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Here Is What's Going On In China: The Bronze Swan Redux

Tyler Durden's picture





 

A month ago, when stock markets around the globe were hitting all time highs, we wrote "The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event"?" which as so often happens, many read, but few appreciated for what it truly was - the end of a major shadow leverage conduit (one involving unlimited rehypothecation at that),and the collapse of a core source of shadow liquidity. One month later, China's "Lehman event" is on the verge of appearing, and with Overnight repo rates hitting 25% last night, coupled with rumors of bank bailouts rampant, it very well already may have but don't expect the secretive Chinese politburo and PBOC to disclose it any time soon. So now that the market has finally once again caught up with reality, for the benefit of all those who missed it the first time, here is, once again, a look at the arrival of China's Bronze Swan.

From May 23: 

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

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?

 

 


 

And now back to June 20, when we find that copper is now down 11.2% since this post was written.


 

 


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Thu, 06/20/2013 - 11:21 | Link to Comment Ancona
Ancona's picture

I think I'll just buckle up and ride this one out.

Thu, 06/20/2013 - 11:22 | Link to Comment monkeyboy
monkeyboy's picture

Ruh roh, I think we here in Australia are about to have our rude awakening!

Thu, 06/20/2013 - 11:25 | Link to Comment Element
Element's picture

We deserve all we get.

Thu, 06/20/2013 - 11:35 | Link to Comment Stackers
Stackers's picture

Sweet Jesus, just read through that whole mess.

 

People 500 years from now are going to look back at us, like we look back at 15th century alchemist.

 

Thu, 06/20/2013 - 11:45 | Link to Comment Fish Gone Bad
Fish Gone Bad's picture

As I have said many many times before over the last 5 years, this will be the first collapse everyone saw coming and still did not get out of the way.

Thu, 06/20/2013 - 12:22 | Link to Comment BigJim
BigJim's picture

I await AnAnonymous' mea culpa with bated breath.

Or is this copper rehypothecation yet another example of unbridled US citizenism?

Thu, 06/20/2013 - 13:42 | Link to Comment Going Loco
Going Loco's picture

Fish Gone Bad - were you posting on Mish's site 5 years ago? Someone with that name used to be there. I seem to remember your boundless optimism (\sarc).

Thu, 06/20/2013 - 11:52 | Link to Comment Element
Element's picture

As Tyler alluded to in the other thread, this is what happens when people mistake 'trading' in financialized 'markets', for no-BS real physical trade of stuff, in an actual economically-viable manner.

Thu, 06/20/2013 - 12:01 | Link to Comment prains
prains's picture

ponzi  vs.  physical

 

lets get physical, physical....

 

she was a cute aussie

Thu, 06/20/2013 - 12:26 | Link to Comment silverserfer
silverserfer's picture

all this bullshit and if you had a video cam watching the stockpiles of copper it would be just sitting there the whole time with an occasional rat scurrying by and the  tranquil sound of birds chirping in the background.

Thu, 06/20/2013 - 12:59 | Link to Comment BigJim
BigJim's picture

Yes, all made possible by the PBOC currency peg.

Thanks again, central planners! 

Thu, 06/20/2013 - 13:38 | Link to Comment NoDebt
NoDebt's picture

.... and dead pigs floating peacefully down the nearby river.

Like I said on here many times before.  Pigs are very smart animals.  They know when it's time to commit mass suicide.  That time has arrived in China.

Thu, 06/20/2013 - 12:11 | Link to Comment Quinvarius
Quinvarius's picture

And they will wonder what a dollar was.  Maybe some kind of exotic tulip.

Thu, 06/20/2013 - 13:04 | Link to Comment BigJim
BigJim's picture

 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.

LOL, that's not how it works in the PM market! Increased physical purchases of gold => price declines in today's bizzaro world.

Thu, 06/20/2013 - 23:06 | Link to Comment old naughty
old naughty's picture

"People 500 years from now are going to look back at us..."

 

No they won't. Not only they'd look at things in a much wider spectrum, they'd not be interested in one of the worst mis-managed period in the history of man-kind.

Besides, isn't this wishful thinking that we'd be in the same-old same-old (consciousness and cycles) 0.5C from now.

Not a chance.

evol-love

 

Thu, 06/20/2013 - 13:16 | Link to Comment THECOMINGDEPRESSION
THECOMINGDEPRESSION's picture

9 TRILLION missing from the FEDERAL RESERVE! HOLY FUCK..

https://www.youtube.com/watch?feature=player_embedded&v=SIM8x5wLtR4

Thu, 06/20/2013 - 14:34 | Link to Comment Midasking
Midasking's picture

tapering is not happening or the entire world will be a smoking hole in the ground. QE will be expanded you can count on that. http://tinyurl.com/mem7o7x

Thu, 06/20/2013 - 12:16 | Link to Comment AmCockerSpaniel
AmCockerSpaniel's picture

>>>>> (get a cup of coffee first: this is not a simple walk-thru) <<<<< More like a vat of coffee. I'm

in my 70's, and this is just over the top for me.  So; If you don't understand it, don't mess with it.

Thu, 06/20/2013 - 13:00 | Link to Comment lakecity55
lakecity55's picture

I'm putting back on the scuba suit to go fondle my PMs.

Thu, 06/20/2013 - 13:54 | Link to Comment nasdaq99
nasdaq99's picture

HOW MUCH MONEY DID THE FED LOSE TODAY???????????????????

Thu, 06/20/2013 - 11:24 | Link to Comment SheepDog-One
SheepDog-One's picture

Feast on the free monies today! For tomorrow, we dine in HELL!

(Which in our case will be a dirty old Chinese restaurant)

Thu, 06/20/2013 - 11:29 | Link to Comment King Nothing
King Nothing's picture

Yeah I didn't read any of that, but even so why is everyone screaming CHINA?

 

Russia is the least loaned out country in the world, so why are they so quiet lately, what are they doing over there and why would any one think they don't have some greater hidden agenda?

 

Just saying

Thu, 06/20/2013 - 11:33 | Link to Comment SheepDog-One
SheepDog-One's picture

I think China is relevant only because they own so much of our debt. Pretty scary too with the wheels falling off that debt. But yes Russia is not to be overlooked, that would be quite foolish.

Thu, 06/20/2013 - 12:57 | Link to Comment rosiescenario
rosiescenario's picture

....and with European auto sales collapsing, here comes a glut of steel and reduced demand for iron ore from So. America on top of any drops in copper demand from that same region. Let's not omit Australia, too, from the monkey hammer now in a downward trajectory.

Thu, 06/20/2013 - 13:09 | Link to Comment Dadburnitpa
Dadburnitpa's picture

Can't imagine that both R & C won't just unload most of their USTs. Russia already is from what I understand.

Thu, 06/20/2013 - 14:27 | Link to Comment RallyRoundTheFamily
RallyRoundTheFamily's picture

They are BTFD in gold and other US assets

Thu, 06/20/2013 - 16:02 | Link to Comment SheepDog-One
SheepDog-One's picture

China and Russia will just 'unload their UST's' to whom exactly? Paraguay?

Fri, 06/21/2013 - 02:28 | Link to Comment StychoKiller
StychoKiller's picture

Check with Jim Willie (goldenjackass), he sez China is buying stuff from London and paying with T-Bills...

Thu, 06/20/2013 - 12:31 | Link to Comment ImnotPOTUS
ImnotPOTUS's picture

Just wait until after the Olympics in Sochi. Putin has the most to gain from a fiat collapse. If you don't owe anyone anything you are large and in charge when no one, and I mean no one is left lending money to the have-nots'.

When the SHTF it will be thrown by Putin. "You want gas for the winter, I'll take commodities, no fiat cash anymore." EU goes apoplectic. Putin to Syria or (insert any muslim oil dictatorship) "lets see how much fun all of you can have when "EVERYONE GETS A KALASHNIKOV for FREEEEEE!!!!!!!....Middle East goes full time civil unrest/war/flames cats and dogs living together... mass hysteria!

China (which is just the worlds largest MAFIA, it is not a government) goes into civil vapor lock. Japan lashes out after committing seppuku for the last 20 years. India gets dragged into resource wars with everyone around it.

The US - USSR balance of power game will be back on. Russia will be the only stable, reliable, and deliverable source of fossil fuels. The US will be the only fiat currency left. Anyone outside these two places has to play both sides to maintain some sort of civil order.

No hidden agenda, If a sociopath behaves in a deliberate, exacting and precise manner it does not mean he is the crazy one if everyone else is living like tomorrow will never happen.

He has no debt, he runs the country with a iron fist, he makes life difficult for adversaries (i.e. Syria) He has a nation of people accustomed to having life fall apart around them for the last 100 years!!!! He is more ready for the fiat collapse than anyone else. He has nukes, an army a navy and an air force.

 

The rest of the world will have to choose between the US and RUSSIA. Or they can make a go of it in a non-aligned framework. Good luck with that. Not much chance of cooperation when the global output of fossil fuels gets cut to a third of what the current fiat debt financed orgy of excess can accommodate.

Thu, 06/20/2013 - 13:13 | Link to Comment Herd Redirectio...
Herd Redirection Committee's picture

If China gets too big for their britches (some years down the line) I expect to see Russia and the US co-operating.

Any way... That is still many years away IMO.

Thu, 06/20/2013 - 11:22 | Link to Comment Ignatius
Ignatius's picture

Fuck China

Here's a preview (full interview soon) of NSA whistleblower Russ Tice on domestic spying and blackmail at the highest levels in the USA:

http://www.boilingfrogspost.com/wp-content/uploads/BF.0112h.Tice.highlig...

Chilling.

Have a nice day

 

Thu, 06/20/2013 - 11:30 | Link to Comment Element
Element's picture

 

 

soz basically, nothing much about home-grown trrists?

It would be nice to maybe see what he claims he's holding in his hand.

Kind of useless without it, if he's a whistle blower, then quit fluffing, out with some evidence.

Thu, 06/20/2013 - 11:44 | Link to Comment Element
Element's picture

Ok red arrowers:

BREAKING: NSA Whistleblower Russ Tice Alleges NSA Wiretapped Then-Sen. Candidate Barack Obama

 

Notice the word "ALLEGES" within the title?

This indicates a claim is being made without evidence or substanciation. Ok?

If there's no evidence or substanciation, then this is not whistle-blowing - it's rendered approximately nothing.

Provide evidence.

Thu, 06/20/2013 - 12:42 | Link to Comment Ignatius
Ignatius's picture

Yeah, if only it were consistent with what Binney, Drake and Snowden and others have been saying... oh, wait.

/sarc

Thu, 06/20/2013 - 13:23 | Link to Comment Herd Redirectio...
Herd Redirection Committee's picture

Evidence, also known as proof, will get you killed.  FYI

Thu, 06/20/2013 - 15:58 | Link to Comment Element
Element's picture

Nope, he claimed many things that no one else has so far (as far as I'm aware) so he's actually inconsistent with the others, and he went out on a limb with novel claims and didn't backup any of them. And those interviewing didn't even challenge the guy for evidence!

That is a simple observation that should be acknowledged, not ignored, avoided or denied.

Thu, 06/20/2013 - 12:58 | Link to Comment lakecity55
lakecity55's picture

Where's the goods on Soetoro/Bounel???

Or is this just a  cia/nsa turf war and we are suckers??

Thu, 06/20/2013 - 14:42 | Link to Comment WillyGroper
WillyGroper's picture

Ok. I'll bite.

For someone so skilled in spectrometry testing, u can't spell worth shit.

substanciation? Credible enuf?

Thu, 06/20/2013 - 16:01 | Link to Comment Element
Element's picture

wft? It was an editing typo, from 'substance', to 'substantiation'.

My point is pretty obvious, so what has nit-picking over a typo got to do with the credibility of the basic point that claims require evidence, or else they are 100% unsubstantiated, and can be (and also should be) ignored, or even discounted?

Plus 'consistency' with what others have said makes no difference. I could easily mouth a lot of NSA stories consistent with what others have said. It's much too easy. The fact is, there are a lot of things said within the posted audio link of the highlights that were not said by any others. I also downloaded the whole audio-file, not just the highlight excerpt claims, to see if there was any evidence offered to substantiate the claims made within the highlights. There wasn't.

So if there's a question of 'credibility' it's with regard to the people that made that audio file, then pretended to present it as a whistle-blowing and insightful report. Which it wasn't, so I won't waste any more time listening to that source again.

Thu, 06/20/2013 - 11:43 | Link to Comment i-dog
i-dog's picture

He was talking about what he's seen ... not what he's got.

Anyway, sounds to me like an ongoing CIA vs. NSA turf war. I'd like to see him interviewed on video ('cos he doesn't sound too convincing on audio).

Thu, 06/20/2013 - 11:46 | Link to Comment Element
Element's picture

He does say in the audio that he's referring to what he has in his hand.

Forget the video, I'd just like to see the detailed evidence.

Thu, 06/20/2013 - 12:56 | Link to Comment lakecity55
lakecity55's picture

If he wants to maitain credibility with me, he'd better have something on the secret TPP Traety.

Thu, 06/20/2013 - 14:46 | Link to Comment dunce
dunce's picture

Physical possession of the evidence is a criminal act because it is classified material, such "evidence " would be used against "you", not the people in charge of the operation. The whole thing is part of the evidence that we have passed the "tipping point" and our govt. is totally out of control. The only question that remains is "who" is in charge? The moron in the white house does not know he is just another pawn in his game.

Thu, 06/20/2013 - 20:06 | Link to Comment i-dog
i-dog's picture

A. Obomber's not a moron ... he's a puppet. Big difference. Childish "he's a poopy-pants" epithets solve nothing.

B. Obomber knows exactly that he's a puppet ... and who's pulling his strings ... otherwise he wouldn't lie every time he opens his mouth. Kennedy was also a puppet, and he got himself air-conditioned when he turned against his puppet-masters.

If Obomber wants to save himself, he should seek whistleblower protection!

Thu, 06/20/2013 - 14:15 | Link to Comment Bobportlandor
Bobportlandor's picture
Why NSA whistle-blower Russ Tice may be right.

And fired NSA contractor, Margaret Newsham story.

Posted Tuesday, Jan. 17, 2006, at 5:15 PM

 

http://www.slate.com/articles/news_and_politics/politics/2006/01/the_pro...

 

One thing for sure is, both of theses persons story's are being confirmed today.

 

Thu, 06/20/2013 - 11:22 | Link to Comment franzpick
franzpick's picture

Kyle Bass points out that the credit event happens so fast that....ooops, there it was.

Thu, 06/20/2013 - 11:23 | Link to Comment NEOSERF
NEOSERF's picture

Uhmmm, okay Short FCX?

Thu, 06/20/2013 - 14:48 | Link to Comment dunce
dunce's picture

Maybe if you are a trader, but i believe it has long term value and bought some more yesterday.

Thu, 06/20/2013 - 11:25 | Link to Comment Brett Merkey
Brett Merkey's picture

Nothing to get excited about. Chinese overnight rates have settled in to a nice, sedate, hardly-worth-mentioning 13%...

http://www.nytimes.com/2013/06/21/business/global/china-manufacturing-co...

Thu, 06/20/2013 - 11:26 | Link to Comment SheepDog-One
SheepDog-One's picture

Man, where's Slaughterer today? He's probably busy counting all his money from short yesterday morning I guess.

Thu, 06/20/2013 - 11:33 | Link to Comment Technical Difficulty
Technical Difficulty's picture

He did say he was naked short. Brave man!

Thu, 06/20/2013 - 12:03 | Link to Comment Dr. Engali
Dr. Engali's picture

Knowing him he's off parying with his proceeds.

Thu, 06/20/2013 - 11:27 | Link to Comment teolawki
teolawki's picture

Run Forrest! Run!

Thu, 06/20/2013 - 11:33 | Link to Comment max2205
max2205's picture

What?.....???

Thu, 06/20/2013 - 11:36 | Link to Comment Legolas
Legolas's picture

The problem with articles like this is "by the time I finish digesting the mountain of information (don't get me wrong, it's a great read) the next great event under the bigtop has the spotlight." 

If only I was smarter !

 

Thanks, Tyler.  Great read !

 

 

 

Thu, 06/20/2013 - 12:10 | Link to Comment Dr. Engali
Dr. Engali's picture

Articles like this serve to enlighten me on just how much I don't know. That's own of the major reasons I like it here..... that and the great commentary.

Thu, 06/20/2013 - 13:07 | Link to Comment Tsunami Wave
Tsunami Wave's picture

This was a long, complex, but good read. This is why I fuckin read ZH. I wouldn't have caught this in any PBOC report let alone anything from sites like Yahoo finance. Also just when I start thinking I know a lot about finance/macroeconomics, I come across something like this and I realize I just don't.

So.... this means that copper prices will be basically twisted down.. Starting a week ago. All banks in china will liquidate everything they can sell to cover any shortfalls/margins. This'll produce a massive ripple effect in SE Asia along with the world.. So All things being equal, what will in this unique case happen to the CNY?

Thu, 06/20/2013 - 11:38 | Link to Comment adr
adr's picture

If you make products, even in China, and try to sell them for a living. There is no profit to be made. Retailer margins keep increasing and production costs keep going up. You can't make a quality product and sell it at a price almost anyone can afford.

True commerce is dead. The only business left is the fantasy world of Wall Street where you don't actually have to make a profit to have your company valued in the hundreds of billions.

In the real business world, it may have looked like you made a profit, but then the sellthrough ends up being crap and you have to take back millions of dollars in merchandise. With the Big Box chargebacks, you may end up losing money.

Inventory weekly turn has fallen below 7% at many major retailers. On some products it has fallen below 5%. What that means is you are only selling 5% of the available inventory each week. Seasons are typically nine weeks long, which means at that sellthrough you are going to have a little over 50% of your inventory left at the end of the season, not good.

What is hysterical is that inventory levels are at the lowest levels in years and you are still getting miniscule sellthrough. 5% of a few hundred units is better than 5% of a couple dozen in overall dollar terms. But the stores have been looking at what is left over and having to mark a couple dozen items down 50% at the end of a season is better than having to mark down a couple hundred.

There is such fear in buyers that anything they buy won't sell, that they will almost not buy anything to begin with.

Thu, 06/20/2013 - 13:12 | Link to Comment Winston Smith 2009
Winston Smith 2009's picture

Agree with you 100%.

‘Financialization’ as a Cause of Economic Malaise - 11 June 2013

http://economix.blogs.nytimes.com/2013/06/11/financialization-as-a-cause-of-economic-malaise/

"the impact of finance on economic growth is very positive in the early stages of development. But beyond a certain point it becomes negative, because the financial sector competes with other sectors for scarce resources.

Ozgur Orhangazi of Roosevelt University has found that investment in the real sector of the economy falls when financialization rises. Moreover, rising fees paid by nonfinancial corporations to financial markets have reduced internal funds available for investment, shortened their planning horizon and increased uncertainty.

Adair Turner, formerly Britain’s top financial regulator, has said, “There is no clear evidence that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 to 30 years has driven increased growth or stability.”

He suggests, rather, that the financial sector’s gains have been more in the form of economic rents — basically something for nothing — than the return to greater economic value.

Another way that the financial sector leeches growth from other sectors is by attracting a rising share of the nation’s “best and brightest” workers, depriving other sectors like manufacturing of their skills."

Thu, 06/20/2013 - 11:55 | Link to Comment Unprepared
Unprepared's picture

Haha, it looks like I will be winning the bet with my co-worker: 20% "correction" from the market top by Nov.

Bet entered: early May.

I think a pecan pie is involved here.

In all cases, FU-BB

Thu, 06/20/2013 - 12:38 | Link to Comment Creepy Lurker
Creepy Lurker's picture

Home made? mmm...

Thu, 06/20/2013 - 11:56 | Link to Comment SillySalesmanQu...
SillySalesmanQuestion's picture

Dr. Copper's prescription pad seems to have disappeared or vanished....Whoosh, aaaaannnd it's gone...

Thu, 06/20/2013 - 12:56 | Link to Comment DOT
DOT's picture

Prescriptions are for MDs; Dr. Copper is a Witch Doctor.   

Ouch!

Thu, 06/20/2013 - 12:35 | Link to Comment Catullus
Catullus's picture

Uh... The PBOC is fucked. They can't do anything about this if it's a USD call. They have to set up an FX Swap with the Fed. Which effectively means bailing out every over-levered Chinese chop shop out there.

Methinks this is payback for 2008 when Chinese banks forced the MMFs to break the buck.

Thu, 06/20/2013 - 12:36 | Link to Comment toadold
toadold's picture

"Cu's on first? No Hu's in the warehouse, no Cu's there. Huh? They arrested him? Who? No Huh. Hu's just reporting what he didn't find.

OH shit!  No that we got plenty of, lousy invetment. Need better way to move it around. To much on Internet."

Thu, 06/20/2013 - 12:40 | Link to Comment toadold
toadold's picture

As for Australia, they'll always have another ewe, also they'll get healthy by eating their Greens...or at least using them for fertilizer.

Thu, 06/20/2013 - 12:40 | Link to Comment czarangelus
czarangelus's picture

What does this mean?

Thu, 06/20/2013 - 13:16 | Link to Comment Catullus
Catullus's picture

They're round tripping copper warrants with off shore banks to create virtual, callable dollars to which they loan out. The dollars are yuan good because of the peg so you can create loans in china.

There's no theoretical limit to the round trip. But if the warrants don't roll, or the underlying begins rolling below current prices, people begin unwinding and then having dollar calls.

Thu, 06/20/2013 - 13:47 | Link to Comment Herd Redirectio...
Herd Redirection Committee's picture

It is (or was) a convoluted way for owners of copper, in bonded warehouses, to make some money.

They have the least risk in this set up, so you can assume they were the originators of the scheme.

Thu, 06/20/2013 - 13:04 | Link to Comment rosiescenario
rosiescenario's picture

So, lets see....China was on a defacto copper standard but because that copper was re-re-re-hypothecated, there is a bit of a problem with the supposed underlying collateral?

 

Here's a modest proposal going forward: since who owns what copper is in doubt, the new metal to use for loan securitization should be silver.

Thu, 06/20/2013 - 13:09 | Link to Comment Panafrican Funk...
Panafrican Funktron Robot's picture

China printing = US inflation comes back onshore.  

Thu, 06/20/2013 - 13:11 | Link to Comment lakecity55
lakecity55's picture

I just ordered more Ag.

The premiums are going up.

Get it while you can.

Keep Stackin!

Thu, 06/20/2013 - 13:13 | Link to Comment rosiescenario
rosiescenario's picture

Just glanced at the put option activity on FCX......quite some move!

Thu, 06/20/2013 - 13:19 | Link to Comment Catullus
Catullus's picture

Wow. Imagine if someone was doing this with oil. That would be epic

Thu, 06/20/2013 - 13:26 | Link to Comment yrbmegr
yrbmegr's picture

Nobody could have forseen this, except that everybody did.  Everybody, that is, but the Chinese government.  Laughable that they thought merely raising interest rates would reduce inflation in China.  Equally laughable that they think merely reducing interest rates will reduce deflation.  A currency peg is exactly that, and this is what happens.

Thu, 06/20/2013 - 13:29 | Link to Comment red_pill
red_pill's picture

off topic, but I don't see an article about the death of Journalist Michael Hastings of Rolling Stone, that wrote the General McChrystal article that seemed to get him fired. He died in a suspicious car crash. Watch the video of the aftermath...at first the car looks shredded in the rear and straight along the sides and NOT crumpled in front, like a gas tank explosion, then after the real firefighters come in and take over from the guy with the garden hose, the car looks totally different; accordioned totally on front and sides, and not shredded in the back...on the same video. I watched video earlier today, and thought it looked weird then, later saw the analysis with still frames from the vid, which I confirmed by looking at the video again; and found out WHY I felt video was weird. Breitbarted?

Video is here: http://12160.info/video/journalist-michael-hastings-dies-in-fiery-crash-hollywood-raw

Analysis with still frame from the video here: http://www.jimstonefreelance.com/hastingsmurdered.html

 

Thu, 06/20/2013 - 13:43 | Link to Comment IridiumRebel
IridiumRebel's picture

Well, Jose was a big help in that video. 

Thu, 06/20/2013 - 13:51 | Link to Comment The Invisible Foot
The Invisible Foot's picture

Ah so that's whats going to set this whole thing of. 5

Thu, 06/20/2013 - 13:52 | Link to Comment imbrbing
imbrbing's picture

phew, my scroll finger is tired now! To sum it up, this is saying things are bad right? :)

Thu, 06/20/2013 - 16:13 | Link to Comment WallowaMountainMan
WallowaMountainMan's picture

goldman:

"we had assumed that deals would continue indefinitely –"

uh...housing?

oops, sorry.

copper

 

"Goldman explains (get a cup of coffee first: this is not a simple walk-thru)"

i'll be right back. am going to get a danish too.

Thu, 06/20/2013 - 16:51 | Link to Comment resurger
resurger's picture

OKAY LET ME GET THIS STRAIGHT OKAY! IF THE BONDS ON THE 10SHIT GOES COUPLE OF BASIS POINTS WHY GOLD DROPS 7%!!!

fuck if i care, make it cheaper..

Thu, 06/20/2013 - 17:16 | Link to Comment Robert.Paulson
Robert.Paulson's picture

TL;DR.... But hey, they are Commies playing Capitalism... Or rather Cleptocratists.

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