The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event"?

Tyler Durden's picture




 

In all the hoopla over Japan's stock market crash and China's PMI miss last night, the biggest news of the day was largely ignored: copper, and the fact that copper's ubiquitous arbitrage and rehypothecation role in China's economy through the use of Chinese Copper Financing Deals (CCFD) is coming to an end.

Copper, as China pundits may know, is the key shadow interest rate arbitrage tool, through the use of financing deals that use commodities with high value-to-density ratios such as gold, copper, nickel, which in turn are used as collateral against which USD-denominated China-domestic Letters of Credit are pleged, in what can often result in a seemingly infinite rehypothecation loop (see explanation below) between related onshore and offshore entities, allowing loop participants to pick up virtually risk-free arbitrage (i.e., profits), which however boosts China's FX lending and leads to upward pressure on the CNY.

Since the end result of this arbitrage hits China's current account directly, and is the reason for the recent aberrations in Chinese export data that have made a mockery of China's economic data reporting, China's State Administration on Foreign Exchange (SAFE) on May 5 finally passed new regulations which will effectively end such financing deals.

The impact of this development can not be overstated: according to independent observers, as well as firms like Goldman, this will not only impact the copper market (very adversely) as copper will suddenly go from a positive return/carry asset to a negative carry asset leading to wholesale dumping from bonded warehouses, but will likely take out a substantial chunk of synthetic shadow leverage out of the Chinese market and economy.

Naturally, for an economy in which credit creation is of utmost importance, the loss of one such key financing channel will have very unintended consequences at best, and could potentially lead to a significant "credit event" in the world's fastest growing large economy at worst.

But before we get into the nuts and bolts of how such CCF deals operate, and what this means for systemic leverage, we bring you this friendly note released by Goldman's Roger Yuan overnight, in which Goldman not only quietly cut their long Copper trading recommendation established on March 1 (at a substantial loss), but implicitly went short the metal with a 12 month horizon: a huge shift for a bank that has been, on the surface, calling for a global renaissance in the global economy, and in which Dr. Copper is a very leading indicator of overall economic health and end demand.

From Goldman:

Closing: Long LME copper September 2013 contract at $7,482/t, a $236/t (3.1%) loss

 

Following the initial sell-off in copper prices in the second half of February 2013, we established a long copper position at $7,718/t in the September contract (on March 1, 2013). We believed that the fall in copper prices, reflecting in part concerns about Chinese activity, was overdone. We reiterated this view on April 22, post further substantial price declines. Since then, prices have rebounded strongly, with the September contract closing at $7,482/t on May 22, up by 10% from the May 1 low of $6,808/t.

 

The emergence of the risk that CCFDs unwind over the next 3 months – we had assumed that deals would continue indefinitely – has complicated our near-term bullish copper view (from current prices). On the one hand, our fundamental short-term thesis is playing out – copper inventories are drawing, copper’s main end-use markets in China are growing solidly (property sales +39% yoy, completions +7% yoy, auto’s output +14% yoy Jan-April 2013), seasonal factors are currently supportive, Chinese scrap availability is tight, positioning also remains short, and policy risks are, arguably, mildly skewed to the upside.

 

Set against this is the likely near-term unwind in CCFDs and, critically, our view that copper is headed into surplus in 2014 (the window for higher copper prices is shortening). On net, we now see the risks to our 6-mo forecast of $8,000/t as skewed to the downside, and, in this context, we unwind our September long copper position at $7,482/t, a $236/t (3.1%) loss, given the recent strong rally in LME prices to near our 3-mo target of $7,500/t. Additionally, we believe that a further rally in copper prices in the near term would be a good selling opportunity taking a 12-month view [ZH: translated: short it].

 

Consumers: We believe that consumers will have a better opportunity to enter the copper market to buy taking a 12-month view. Following the recent sharp sell-off in zinc we are increasingly bullish on the outlook from current prices and as such believe consumers should take advantage of current low levels.

 

Producers: Our base case of a sharp slowdown in growth of Chinese construction completions in 2014, in the context of above-trend supply growth, presents significant longer-term downside risks to global copper demand growth and prices. Therefore we continue to believe that any further rallies in the copper price in 2013 represent a good opportunity to hedge, and in our view other non-producer market participants should continue to monitor any copper positions in light of the 2014 downside risks.

 

So just what is the significance of CCFDs? As it turns out, it is huge. Goldman explains (get a cup of coffee first: this is not a simple walk-thru):

The combination of Chinese capital controls and a significant positive domestic (CNY) to foreign (USD) interest rate differential has, in recent years, resulted in the development and implementation of large scale ‘financing deals’ which legally arbitrage the interest rate differential via China’s current account. These Chinese ‘financing deals’ typically use commodities with high value-to-density ratios such as gold, copper, nickel and ‘high-tech’ goods, as a tool to enable interest rate arbitrage. With the notional value of the deals far exceeding the export/import value of the commodities used, and likely significantly contributing to the recent run-up in China’s short-term FX lending (and related upward pressure on the CNY), China’s State Administration of Foreign Exchange (SAFE) announced new regulations to address these issues (May 5), to be implemented in June. Goldman continues:

SAFE’s new policies are, in our view, likely to bring these Chinese ‘financing deals’ to an end over the next 1-3 months. Having said this, some uncertainty remains around the implementation of the new policies by SAFE and Chinese banks, the speed at which the policies impact the market, and the possibility that new financing deals are “invented”. Owing to these uncertainties, a complete unwind of CCFDs is still at this point considered a risk.

In this note we provide a full example of a typical deal and discuss our understanding of the impact of an unwind in Chinese Copper Financing Deals (CCFDs) 1 on the copper market.

 

Our view is that the bulk of copper stored in bonded warehouses in China – at least 510,000t at present, as well as some inbound copper shipments into China – is being used to unlock the CNY-USD interest rate differential. This material has not been entirely unavailable to the market (deals can be broken if costs rise, such as a tightening of LME spreads), but the inventory has been effectively financed by factors exogenous to the copper market for some time.

 

We find that a complete unwind of CCFDs would be bearish for copper prices as the copper used to unlock the differential would shift from being a positive return/carry asset to a negative carry asset for those who currently hold it. As such this inventory will likely become more ‘available’ to the global market. Initially stocks would likely move into the Chinese domestic market to ease the current tightness, until the current SHFE price premium to LME closes.

 

After the SHFE-LME price arbitrage closes sufficiently, the remaining bonded stock (over and above day-to-day working flows) would likely shift from bonded warehouses to the LME. We expect that the ex-China (LME) market would likely see inventory increases as a result, as China draws on bonded stocks instead of importing and as excess bonded stocks are shifted back on to the LME. We estimate that the ex-China market will need to ‘carry’ a minimum of 200-250kt of additional physical copper over the coming months, equivalent to 4%-5% of quarterly global supply. The latter would most likely result in a widening contango, including downward pressure on cash prices.

 

Specifically, the current LME 3-15 month contango is 1.1%, compared to full carry of c.3%-3.5%.

 

The emergence of this bearish risk – we had assumed that deals would continue indefinitely – complicates our near-term bullish copper view. Indeed, our fundamental short-term thesis is unfolding – copper inventories are drawing, copper’s main end-use markets in China are growing solidly (property sales +39% yoy, completions +7% yoy, auto’s output +14% yoy over the Jan-April 2013 period), seasonal factors are currently supportive, and scrap availability in China is reportedly tight. Positioning also remains short, and policy risks may be mildly skewed to the upside (ECB meeting June 6 and FOMC meeting June 18-19).

 

The other factors that have recently supported a rebound in copper prices have been mine supply disruptions at Grasberg in Indonesia (c.480kt for 2013E), and the threat of further strikes in Chile ahead of the Chilean elections and at Grasberg ahead of contract negotiations (the current labour contract ends in September). Our forecast 2013 disruption allowance of 5.8%, or c.900kt is designed to account for these kinds of developments, and so far this year our allowance looks reasonable, meaning that these disruptions are not set to impact our overall balance forecast.

 

Set against this is the likely near-term unwind in CCFDs and, critically, our view that copper is headed into significant surplus in 2014 (the window for higher prices is shortening). On net, we now see the risks to our 6-mo forecast of $8,000/t as skewed to the downside. In this context, we unwind our September long copper recommendation at $7,482/t, a 3% loss.

If you haven't shorted copper after reading the above.... we suggest you re-read it.

Ploughing on: below is the reason for SAFE's new dramatic regulations, and why China decided to go ahead and kill CCFD, unintended consequences, whatever they may be, be damned:

China’s foreign currency reserves have risen significantly since the start of the year, placing upward pressure on the CNY (Exhibit 1). This development prompted SAFE, China’s regulator of cross-border transactions, to announce a new set of regulations on May 5, to be implemented in June.

 

 

The new regulations can be split into two parts, and broadly summarised as follows:

 

a) The first measure targets Chinese bank balance sheets. This measure aims to:

 

i) Directly reduce the scale of China’s FX loans, thus reducing the scale of letter of credit (LC) financing (bank loans), thereby reducing the volume of funding available for CCFDs (though not specifically targeting CCFDs); and/or

 

ii) Raise banks’ FX net open positions (banks are required to hold a minimum net long FX position at the expense of CNY liabilities), thus raising LC financing costs, thereby increasing the cost of funding CCFDs.

 

Specifically, Exhibit 2 shows that SAFE aims to implement a bank loan to bank deposit ratio of 75%-100% going forward, compared to an existing ratio of  >150%.

 

 

b) The second measure targets exporters and/or importers (‘trade firms’) by identifying any activities that mainly result in FX inflows above normal export/import backed activities (i.e. trades for the purpose of interest rate arbitrage, amongst others). This measure would force entities to curb their balance sheets if they are found to be involved in such activities.

 

Since May10 SAFE has been requesting ‘trade firms’ provide detailed information of their balance sheets and trading records, in order to categorize them as either A-list or B-list firms by June 1, 2013. B-list firms will be required to reduce their balance sheet significantly by cutting any capital inflow related trade activities.

 

To avoid being categorized as a B-list firm by SAFE, ‘trade firms’ may reduce their USD LC liabilities in the near term, with CCFDs likely impacted. It is not yet clear what happens to the B-list firms once they are categorized as such. However, if B-list firms were prohibited from rolling their LC liabilities this could increase the pace of the CCFD unwind, since these trade firms would likely need to sell their liquid assets (copper included) to fund their LC liabilities accumulated through previous CCFDs.

 

These new regulations are likely to impact a number of markets and market participants. In this note we focus on the impact on CCFDs and the copper market. Should a) and b) be enforced, copper financing deals are highly likely to be impacted.

* * *

That explains China's macro thinking. But what does it mean for the actual Copper Financing Deal? The below should explain it:

An example of a typical, simplified, CCFD

 

In this section we present an example of how a typical Chinese Copper Financing Deal (CCFD) works, and then discuss how the various parties involved are affected if the deals are forced to unwind. Exhibit 3 is a ‘simplified’ example of a CCFD, including specific reference to how the process places upward pressure on the RMB/USD. We believe this is the predominant structure of CCFDs, with other forms of Chinese copper financing deals much less profitable and likely only a small proportion of total deal volumes.

 

A typical CCFD involves 4 parties and 4 steps:

  • Party A – Typically an offshore trading house
  • Party B – Typically an onshore trading house, consumers
  • Party C – Typically offshore subsidiary of B
  • Party D – Onshore or offshore banks registered onshore serving B as a client

Step 1) offshore trader A sells warrant of bonded copper (copper in China’s bonded warehouse that is exempted from VAT payment before customs declaration) or inbound copper (i.e. copper on ship in transit to bonded) to onshore party B at price X (i.e. B imports copper from A), and A is paid USD LC, issued by onshore bank D. The LC issuance is a key step that SAFE’s new policies target.


 

Step 2) onshore entity B sells and re-exports the copper by sending the warrant documentation (not the physical copper which stays in bonded warehouse ‘offshore’) to the offshore subsidiary C (N.B. B owns C), and C pays B USD or CNH cash (CNH = offshore CNY). Using the cash from C, B gets bank D to convert the USD or CNH into onshore CNY, and trader B can then use CNY as it sees fit. 

 

The conversion of the USD or CNH into onshore CNY is another key step that SAFE’s new policies target. This conversion was previously allowed by SAFE because it was expected that the re-export process was a trade-related activity through China’s current account. Now that it has become apparent that CCFDs and other similar deals do not involve actual shipments of physical material, SAFE appears to be moving to halt them. 

 

Step 3) Offshore subsidiary C sells the warrant back to A (again, no move in physical copper which stays in bonded warehouse ‘offshore’), and A pays C USD or CNH cash with a price of X minus $10-20/t, i.e. a discount to the price sold by A to B in Step 1. 

 

Step 4) Repeat Step 1-Step 3 as many times as possible, during the period of LC (usually 6 months, with range of 3-12 months). This could be 10-30 times over the course of the 6 month LC, with the limitation being the amount of time it takes to clear the paperwork. In this way, the total notional LCs issued over a particular tonne of bonded or inbound copper over the course of a year would be 10-30 times the value of the physical copper involved, depending on the LC duration. 

 

Copper ownership and hedging: Through the whole process each tonne of copper involved in CCFDs is hedged by selling futures on LME futures curve (deals typically involve a long physical position and short futures position over the life of the CCFDs, unless the owner of the copper wants to speculate on the price).

 

Though typically owned and hedged by Party A, the hedger can be Party A, B, C and D, depending on the ownership of the copper warrant.

As Goldman further explains, the importance of CCFD is "not trivial" - that is an understatement: with the implicit near-infinite rehypothecation in which the number of "circuits" in the deal is only a factor of "the amount of time it takes to clear the paperwork", there may be hundreds of billions, if not more, in leverage resulting from this shadow transaction that has been used in China for years. Now, that loop is about to end. The reality is nobody can predict what the impact will be, but whatever it is - i) it will extract tremendous leverage from the system and ii) it will have adverse impacts on both China's ability to absorb inflation and grow its economy.

How important are CCFDs? They are not trivial!

 

Chinese ‘financing deals’, including CCFDs, are likely to contribute to China’s FX inflows since they involve direct FX inflows through China’s current account. Specifically, for CCFDs, the immediate cross-border conversion of FX to onshore CNY after Party C pays Party B for the copper warrant (Step 2) directly contributes to China’s FX inflows. In terms of outflows, the issuance of LC (FX short-term lending) by Party D to Party A (Step 1) is not associated FX outflow by definition, and when the LCs expire they tend to be rolled forward. Step 3 occurs offshore, so there is no inflow/outflow related to this transaction.

 

In this way, the net Chinese FX inflows/outflows associated with CCFDs are equivalent to the change in the value of the notional LCs. We make some broad estimates of how much of China’s short-term FX lending could be accounted for by CCFDs.

 

Specifically, our best estimate suggests that roughly 10% of China’s short-term FX lending could have been associated with CCFDs since the beginning of 2012 (Exhibit 4). In April 2013, we estimate that CCFDs accounted for $35-40 bn (stock) of China’s total short-term FX lending of $384 bn (stock), making various assumptions. More broadly, Chinese bonded inventories and short-term FX lending has been positively correlated in recent years (Exhibit 5).

 

Two key questions remain: how the upcoming unwind will impact each CCFD participant entity...

How an unwind may impact each CCFD participant

 

As we discussed on pages 4 and 5, SAFE’s new regulations target both banks’ LC issuance (first measure) and ‘trade firms’ trade activities (second measure). Here we discuss how the different entities (A, B, C, D) would likely adjust their portfolios to meet the new regulations (i.e. what happens in a complete unwind scenario).

 

Party A: Party A, without the prospect of $10-20/t profit per Step 1-3 iteration, is likely to find it hard to justify having bonded copper sitting on its balance sheet (the current LME contango is not sufficient to offset the rent and interest costs). As a result, Party A’s physical bonded copper would likely become ‘available’, and Party A would likely unwind its LME short futures hedge.

 

Party B, C: To avoid being categorized as a B-list firm by SAFE, Party B and C may reduce their USD LC liabilities by: 1) selling liquid assets to fund the USD LC liabilities, and/or 2) borrowing USD offshore and rolling LC liabilities to offshore USD liabilities. The broad impact of this is to reduce outstanding LCs, and CCFDs will likely be affected by this. It is not yet clear what happens to the B-list firms in detail once they are categorized as such. However, if B-list firms were prohibited from rolling their LC liabilities this would increase the pace of the CCFDs unwind. In this scenario, these trade firms would have to sell their liquid assets (copper included) to fund their LC liabilities accumulated through previous CCFDs.

 

Party D: To meet SAFE’s regulations, Party D will likely adjust their portfolios by reducing LC issuance and/or increasing FX (mainly USD) net long positions, which would directly reduce the total scale of CCFDs and/or raise the LC financing cost, respectively.

... And what happens to copper prices (hint: GTFO)

Implications for copper - bonded copper moves from a positive carry asset to negative carry asset

Implications for copper - bonded copper moves from a positive carry asset to negative carry asset

 

We expect that a complete unwind of CCFDs, everything else equal, is likely to be bearish for copper prices, LME spreads, and bonded premiums.

 

CCFDs involve a long copper physical positions and a short futures position on the LME. The physical position would be sold if CCFDs unwound and the short futures positions bought back. The newly available physical copper would not be financed by the China and ex-China interest rate differential anymore (not a positive carry asset anymore), and would instead need to be financed by a natural contango (in the interim copper becomes a negative carry asset), everything else equal.

 

Theoretically then, the physical market, over a short period (say, one quarter), may need to absorb as much as c.400kt of copper, equivalent to 8% of quarterly global copper supply.

 

By contrast, the LME futures market would need to absorb buying of c.0.2%-0.3% of quarterly traded LME volumes and c.6% of daily average 2012 open interest. The impact on the physical market is therefore likely to be relatively large, in spite the fact that an unwind of CCFDs does not result in the creation of new copper (i.e. aggregate global copper inventory impact is 0/our inventory chart does not change).

 

What about in practice?

 

Since there are no comparable historical examples to make reference to, what happens when CCFDs unwind in practice is open for debate. We believe that since the downward pressure on the physical market is large, both in absolute terms and relative to the upward pressure on the futures market, near-term prices are likely to come under relatively significant pressure. Further, if the market fears the unwind of CCFDs, physical buyers may hold off on purchases, and futures sellers may bet on lower prices (offsetting either in part or more than offsetting the financing deal related unwind buying). In this way it is likely that in practice the whole copper price curve would be under pressure in the case of a complete CCFD unwind, at least until the contango widens sufficiently to compensate for the cost of carry.

 

We see the following as a likely chain of events in a complete unwind scenario:

  • China would draw on bonded until it is ‘full’. In the current market bonded copper stocks will likely initially flow into the domestic Chinese market, since SHFE prices are above LME prices, with the SHFE curve in backwardation and LME in contango.
  • Chinese imports fall/remain low, placing upward pressure on LME stocks. Since China is drawing bonded inventories to meet its demand, Chinese copper imports are likely to be under downward pressure beyond May, resulting in any excess material ex-China turning up on the LME as well (Exhibit 7). Remaining bonded stocks (ex-stocks in transit), would shift to LME. Once China is ‘full’ (i.e. the import arbitrage closes, bonded physical premia decline, SHFE price and curve softens), the remaining excess bonded inventory will likely make its way on to the LME. Since China is in deficit at present (drawing bonded and SHFE inventories, SHFE in backwardation), due in part to seasonal factors, the inventory numbers noted above, in practice, will likely be smaller but still very large. Our best estimate would be a minimum of 200,000-250,000t of stock could shift/build on the LME over the next 2-3 months, or 4%-5% of quarterly global consumption.
  • LME contango to widen. Higher LME stocks suggest higher LME copper spreads, including downward pressure on the front end. Exhibit 8 illustrates that over the last 6 years, the buildup of LME inventory has been consistently associated with widening LME spreads into contango, and the scale of contango is mostly driven by financing cost and inventory levels. With excess copper flowing into LME warehouses, the spread needs to widen further to finance the carry trade effectively. For reference, LME annual rents are c.$150/t or 2% of copper prices. Assuming an annualized financing cost of 1%-1.5%, full carry is c.3%-3.5%, compared to current LME 3-15 month contango of 1.1%.

 

The main caveat to the above is that a complete unwind in CCFDs is still subject to the implementation of the policy by SAFE, Chinese banks and ‘trade firms’, and the possibility that new financing deals are “invented”. As a result, we will continue to closely monitor implementation of the policy by banks via monitoring bonded physical premiums, SHFE spreads and bonded stock flows.

Finally, what does all this mean for explicit rehypothecation chain leverage (initially just at the CCFD level although a comparable analysis must be done for systemic as well) and CCFD risk exposure:

Leverage in CCFDs

 

Below is a demonstration of the LC issuance process in a typical CCFD. Assuming an LC with a duration of 6 months, and 10 circuit completions (of Step 1-3) during that time (i.e. one CCFD takes 18 days to complete), Party D is able to issue 10 times the copper value equivalent in the form of LCs during the first 6 month LC (as shown from period t1 to t10 in Exhibit 10). In the proceeding 6 months (and beyond), the total notional value of the LCs remains the same, everything else equal, since each new LC issued is offset by the expiration of an old one (as shown from period t11 to t20).

 

In this example, total notional amount of LC during the life of the LC = LC duration / days of one CCFD completion* copper value = 10. In this example, the total notional amount of LC issued by Party D, total FX inflow through Party D from party A, and total CNY assets accumulated by party B (and C) are all 10 times the copper value (per tonne).

 

To raise the total notional value of LCs, participants could:

  • Extend the LC duration (for example, if LC duration in our model is 12 months, the notional LC could be 20 times copper value)
  • Raise the no. of circuits by reducing the amount of time it takes to clear the paperwork
  • Lock in more copper

 

Risk exposures of parties to CCFDs

 

Theoretically, Party B risk exposure > Party D risk exposure > Party A risk exposure

 

  • Party B’s risks are duration mismatch (LC against CNY assets) and credit default of their CNY assets;
  • Party D’s risks are the possibility that party B has severe financial difficulties. (they manage this risk by controlling the total CNY and FX credit quota to individual party B based on party B’s historical revenue, hard assets, margin and government guarantee) (Party D has the right to claim against party B (onshore entity), because party B owes party D short term FX debt (LC)). If party B were to have financial difficulties, party D can liquidate Party B’s assets.
  • Party A’s risk is mainly that party D (China’s banks) have severe financial difficulties (Party A has the right to claim against party D (onshore banks), because Party A (or Party A’s offshore banks) holds an LC issued by party D). In the case of financial difficulties for Party B, and even in case Party D has difficulties, Party A can still get theoretically get paid by party D (assuming Party D can borrow money from China’s PBoC).

In brief (pun intended): a complete, unpredictable clusterfuck accompanied by wholesale liquidations of "liquid assets", deleveraging and potentially a waterfall effect that finally bursts China's bubble, all due to a simple black swan. Although, in reality, nobody knows. Just like nobody knew what would happen when the government decided to let Lehman fail.

So... is this China's Lehman?

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Thu, 05/23/2013 - 10:08 | 3591845 brewing
brewing's picture

fuck it, let's do this...

Thu, 05/23/2013 - 10:11 | 3591855 HelluvaEngineer
HelluvaEngineer's picture

US markets will close green today.  How pathetic.

Thu, 05/23/2013 - 10:17 | 3591864 The Master
The Master's picture

Bernanke's bipolarism yesterday was totally deliberate.  He wanted to test market reaction.  He has now seen that there is NO WAY QE can be tapered any time soon.  He will not step down as Chairman with a market in free fall.  As much as I hate to say it, this is the best BTFD opportunity we've had in a while.  Furthermore, hedge funds are unwinding their Nikkei positions and I imagine a lot of those proceeds will flow into U.S. equities.

Thu, 05/23/2013 - 10:32 | 3591913 SWRichmond
SWRichmond's picture

Isn't it interesting how everyone intuitively knows that money- and credit-creation must be based on somthing real, hence the basis of commodities for various infinite or near-infinite rehypothecation schemes (copper, gold at 100:1, etc)?  "My leverage is safe as long as it's got some reality behind it, some real good...wait, HOW MUCH leverage?  HOW MANY people own this asset?". 

Thu, 05/23/2013 - 10:43 | 3591958 Buckaroo Banzai
Thu, 05/23/2013 - 11:17 | 3592059 nope-1004
nope-1004's picture

Financial innovation.  How wonderful.  Party A lends me $1, I'll sell something to B for $2, B takes a 50% commission and uses it as collateral, meanwhile the initial $1 item not only is inflated by 2.5 times (GDP?), but the item is then resold to multiple parties!!!

Now that's growth baby!

Ya, this will end jus' fine.  We truly do have the most unintelligent in society running the banks.  EVERYTHING is a ponzi scheme to skim off of the intial asset, meanwhile the integrity and whereabouts of the asset itself is in question.

Possession will be everything going forward.  If you don't have it near you, on you, or with you, the fuckers will resell title to it.  That's the only mechanism they have left to show "growth".

 

Thu, 05/23/2013 - 11:26 | 3592140 Buzz Fuzzel
Buzz Fuzzel's picture

Did you say copper?  I wonder what effect this will have on copper?

http://www.extremetech.com/extreme/156393-cold-fusion-reactor-independen...

 

Thu, 05/23/2013 - 11:44 | 3592213 Acet
Acet's picture

I quote: "the nickel’s electrons are forced into the hydrogen to produce neutrons"

The writter of the article doesn't have even the most basic understanding of the structure of atoms: you can't make neutrons from electrons.

I'll wait for a peer-reviewed scientific paper rather than a fluff piece.

Thu, 05/23/2013 - 17:46 | 3593797 espirit
espirit's picture

Should Dr. Copper fail or fall out of favor, one could anticipate the miners to cut back production.

Hmmm... that would mean any by-products of such production could also be reduced.  2+2=4.

Fri, 05/24/2013 - 04:27 | 3595151 Acet
Acet's picture

I stand corrected.

Too long since I studied Physics ...

Thu, 05/23/2013 - 12:08 | 3592334 draug
draug's picture

I give that story a very low chance of being real right now, but if it is then you can forget everything you know about the world economy, the markets and the current recession.

Thu, 05/23/2013 - 14:43 | 3593042 zhandax
zhandax's picture

If it is real we have little chance of hearing about it.  Oilprice has an article which lists the MIC as the first customer. 

http://oilprice.com/Alternative-Energy/Nuclear-Power/Whats-Happened-to-A...

Thu, 05/23/2013 - 10:46 | 3591973 SWRichmond
SWRichmond's picture

Let me once again urge readers to read about and understand MEFO bills and Hjalmar Schacht.

https://en.wikipedia.org/wiki/Mefo_bills

Schacht created this system as a temporary method to fund rearming with only one million Reichsmarks in capital.

By 1939, there were 12 billion Reichsmark of mefo bills

That makes Jeff Christian look like a piker.

Thu, 05/23/2013 - 18:34 | 3593847 SHRAGS
SHRAGS's picture

The link is broken, this one works http://en.wikipedia.org/wiki/Mefo_bills

 

Interesting info...thes quotes got my attention: "they needed a way to fund rearming without leaving a paper trail".  Schacht has later said that the device "enabled the Reichsbank to lend by a subterfuge to the Government what it normally or legally could not do".[1]

 

Just image if the ESF or some other large entity levered up using similar techniques. 

Thu, 05/23/2013 - 10:51 | 3591988 dontgoforit
dontgoforit's picture

There's way too much ass to set

Thu, 05/23/2013 - 11:09 | 3592064 aint no fortuna...
aint no fortunate son's picture

Wonder how Blythe Masters is sleeping these days...

and here comes the SPX rally as Kevin Henry nails the VIX...

Thu, 05/23/2013 - 10:33 | 3591916 Dr. Engali
Dr. Engali's picture

The fed can never end QE regardless of the rhetoric. They may want to, but they are stuck in a box.

Thu, 05/23/2013 - 10:40 | 3591928 McMolotov
McMolotov's picture

$3.75 billion POMO today. If it doesn't close green, does that mean the party's over? Or does it just mean we'll get MOAR?

As for Tyler's article, I consider myself relatively intelligent, but this made me feel like a fucking imbecile. I'm sure I had the same look on my face while reading it that a five-year-old would have if Stephen Hawking were trying to explain string theory.

What I got out of it is what I get out of most articles of this type: The financial system is the equivalent of ten men tying their dicks together with string, and if one of them tries to run away, everyone's in for a shitload of pain.

Thu, 05/23/2013 - 10:51 | 3591987 Dr. Engali
Dr. Engali's picture

 LOL....nice imagery.  They don't need to close it green, they just need to create the illusion of stability. When the party is over nobody will profit from the downside. As for the article I have to read these twice t grasp everything he is saying. 

Thu, 05/23/2013 - 10:55 | 3592007 BandGap
BandGap's picture

String theory I understand, this shit lost me through sheer convolution. Nothing is straightforward.

Why would ten guys tie their dicks together with a string? Is Dr. Copper involved?

Thu, 05/23/2013 - 11:05 | 3592054 Rubicon
Rubicon's picture

"get a cup of coffee first" was enough for me to lie down.

Thu, 05/23/2013 - 11:25 | 3592135 donsluck
donsluck's picture

If a financial arrangement cannot be understood by a person of average intelligences, it's fraud.

Thu, 05/23/2013 - 11:54 | 3592256 Going Loco
Going Loco's picture

During my career I have had involvement with two large deals. One of them was founded on a book (literally) of about 70 or 80 pages, tables of figures, charts, and abstruse calculations. I never did understand it fully. It turned out that nobody else did either. The other deal was done on the back of an envelope, literally. I went into the meeting to discuss the deal and the CEO pulled the envelope out of his pocket. I got the hang of the second deal in about 30 seconds, evaluated it during a one hour discussion, worked out how to implement it in the second hour, and the heads of terms were signed about a fortnight later.

The first deal went very, very sour and only the lawyers profited.

The second deal went very, very well. I daresay the other side wished they had asked for a higher price when the dust had settled, but it wasn't a bad deal for them. It was a very good deal for us. I got a bonus.

This copper rehypothecation scam reminds me of the first deal. It is either a fraud on the banks, or it has been facilittated by the banks to cheat their regulators (assuming they have any). It will undoubtedly go badly wrong for everyone at some point.

Thu, 05/23/2013 - 14:55 | 3593113 Thisson
Thisson's picture

This copper deal is basically the same as bullion leasing.  They start with copper, trade it for cash, loan out the cash, collect interest payments for the duration of the deal, and then get the cash back and repurchase the copper.  The reason the article is hard to understand is that most of us are not familiar with the terms of these LCs, and the article doesn't clearly explain what they are (except for saying that they are short term fx debt).  It's not really clear why any copper is needed for this transaction, because the parties are just shifting it around in a circle.  I guess the LC is only issued in relation to trading in a tangible, because otherwise they could really be using a peppercorn or any token of imaginary value.

The main problem I have with this article is that it's arguing that copper will drop as a result of SAFE limiting copper financing deals going forward.  I have this problem because, as the article conceeds, one of the solutions for the deal participants is to USE MORE COPPER.  So, in fact, based on the article's own premises, copper could go up!

Thu, 05/23/2013 - 17:27 | 3593752 Panafrican Funk...
Panafrican Funktron Robot's picture

Yeah, I'm actually with you there bud.  Let's all remember what party is recommending a short here.  Now lets all guess what bet they're actually taking.  

Thu, 05/23/2013 - 18:03 | 3593830 post turtle saver
post turtle saver's picture

This comment needs a few hundred more +1 votes. Well done.

Thu, 05/23/2013 - 19:08 | 3594001 spencer
spencer's picture

you misunderstood. the "more copper" is because of the loop. like a fractional reserve system.

but otherwise you are correct in assumption of market value - the physical unwind will hit distributors and hedge unwind will likely hit COMEX.

so it is quite likely we see a little spike in price. I would not count on it though.

The opposite happens in gold lately - there is paper liquidation in GLD and massive physical drain on the inventory side - the outcome is a price drop in gold.

 

But anyway - the article is very good.

 

Thu, 05/23/2013 - 11:36 | 3592182 Meat Hammer
Meat Hammer's picture

I drank 2 cups of coffee, still felt like a window-licking retard, and set a land-speed record running to the bathroom.  

Thu, 05/23/2013 - 10:54 | 3592002 MarsInScorpio
MarsInScorpio's picture

McMolotov

 

As always, short, sweet, and clearly understandable. Congrats.

 

Ouch!!

-30-

Thu, 05/23/2013 - 11:32 | 3592162 t0mmyBerg
t0mmyBerg's picture

Thanks for a good laugh.

Thu, 05/23/2013 - 11:55 | 3592260 TheEdelman
TheEdelman's picture

He said to grab a cup of coffee.  He should of said to grab a cup of Epinephrine.  I atleast now know what CCF is.  srsly

Fri, 05/24/2013 - 10:17 | 3595735 icanhasbailout
icanhasbailout's picture

he financial system is the equivalent of ten men tying their dicks together with string,

 

Best. Metaphor. Ever.

Thu, 05/23/2013 - 10:25 | 3591868 The Thunder Child
The Thunder Child's picture

Unfortunately HFT and POMO can keep this turd afloat indefinitely, or until TPTB are ready to flush.

Would you still walk into a Casino and play if you knew it was rigged? People need to ask the same question with this market, there is no difference....walk away.

Thu, 05/23/2013 - 10:57 | 3592013 BandGap
BandGap's picture

You would play with these odds, the real bet would be timing as to when they pulled the plug.

Thu, 05/23/2013 - 11:19 | 3592103 The Thunder Child
The Thunder Child's picture

I have morals and I know that every dollar put into this shitshow is one more vote for its continued support.

Trust me I have been tempted many times since I withdrew but I stand firm and keep stacking.

Thu, 05/23/2013 - 12:31 | 3592436 Kaiser Sousa
Kaiser Sousa's picture

Exactly...stay the righteous path...
Be in this shithole of a world but not of it....
And yes, always be stacking my friend....

Thu, 05/23/2013 - 11:14 | 3592085 viahj
viahj's picture

Benanke is a pilot in a blacked out cockpit trying to manage a controlled descent.  One turbulent air bubble may wrench control from his sweaty palms and the decent's glide slope may be turned into Newton's apple. 

 

 

Thu, 05/23/2013 - 17:24 | 3593744 icanhasbailout
icanhasbailout's picture

He's more like a pilot who deliberately dismantled the normal controls and is trying to land the plane by ordering everyone inside to move left or right, forward or backward.

Thu, 05/23/2013 - 10:33 | 3591917 icanhasbailout
icanhasbailout's picture

Kevin Henry is strapped to the trading terminal with a backpack full of zeroes, a forced IV supplying Mountain Dew directly to the bloodstream.

Thu, 05/23/2013 - 16:52 | 3593641 SILVERGEDDON
SILVERGEDDON's picture

Jesus H. Christ on a crutch.

What about the value of my penny collection ?

There goes the retirement fund.

 

Fuckers. 

Thu, 05/23/2013 - 10:30 | 3591903 Son of Loki
Son of Loki's picture

Loops make me Dizzy.

Thu, 05/23/2013 - 10:49 | 3591984 dontgoforit
dontgoforit's picture

Just too much tube and not enough holes.

Thu, 05/23/2013 - 11:20 | 3592110 slaughterer
slaughterer's picture

Copper goes to 1.50 = all markets collapse.  

Fri, 05/24/2013 - 02:59 | 3595104 mkkby
mkkby's picture

Nah.  It's just another form of paper that the fed and other CBs will buy at face value when the ponzi unwinds.  Eventually they'll rehypothecate the paper using itself as the collateral.

Thu, 05/23/2013 - 10:10 | 3591852 Possible Impact
Possible Impact's picture

Tulips...

Thu, 05/23/2013 - 10:13 | 3591860 LawsofPhysics
LawsofPhysics's picture

By god they will put a bid under treasuries and close green...    insane.

Thu, 05/23/2013 - 10:26 | 3591889 Dr. Engali
Dr. Engali's picture

This surprises you? They will do whatever it takes to maintain the illusion of a stable system. Watch for the smack down in gold before the day is over.

Thu, 05/23/2013 - 10:30 | 3591905 lakecity55
lakecity55's picture

my fiats are loaded and waiting. dealer on speed dial.

Thu, 05/23/2013 - 10:31 | 3591909 fonzannoon
fonzannoon's picture

Here is a quick insanity test for everyone on here. Do you think a big correction is coming? Do you think it will take place over the course of days/weeks etc? Do you think you will be able to profit from this?

If you answered yes then you are insane and you will go insane waiting for it. We will go from full retard to full corzine in a half a second.

 

Do NOT follow this link or you will be banned from the site!