about to see are likely to shock you. They prove that the global financial Ponzi scheme is far more extensive than most people would ever dare to imagine. The truth is that our financial system is little more than a giant pyramid scheme that is based on debt and paper promises. It is literally a miracle that it has survived for so long without collapsing already. But at some point a day of reckoning is coming, and when it arrives it is going to be the most painful financial crisis the world has ever seen.
The biggest news in the sage surrounding Chinese evaporated collateral troubles at Qingdao, which as noted is merely the 3rd largest Chinese port, is that this scandal has now spread to a second Chinese port: Penglai, which is also located in the Shandong province. Putting some size numbers for context: Qingdao's copper inventory is about 50,000 tons, compared to 800,000 tons in Shanghai, analysts say. There's "little evidence" for now that traders in Shanghai fraudulently have pledged collateral to banks, said Sijin Cheng, an analyst with Barclays Research in Singapore. Little evidence will become "lots" in the coming days when we expect more "discoveries" at all other bonded warehouses as the relentless inflow of commodities finally reverses and the beneficiaries finally demand possession. As everyone who has followed even the simplest Ponzi schemes knows, this is the part of the lifecycle when many tears are shed by most.
While we have warned about the problem with near-infinitely rehypothecated physical/funding commodities/metals, be they gold or copper, many times in the past, and most recently here, it was only this week that China finally admitted it has a major problem involving not just the commodities participating in funding deals - in this case copper and aluminum - but specifically their infinite rehypothecation, which usually results in the actual underlying metal mysteriously "disappearing", as in it never was there to begin with. It would appear our fears of global contagion (through various transmission channels) are now coming true as WSJ reports that as many as a half-dozen banks are trying to determine whether the collateral for loans they made to commodities traders was used fraudulently by a third party to obtain other loans. As we detailed previously, it appears the day when the Commodity Funding Deals finally end is fast approaching... and as we note below, why that will certainly be a watershed event.