This page has been archived and commenting is disabled.

Someone Is Betting That The Chinese Currency Collapses By The End Of 2014?

Tyler Durden's picture


Last week, USDCNY began to accelerate lower and break across the "real pain" threshold that we have been discussing for many of the world's so-called "hedgers" who have been riding the one-way strengthening trend of the CNY for years and piled in with leveraged trades on what had been a one-way bet. The collapse this week, to levels not seen since pre-BoJ QQE and pre-Fed QE3 appeared to trigger an avalanche of unwinds or hedges of the exposures we have been worrying about. As the chart below shows, billions of dollars of upside calls on USDCNY were purchased on Friday with serious size out to 6.65 strikes (levels not seen since 2009) by the end of 2014.


The losses are mounting, as we explained in great detail here...

Simply put, if the CNY keeps going (whether by PBOC hand or a break of the virtuous cycle above), then things get ugly fast...

How Much Is at Stake?
In their previous note, MS estimated that US$350 billion of TRF have been sold since the beginning of 2013. When we dig deeper, we think it is reasonable to assume that most of what was sold in 2013 has been knocked out (at the lower knock-outs), given the price action seen in 2013.

Given that, and given what business we’ve done in 2014 calendar year to date, we think a reasonable estimate is that US$150 billion of product remains.

Taking that as a base case, we can then estimate the size of potential losses to holders of these products if USD/CNH keeps trading higher.


In round numbers, we estimate that for every 0.1 move in USD/CNH above the average EKI (which we have assumed here is 6.20), corporates will lose US$200 million a month. The real pain comes if USD/CNH stays above this level, as these losses will accrue every month until the contract expires. Given contracts are 24 months in tenor, this implies around US$4.8 billion in total losses for every 0.1 above the average EKI.


And clearly the hedging of those losses is underway en masse... (the size of the circles is the notinal being hedged - we have highlighted a few for context) as it is clear, hedgers are concerned that CNY would weaken to 6.65 or beyond by the end of the year

(h/t @moved_average )


The escalation of the unwind in recent days suggests the vicious circle is beginning.

Finally, putting aside speculative trader P&L losses, many of which are said to be of Japanese origin and thus will hardly enjoy much or any PBOC sympathies, here is CLSA's Russel Napier on what the long-tern fate of the Renminbi will be:

“Mercantilist alchemy transmutes China’s external surpluses into foreign exchange reserves and renminbi. But with capital outflows from China at record highs, those surpluses are only maintained due to its citizens’ foreign-currency borrowing. Bank-reserve and M2 growth are already near historical lows and are driving tighter monetary policy. This will lead to severe credit-quality issues and force the authorities to accept a credit crunch or opt for a major devaluation of the renminbi. They will do the latter; and despite five years of QE, the world will get deflation anyway.”


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 04/26/2014 - 18:41 | 4699803 Yen Cross
Yen Cross's picture

 Wi Fuk Up.   Tu fuk yu/

Sat, 04/26/2014 - 19:55 | 4699931 aVileRat
aVileRat's picture

Yup, good catch. Few have been moving the Japan trade to the China trade in the last 3 weeks. Not like you can hide slugs/shorts this big and it's not like the players have been quiet on the "short china" trade since Jan-14. The Russia and Chinese party rooms at 2014 Davos are going to be sober as an Orthodox church on easter.

PBOC is the new Argentina (and Argentina is still a pile of crap), they are either going to need to do a stupidly large currency devaluation and subsequent "1-time charge" on the discrepancy between regional and national current accounts / tax fraud...... or the inflation is going to eat them alive before 2016. If you look at guys like Foxcon and Greely, the writing is pretty clear on the wall that the pump & dump export 5-year plans are stalling out. What comes next will likely force large contractors like Seimens or GE to review the solvency of their own contracts (and bribery laws) for some of these municipal 10+ billion projects. That corporate reckoning with many OEM manf. towns and banks I suspect will make the Asian Flu look like a cocaine buzz. 

If PBOC refuses to raise the rates and enter a "acclerated soft landing" I suspect credit fraud will grow exponentially given the increasing scarcity of non-metal collateral plus high leverage rates in the OEM manf. sector. The secondary effect is if they do raise the rates, then the blowback on muni-trusts and other retail ponzi schemes will force the Army on the people, which will permantly end the whole "peoples army" chirade that props up the Politburo in the eyes of many Han low-party members.

What makes this all amusing is at the same time China and most BRICS are suffering horrible corruption, downgrades in domestic earnings and a 10 to 25% decline in BRIC middle class growth/consumer discretionary demand, we see all the talking heads in London,Toronto,NewYork,Paris trying to pump EEM's to retail flow. It's like everyone is trying to forget 1998, or get off their 1998-like India/China positions.



Sat, 04/26/2014 - 20:17 | 4699970 post turtle saver
post turtle saver's picture

an excellent analysis, well done +1

Sat, 04/26/2014 - 20:56 | 4700014 Pinto Currency
Pinto Currency's picture


I suspect that China has an exit strategy outside of the conventional framework of the current financial system.

Their announced intention to trade gold and oil in Yuan, the numerous empty cities that have been built, their BRIC allignment, stockpiling of raw materials and gold, ...

They may just cut the mooring lines with the Western financial system when the Russia situation goes hot and accept a decade of social disruption as a cost preferable to Western domination.

Sat, 04/26/2014 - 22:41 | 4700283 TruthInSunshine
TruthInSunshine's picture

China has basically come out & openly stated they're going
to massively devalue the CNY (as I've been stating is necessary given their export-INTENSE economy) relative to developed nation currencies, and there's not a damned thing that will be done to stop them from doing so given that a) trying to stop them from doing so will impede their ability to clear their massive toxic debts that their banking system is sitting upon, b) trying to stop them from doing so will merely accelerate and deepen the now renewed global'economic crisis, in no small measure to crises in emerging markets (and a very weak BRIC wall), c) doing so will most assuredly guarantee a nasty, protracted trade war, with many reciprocate tariffs & import sanctions (see D as to why this will not be welcomed by western firms), and D) Western firms have now built out TRILLIONS in plant/factory & R&D investments, now captive holdings planted on Chinese soil, with 50 year growth plans largely dependent on sales in China and exports of Chinese manufactured components/goods to the rest of the globe (so, they're likely to lobby for gentle treatment of China).

I will not be shocked to see the CNY pegged at 8 or even 10 to 1 USD within 18 months, and to be honest, 12 to 1 is not a ridiculous target position for a 24 to 36 month time frame. That would be a currency devaluation against the USD (and Euro, most likely) of 50%.

Sun, 04/27/2014 - 08:17 | 4700768 Joenobody12
Joenobody12's picture

10 to 1 USD ? Is it todays USD or the USD in 36 months ? Have you figure out what the projected US national debt interest payment versus GDP is in 36 months ? 

Sun, 04/27/2014 - 09:25 | 4700865 sessinpo
sessinpo's picture

 Joenobody12          10 to 1 USD ? Is it todays USD or the USD in 36 months ? Have you figure out what the projected US national debt interest payment versus GDP is in 36 months ?


You are only looking at one side of the equation. How about the projected situation in China in 36 months?

Mon, 04/28/2014 - 01:47 | 4703073 Joenobody12
Joenobody12's picture

Who can predict what is going to happen in 12 months , never mind 36. However, devaluing the RMB will have a positive effect on its trade balance whereas the accumulation of more debt will be negative for the US. Given past history, it is unlikely there will be any change in the trend of debt accumulation in the US. Also, dont forget there are over a billion poor Chinese so there are lots of room for the expansion of the Chinese economy (internal consummer consumption). Not so much in the US although here infrastructure can use an infusion of $$. 

Sun, 04/27/2014 - 04:13 | 4700601 Oracle 911
Oracle 911's picture

I suspect they will sink the US$.

Sun, 04/27/2014 - 04:49 | 4700615 Rumination
Rumination's picture

Some of this is over my head, but googling some of the terms, I can understand exactly what you're saying. I know we're not all journalists here, but please do a little proofing, guys. "Greely" shoud be "Geely." You have significant contributions to this blog, but credibility wanes with mistakes. Journalists understand this, and always make sure their punctuation, spelling and grammar are correct.

Sun, 04/27/2014 - 08:08 | 4700756 Wahooo
Wahooo's picture

Journalists might get the spelling right, but they get the story wrong.

Sun, 04/27/2014 - 07:47 | 4700728 monkeyboy
monkeyboy's picture

So thats *WHY* they be buying all that gold...the yuan drops...

Mon, 04/28/2014 - 07:27 | 4703333 TheSecondLaw
TheSecondLaw's picture

most BRICS are suffering horrible corruption, downgrades in domestic earnings and a 10 to 25% decline in BRIC middle class growth/consumer discretionary demand

I live in a BRICS country and can confirm the sorry truth of this statement.  Inflation is also way higher than the "official" numbers.

Sat, 04/26/2014 - 20:11 | 4699957 post turtle saver
post turtle saver's picture

The 1998 Russian finance crisis was triggered in part by the 1997 Asian finance crisis. The '97 Asian finance crisis resulted in decreased demand in two very important areas: crude oil (petro products) and non-ferrous metals (e.g. copper and other metallic commodities). This had an impact on Russian foreign reserves as these were (and continue to be) the two most valuable sources of Russia's capital inflows. Hence the happenings in '98 and my prediction that, unless things change soon in dramatic fashion, we'll see the same in 2015.

History doesn't repeat, but it does rhyme. This is why I've been paying strong attention to what's currently happening in China, and I'm glad to see ZH focusing on this very real concern.

What are the fixes? Pick your poison as the article states... credit crunch (which is certain death) or devaluation (which is slow death by a thousand cuts, but at least you buy time). Devaluation, deflation, and dropped demand are death for commodity economies. This doesn't bode well for any of us but some will be better set for what comes than others. Expect the phrase "flight to treasuries" to be on everyone's lips in the coming months.

Sat, 04/26/2014 - 22:30 | 4700271 JLee2027
JLee2027's picture

But I  thought the Yuan was going to take over the world?

Sun, 04/27/2014 - 04:17 | 4700603 Oracle 911
Oracle 911's picture

Like I said, they will sink the US$.

Sun, 04/27/2014 - 09:29 | 4700868 sessinpo
sessinpo's picture

Oracle 911         Like I said, they will sink the US$.



It would be the US Government that would sink the US $

Sun, 04/27/2014 - 13:03 | 4701174 Oracle 911
Oracle 911's picture

I disagree, at least partially. Because rest of the world need move away from US$. And it would be a reaction on a really stupid move of US gov (sadly the stupidity is limitless).

Sun, 04/27/2014 - 12:30 | 4701115 Jumbotron
Jumbotron's picture

This dovetails very nicely with Eric Janzen's article from the first of the year, detailing his forecast for the rest of 2014 and beyond.  He sees a big recession beginning this year and particularly going into 2015 and beyond.  He has nailed the last 3 bubbles and 2 recessions years in advance.  Not saying he is a prophet or has this scenario right.....but.....

Sat, 04/26/2014 - 18:47 | 4699814 Quus Ant
Quus Ant's picture

Who's wearing the dirtiest shirt now, bitches?  Smell test.  Canada, you're next.

Sat, 04/26/2014 - 21:13 | 4700109 Aknownymouse
Aknownymouse's picture

What r u saying? Canadian looney is backed by tons of gold, oil and agri products. This is the most solid of all. Get some.

Sat, 04/26/2014 - 21:39 | 4700129 Quus Ant
Quus Ant's picture

Gold, oil, AND agri?  Then US troops are probably already on the ground.  Any country gets to uppity- helloooo Canadian middle class- and they can expect an audit. 

There can be only one.

Sat, 04/26/2014 - 23:56 | 4700368 Bindar Dundat
Bindar Dundat's picture

Like I said before: Canada and the U.S. share a common problem-- we both have lazy bums on our immediate and unguarded southern border....ah?

The last time you messed with us we burnt down Washington and the WH  :-) Ah?

Sun, 04/27/2014 - 00:00 | 4700379 Quus Ant
Quus Ant's picture

Hey, I didn't mess with you and you didn't mess with me.  but the government that runs my open air prison will ensure the government that runs your open air prison will never be more than a slavish understudy.

Sun, 04/27/2014 - 10:31 | 4700945 Mad Muppet
Mad Muppet's picture

Like I said before: Canada and the U.S. share a common problem-- we both have lazy bums on our immediate and unguarded southern border....ah?

The last time you messed with us we burnt down Washington and the WH  :-) Ah?



Just speaking for myself, now would be a very good time to do it again.

Sun, 04/27/2014 - 06:34 | 4700673 litemine
litemine's picture

The Canadian Government holds No Gold. A requirement if we wanted to Trade. The  Rule Book was  wrote by the IMF./

Sun, 04/27/2014 - 08:00 | 4700729 prains
prains's picture

Yes, all of Canada's gold still resides in the ground


but some would have you believe that it lives in Toronto, don't believe them

Sun, 04/27/2014 - 14:23 | 4701358 emersonreturn
emersonreturn's picture

QA, canada's a colony, always has been, it's very comfortable as a colony, it wouldn't dream of becoming uppity.  the brits taught it how to cue and stay polite.  the free trade agreement is firmly in place, water oil and whatsoever else the master needs.  

Sat, 04/26/2014 - 18:49 | 4699817 km4
km4's picture

OT but good 

Russia opening gov’t-backed startup accelerator in Crimea via @VentureBeat

perhaps Putin talking to Obama hope and change ;-)

Sat, 04/26/2014 - 18:53 | 4699825 Latitude25
Latitude25's picture

Where's that deflation?  I need deflation NOW.

Sat, 04/26/2014 - 18:57 | 4699832 0b1knob
0b1knob's picture

Massive over supply and cancelled Chinese contracts in soybeans.

Coming soon:  Cancelled purchase contracts for coal, iron ore, oil, etc. etc etc.

The wheels are coming off the Chinese bus.

Sat, 04/26/2014 - 19:10 | 4699854 James_Cole
James_Cole's picture

Coming soon:  Cancelled purchase contracts for coal, iron ore, oil, etc. etc etc.

Coming soon? 
Sat, 04/26/2014 - 19:11 | 4699856 Amish Hacker
Amish Hacker's picture

We might be about to find out how many times those commodity warehouses full of "collateral" have been rehypothecated.

Sun, 04/27/2014 - 10:12 | 4700919 Bernoulli
Bernoulli's picture

x10? x20? "FlowTex-Style"

Makes me crack up over and over again... the "brain" behind it used to be a used car and scrap dealer... he he...

In contrast, today in China they probably didn't even move around the collateral, they probably just showed the same shit to everybody without blushing (if anybody came at all to "audit").


Sat, 04/26/2014 - 20:25 | 4699989 post turtle saver
post turtle saver's picture

uh oh... you delivered before receiving letters-of-credit? bend over, me love you looooong time

Sun, 04/27/2014 - 06:52 | 4700680 Flagit
Flagit's picture


The wheels are coming off the Chinese bus.

yup, they...wait, were you making a joke?

Sat, 04/26/2014 - 19:03 | 4699836 Yen Cross
Yen Cross's picture

 No disrespect to PBoC. They've certainly been complicite in the central banster game.

 What is com·plic·it?

  (k?m-pl?s'?t) adj. Associated with or participating China's gross domestic ouput is failing.
China can't even maintain ^6% growth.  Look @ electrical{energy] output and shipping demand for honest a questionable act or a crime; having complicity: newspapers complicit with the propaganda arm of a dictatorship    In any case the PBoC has outspent the Fed. @ 3:1 ratio.   China's gross domestic ouput is failing. China can't even maintain ^6% growth.  Look @ electrical{energy] output and shipping demand for honest answers.
Sat, 04/26/2014 - 19:02 | 4699841 Robot Traders Mom
Robot Traders Mom's picture

This would send a good chunk of change into Tsy's and allow the Fed to unload some of their balance sheet...makes sense.

Sat, 04/26/2014 - 19:04 | 4699845 km4
km4's picture

OT but good

Angela Merkel preaches pro-growth reforms to her neighbours but implements anti-growth ones in Germany

Sun, 04/27/2014 - 03:58 | 4700590 TPTB_r_TBTF
TPTB_r_TBTF's picture

More growth in Germany would attract undesirables to come to Germany looking for work.


Maybe she knows what she is doing?


Germany's neighbors should keep their undesirables and find something for them to do.

Sat, 04/26/2014 - 19:08 | 4699853 Sudden Debt
Sudden Debt's picture

Well, a chinese economic crash would really mess up the global geopolitical situation for the worst.

At best, China would get a revolution by the working class and at worst they look for a black sheep and pickup fights allover Azia.

And what's next? Because being the least broke isn't exactly a good place for any other superpower.

Europe is broke... we know that.
America is broke... we know that.
Russia is broke... we know that.
China is broke... we know that.
Japan is broke... we know that.
And the parking spaces like Africa and south America... who cares.

So will we fight each other or become best friends?

That world currency really start to sound a bit les conspiracy right now...

Sat, 04/26/2014 - 19:21 | 4699874 Yen Cross
Yen Cross's picture

SDR will NEVER happen SD.  Black markets and regional issues will see to that.

 Personally, I think things are going to "disintergrate" into regional conflict.  I hope that's the outcome.

   Civil War United States <2030> full blown.

Sat, 04/26/2014 - 20:52 | 4700063 Pinto Currency
Pinto Currency's picture


Russia has Gov debt to GDP ratio of 8.4%

Not too broke.

Sat, 04/26/2014 - 21:10 | 4700101 wintermute
wintermute's picture


Fill in the blanks for an answer to the next reserve currency conundrum.

Sat, 04/26/2014 - 22:36 | 4700275 RafterManFMJ
RafterManFMJ's picture

Bullion Coin?

Sun, 04/27/2014 - 07:05 | 4700689 hithere111
hithere111's picture


Sun, 04/27/2014 - 07:49 | 4700732 prains
prains's picture




Sun, 04/27/2014 - 13:57 | 4701301 pomlad5
pomlad5's picture


Sun, 04/27/2014 - 16:01 | 4701635 TheRedScourge
TheRedScourge's picture

1) Can't tell if Bitcoin or Bullion (same amount of underscores)

2) Additionally can't tell if serious or trolling


Good job sir.

Sat, 04/26/2014 - 23:15 | 4700321 seek
seek's picture

Three options: no civil war after a come-to-god moment at the federal level, Civil war 2.0 will be settled by 2030, or the US will look like Somolia.

My bet is #2, with the US segregating into a few largish mutli-state coalitions, probably with some token federal government that manages the remnants of the US nuclear arsenal and little else. The northeast and the rust belt are going to look like east Germany during the cold war, since that's where the people who made this fucking mess have their power base. California will be its own country for a little while (before it turns into Somolia 2.0, and I suspect AZ, NV, and OR will have some immigration policies in place that make the current ones look like open borders.)

I have no doubt regardless of any of those three outcomes that there's a massive shift in power towards Texas in the next 15 years. The fact that the CIA relocated to Colorado should scare the hell out of people on multiple levels.

Sun, 04/27/2014 - 03:23 | 4700576 Mr.Kowalski
Mr.Kowalski's picture

I've always thought that when the prosperity runs out, so will the unity. If something so severe as a currency collapse occurs, I can forsee the new Republics of Texas, California, Pennsylvania, Tennessee, Quebec, Michigan and Nebraska replacing the old, failed regime within a couple of ugly years. 

Sun, 04/27/2014 - 16:07 | 4701644 TheRedScourge
TheRedScourge's picture

Pehaps we will see the return of the city state, as per the fall of Rome. I could see the entire Bay Area in California becoming independent from the rest. Once the nationstates fall, I don't see the cities being too enthusiastic about the idea of subsidizing each other. At the very least, if Texas comes to its senses, it will surely build a 10 meter high fence around Austin to not let the Californians who have fleed the consequences of their own politics out into the rest of the state.

Sat, 04/26/2014 - 19:27 | 4699884 lakecity55
lakecity55's picture mean it could be like.....a real World War! Just the ticket for TPTB!

Everyone at War with Everyone!

Billions of Broken WIndows!

Dow to The Moon, Alice!

Sat, 04/26/2014 - 19:40 | 4699907 Yen Cross
Yen Cross's picture

 I literally think the United States as we know it today will be in "full blown" civil war in 15 years. 2030<

  The writing is on the wall. P.S. fuck you NSA and that scumbag that lied to Congress.

Sat, 04/26/2014 - 22:20 | 4700241 fudge
fudge's picture that you Earl ?

Sat, 04/26/2014 - 19:28 | 4699888 Remnant_Army
Remnant_Army's picture

Friday, July 8th, 2011 @ 15:30


"New World Currency will be presented to an incredulous world

The New One World Currency, which will be presented to an incredulous community, is designed to control you. Then once that happens they will try to deprive you of food. Unless My children accept this reality now they will be defenceless when they are under the control of a New World Order, led by masonic forces. Prepare now, My children, because although The Warning will convert millions, including those loyal to the One World Order, it will not be enough to stop these evil slaves of Satan and the antichrist. Without control of your money, you will find it hard to defend your right to property, food and health, the three things which they will be in charge of, if you do not start shouting your opposition now. Stop your leaders in their tracks. Don’t let them bully you. If enough of you are alert to this evil, monstrous plan, then you can warn others.

Plan your food supplies now
Plan your food supplies now. Grow and buy seeds that will keep you alive. Buy silver coins or gold, so that you can buy what is necessary. Most importantly find locations where, as a group, you can meet to offer the Holy Sacrifice of the Mass. For in time, your churches will be burned to the ground."

Sun, 04/27/2014 - 10:25 | 4700939 Which is worse ...
Which is worse - bankers or terrorists's picture

Jim Rickards says the IMF will bail out the Fed and create the new currency regime, but can they really bail out all of these entities I'd they go simultaneously?

Sun, 04/27/2014 - 12:25 | 4701107 Keyser
Keyser's picture

So who is going to bail out the IMF? It's all one big circle jerk with the printing presses running at full speed... 


Sat, 04/26/2014 - 19:17 | 4699865 Atomizer
Atomizer's picture

George Soros

You're a fucking POS. We have to hear about an earthquake or new QE to drive US equities.  Fucking idiotism. What now 105?


Pick your poison, old man cunt.

Sat, 04/26/2014 - 19:25 | 4699882 lakecity55
lakecity55's picture

George Soros: The Brain.

Bath House: Pinky.

Sat, 04/26/2014 - 19:19 | 4699869 hairball48
hairball48's picture

Gold and Silver bitchez! Be your own central bank.

That's all you need to know

Sat, 04/26/2014 - 19:19 | 4699870 bugs_
bugs_'s picture

The World watched but really did not feel the Japanese Deflation.  As they say China is much bigger - when they have their third wave down will The World be able to simply watch - or will we feel it?

Sat, 04/26/2014 - 23:30 | 4700336 Cthonic
Cthonic's picture

Several trillion yen of samurai bonds were issued, and yen was the currency carry trade of choice for almost two decades.  What ever happened to Japan Post, still stuffed to the gills with gov't debt?

Sat, 04/26/2014 - 20:37 | 4700019 q99x2
q99x2's picture

You got that one all the way through. Good work.

My rice is looking forward to the deflation

Sat, 04/26/2014 - 20:46 | 4700041 markar
markar's picture

The Chinese are not stupid They most likely have at least 10,000 MT of gold, not including what their citizens hold. How much do we have? They know the time is close to unleash the gold backed Yuan. The dollar will collapse before the Yuan does.

Sun, 04/27/2014 - 04:27 | 4700582 TPTB_r_TBTF
TPTB_r_TBTF's picture


"The dollar will collapse before the Yuan does."


Which candle should i be watching?


Since you know in advance, the order in which the World's fiat currencies will collapse, then maybe you would be so kind as to tell me which timeframe will build the most interesting candle formation?

Sun, 04/27/2014 - 09:37 | 4700874 sessinpo
sessinpo's picture

markar     The Chinese are not stupid They most likely have at least 10,000 MT of gold, not including what their citizens hold. How much do we have? They know the time is close to unleash the gold backed Yuan. The dollar will collapse before the Yuan does.


Answer this question.

What happens if China's trading partners can't pay in PM's? Shall China give up those exports? A global economy is a two edged sword.

Sun, 04/27/2014 - 11:53 | 4701057 83_vf_1100_c
83_vf_1100_c's picture

"The Chinese are not stupid They most likely have at least 10,000 MT of gold, not including what their citizens hold."


We're covered. Round up all the rappers and gangstas, take their teeth and chains...we're solvent again. /s

Sat, 04/26/2014 - 20:46 | 4700042 markar
markar's picture

The Chinese are not stupid They most likely have at least 10,000 MT of gold, not including what their citizens hold. How much do we have? They know the time is close to unleash the gold backed Yuan. The dollar will collapse before the Yuan does.

Sat, 04/26/2014 - 21:05 | 4700089 I Write Code
I Write Code's picture

Exsqueeze me, but didn't somebody sell those calls?

Sat, 04/26/2014 - 21:16 | 4700116 Aknownymouse
Aknownymouse's picture

I think the question is always is it one buyer and many sellers? Or one seller and many buyers? That would tell you which side the bet is.

Sun, 04/27/2014 - 11:30 | 4701015 SoDamnMad
SoDamnMad's picture

Bingo  What were these worth?  Could they have taken the other side too hoping to head-fake many and then pop out their GOLD ace card.

Sat, 04/26/2014 - 23:11 | 4700318 yogibear
yogibear's picture

Currency wars, then real wars.

Sun, 04/27/2014 - 00:20 | 4700400 thecoloredsky
thecoloredsky's picture

My guess Chinese buying as much gold as they can without spooking the markets. Last thing Chinese want are real wars if I were in their shoes.

Sat, 04/26/2014 - 23:31 | 4700337 jonjon831983
jonjon831983's picture

Big player doubling down on bets to cover losses on other side?

Sun, 04/27/2014 - 00:59 | 4700459 SmittyinLA
SmittyinLA's picture

China's cutting a fat hog, about a $600B a year dollar surplus, enough to cover their entire fuel bill and then some.  Problem is we just print it, and the $600B a year "surplus" is a total fraud. Something's gotta give, most likely their currency. (And ours) gas is going up, bet on it.

Sun, 04/27/2014 - 02:43 | 4700541 polo007
polo007's picture

According to Tullett Prebon Group Limited:

perfect storm

energy, finance and the end of growth


The economy as we know it is facing a lethal confluence of four critical factors – the fall-out from the biggest debt bubble in history; a disastrous experiment with globalisation; the massaging of data to the point where economic trends are obscured; and, most important of all, the approach of an energy-returns cliff-edge.

Through technology, through culture and through economic and political change, society is more short-term in nature now than at any time in recorded history. Financial market participants can carry out transactions in milliseconds. With 24-hour news coverage, the media focus has shifted inexorably from the analytical to the immediate. The basis of politicians’ calculations has shortened to the point where it can seem that all that matters is the next sound-bite, the next headline and the next snapshot of public opinion. The corporate focus has moved all too often from strategic planning to immediate profitability as represented by the next quarter’s earnings.

This report explains that this acceleration towards ever-greater immediacy has blinded society to a series of fundamental economic trends which, if not anticipated and tackled well in advance, could have devastating effects. The relentless shortening of media, social and political horizons has resulted in the establishment of self-destructive economic patterns which now threaten to undermine economic viability.

We date the acceleration in short-termism to the early 1980s. Since then, there has been a relentless shift to immediate consumption as part of something that has been called a “cult of self-worship”. The pursuit of instant gratification has resulted in the accumulation of debt on an unprecedented scale. The financial crisis, which began in 2008 and has since segued into the deepest and most protracted economic slump for at least eighty years, did not result entirely from a short period of malfeasance by a tiny minority, comforting though this illusion may be. Rather, what began in 2008 was the denouement of a broadly-based process which had lasted for thirty years, and is described here as “the great credit super-cycle”.

The credit super-cycle process is exemplified by the relationship between GDP and aggregate credit market debt in the United States (see fig. 1.1). In 1945, and despite the huge costs involved in winning the Second World War, the aggregate indebtedness of American businesses, individuals and government equated to 159% of GDP. More than three decades later, in 1981, this ratio was little changed, at 168%. In real terms, total debt had increased by 214% since 1945, but the economy had grown by 197%, keeping the debt ratio remarkably static over an extended period which, incidentally, was far from shock-free (since it included two major oil crises).

Sun, 04/27/2014 - 05:59 | 4700653 bearparadigm
bearparadigm's picture

I think the most interesting consequence of a Chinese collapse is the implication it will have for the US$.

In the short run, a collapse in the remnibi obviously implies a strengthened nominal US$ and lower treasury yields, as hot money escapes China (and other BRICs) into what is perceived to be safe heaven assets.

Nevertheless, the long-run impact still escapes clarity to me. It is important to remember that the fundamentally paradoxical situation the US has enjoyed with low interest rates, low inflation, high fiscal and current account deficits has only been enabled by the BRICs (and especially China) offsetting their current account surpluses through the purchasing of US$ (at the expense of increasing their domestic money supply and inflation). In the case of China, we are seeing these current account surpluses dwindling into deficits due to the inflation created. Symptomatic to the situation, inflation is beginning to be exported back to the US through higher foreign demand for agriculture goods leading to price increases.

As the author has pointed out, China cannot fight domestic inflation and keep the remnibi low against the US$ at the same time. They have already (half-heartedly though) tried this through the use of capital controls, only to experience a massive increase in carry trades using commodity financing schemes (first copper, then gold).

The breaking point is likely to materialize when Chinese inflation reaches levels that cause social unrest and visibly distorts real domestic economic growth (e.g. when prices become unpredictable). After several years of negative interest rates, destruction of capital formation with inflation disguised as growth, the economy needs one last push (the final nail in the coffin if you will) to get there, which will be the Chinese decision to devaluate its currency.

I would expect a slow up-tick in inflation to 2-4% in the United States, driven by continued Chinese demand for agriculture goods. A collapse in the US$, and escalation of inflation to double digits will only take place once China reaches the breaking point. After which China will drop the US$ and import massively.

Hence, to answer my own question, I expect the end game to be a lower US$. But perhaps only in PPP (purchasing power parity) terms (probably not in nominal terms, as China is debasing their currency more than any other major nation).

Sun, 04/27/2014 - 20:35 | 4700750 El Hosel
El Hosel's picture

....So, Initially Dollar rallys, gold goes up with dollar on "currency crisis" in China. Later dollar goes down and gold really goes up as the Ponzi loses its facade.

Sun, 04/27/2014 - 08:19 | 4700772 prains
prains's picture

I'm not sure what the actual mathematical iteration will be that implodes the global ponzi, many of these ideas sound very plausible and thanks for the analysis. some have come on here and accused ZH readers of actually wanting the crash so that we can have the zombie apocolypse, IMO nothing could be further from the truth. some readers have confused knowing something big is going to happen with wanting something big to happen. No sane person here wants the world to implode but they also know that it's mathematically inevitable. The clearer thinkers here know the sooner it happens the sooner it can be fixed in some fashion that hopefully doesn't incinerate the globe. All this fucking around is just making things worse, consolidating resources in fewer and fewer hands making the eventual outcome so much worse for so many more.

The only thing I ask of the zombies, when this thing goes off......please eat the Oligarchs first, they really do deserve your utmost attention.

Sun, 04/27/2014 - 10:27 | 4700942 Herdee
Herdee's picture

China's exit strategy poses a danger to the U.S. debt.If China continues to pull money out and stop buying U.S. debt all together then you have a situation where politians are saying "debts don't matter".They think that they can continue endlessly printing money and Europeans will somehow do the dirty work for them through Belgium.It's called "blind faith".Then all of a sudden an act of randomness hits.

Sun, 04/27/2014 - 12:43 | 4701141 TheEndIsNear
TheEndIsNear's picture

What is meant by "strikes"?  ie; "out to 6.65 strikes"

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