On Friday China had what some are calling its “Bear Stearns moment”. For the first time ever in the history of the People’s Republic, a domestic company announced it could not make an interest payment due on one of its loans, and Beijing did not intervene or lean on creditors to suppress their claims. In allowing the first ever bond default to proceed, the concept of risk has been introduced to the Chinese $1.4 trillion corporate bond market, that had heretofore been blindly chasing the highest coupon payments with no concern for the creditworthiness of the borrower. The revelation that capital loss is now part of the investment landscape naturally causes participants to re-evaluate risk and look for significantly higher yields in compensation.
Up until this point, Chinese officials were able to pretend and extend in order to keep the Ponzi of Chinese debt ever growing. But reckless spending over the past 5 years amid still slowing global growth and plunging exports have introduced a cash crunch. As in the rest of the world, artificially low yields since 2007 courtesy of belief in government and central bank bailouts, have not eased credit strains, but rather only aggravated them, as households, corporations and governments were enticed to borrow their brains out. See more here: Whistling Past The Graveyard After China’s 1st ever bond default.
Meanwhile copper and iron prices are being suitably whacked lower as metals–hoarded the past few years as collateral for binge-borrowing and off-balance sheet financing–are now coming out of the woodsheds. Broader than China, global investment banks that were churning and burning through most asset markets the past few years are now being squeezed out by tighter regulation and investigations into widespread market manipulation. This is leading them to dump holdings and exit the space.
Copper is now down 28% since April 2011, 5% in just the past 2 days, and iron ore even more. The Shanghai Composite Stock Exchange retraced below 2000 last night, 67% below its bubble peak in October 2007 and now just 13% above its all time low seen in the market collapse of 2008.
As much as precious metal lovers talk about the safe haven currency of gold and silver, to date they too have failed to decouple from global de-levering trends dominating other commodity markets. One might do well to realize that although its true most financial assets and markets have been highly manipulated, hoarded and traded the past 5 years, a cessation of such practices usually leads to lower, not higher prices. So far precious metals have failed to buck that trend.
I vividly recall the mania of previous bull peaks; most recently 2007/08. As risk markets roared away from any reasonable connection with earnings trends, consumer demand or economic growth, participants became increasingly intoxicated and enamored with the fire. The structure was burning as the majority held capital in the flames on the promise of warmth. It is painful to watch this demented cycle prey once more on the weak and ill-informed.
Today as global debt pushes through a mind-boggling 100 trillion (up more than 30 trillion since the credit crisis first exploded in 2007) and margin debt surges to the highest levels ever recorded (chart below), financial conditions are even more treacherous on nearly every risk measurement than 2007 and even 2000. And still the risk-sellers are confidently herding followers toward the warmth of the blaze.
Last week famed Hedge Fund Manager Seth Klarman offered this warning in his client note:
“When the markets reverse, everything investors thought they knew will be turned upside down and inside out. ‘Buy the dips’ will be replaced with ‘what was I thinking?’ . . . Anyone who is poorly positioned and ill-prepared will find there’s a long way to fall. Few, if any, will escape unscathed.”
Just like the emperor, the market is wearing no clothes. Right now, many people see only what they want to believe. It’s been a long time since investors felt full-throated fear, and many have forgotten what it feels like. The panic to buy will be replaced by the urgency to get out at any price. No one can know what will cause perceptions to change, but they will.
At the moment, emerging markets are in deep trouble, and what is happening in Ukraine didn’t help. Nevertheless, the CEOs of several major brokerage firms have urged investors to “go long” emerging markets because they are so “cheap.” Once again, these well-educated salesmen are wrong. Emerging markets will recover one day, but not soon. Urging investors to buy on the dip is disgraceful.”
“BBC’s Robert Peston travels to China to investigate how this mighty economic giant could actually be in serious trouble. China is now the second largest economy in the world and for the last 30 years China’s economy has been growing at an astonishing rate. While Britain has been in the grip of the worst recession in a generation, China’s economic miracle has wowed the world.
Now, for BBC Two’s award-winning strand This World, Peston reveals what has actually happened inside China since the economic collapse in the west in 2008. It is a story of spending and investment on a scale never seen before in human history – 30 new airports, 26,000 miles of motorways and a new skyscraper every five days have been built in China in the last five years. But, in a situation eerily reminiscent of what has happened in the west, the vast majority of it has been built on credit. This has now left the Chinese economy with huge debts and questions over whether much of the money can ever be paid back.
Interviewing key players including the former American treasury secretary Henry Paulson, Lord Adair Turner, former chairman of the FSA, and Charlene Chu, a leading Chinese banking analyst, Robert Peston reveals how China’s extraordinary spending has left the country with levels of debt that many believe can only end in an economic crash with untold consequences for us all.”
“Philadelphia Federal Reserve President Charles Plosser is “very worried” about the potential for unintended consequences of the Fed’s massive quantitative easing program. Plosser told CNBC that the U.S. was still suffering from “lasting effects” of the recession and “may never return” to its previous growth rates – and warned that policy should not bet on growth returning to previous rates, saying it could be “many, many years”. Here is a direct video link.
Waiting for speculative fevers to break in financial markets can feel like running up a steep hill in the dark. You know the peak is ahead, you know the downhill stretch with feel like heaven on the other side, but you have no idea how much further you have to endure to successfully stay on course and conquer the summit. It is a mental test that the majority of our peers and other market participants fail miserably every 5 year cycle, as they race confidently ahead near market tops only to fall many years behind in the mean reversion on the other side of every peak.
Yesterday in a moment of rare candor, Dallas Fed President Richard Fisher noted concern over what he called the “eye-popping levels” of some stock market metrics today that have not been seen since the “dot-com boom of the late 90′s”. Ah yes 1999, I remember it well, the euphoria was practically unanimous. The analysts, business leaders and finance types all agreed: computers had revolutionized the global economy and a “brilliant” interventionist Fed under Maestro Greenspan, had abolished the business cycle and would never let stocks and high yield bond prices go down again… It was a heady time indeed. Precisely why it set up for the second most spectacular capital drubbing in market history (second only to the crash of 1929).
And yet, if one imagined that two 50%+ capital wipe outs in just the past 14 years since 2000 might still be in memory, you’d be wrong. Today’s bulls are stampeding more confidently than in 2000 or 2007. As shown in the chart below, bearish sentiment is now at the lowest levels recorded in more than 25 years. Bears today are practically extinct.
Either the bulls are right and this time is different at long last, or the mean reversion on the other side of this spectacular summit in asset prices is likely to bring generational investment opportunity to those brave souls who can retain mental strength, stay liquid, avoid the madness of the crowd and achieve their just rewards on the other side of the summit once more.
The Russian government collects 52% of its revenue from oil and gas taxes, and about 50% of the population are heavily dependent on government transfer payments for their sustenance. Under Putin, the Russian economy has not diversified but remains a nation dependent on petroleum exports.
The trouble is that oil prices above $100 a barrel are considered necessary in order to sustain Russia’s current income needs, and looking forward, a triple-digit-price for oil is suspect. As shown in the chart below, WTI was $12 a barrel in 1999 before the credit bubble boom began, and long term secular support remains in the $55 area, some 50% below current levels.
As Tom Friedman reminded this week: Putin is long oil, but short history: Why Putin doesn’t respect us”
“Putin is now fighting human nature among his own young people and his neighbors — who both want more E.U. and less Putinism. To put it in market terms, Putin is long oil and short history. He has made himself steadily richer and Russia steadily more reliant on natural resources rather than its human ones. History will not be kind to him — especially if energy prices ever collapse.
The cyclical downtrend in the US dollar–starting from the Tech bust in 2000 all the way to the credit/commodities bubble bust in 2008-11–bestowed an embarrassment of oil riches on the Russian government(and other commodity-focused exporters). But times are changing and the price of hydro-carbons appears garishly high today amid a secular backdrop of still weak global demand following the credit bubble bust; the prospects of a strengthening US dollar as QE-belief retreats and Emerging Markets implode; a slowly spreading clamp down on what has been rampant commodity price-fixing by large financial intermediaries the past few years; and against all naysayers–the rise of alternative energy in a hundred different forms. See It’s Time to Drive Russia Bankrupt–Again, for some interesting historical insights on how the strong dollar policy of the 1990′s helped to speed Soviet Russia’s collapse in 1991.
And one more game changer…technological innovation finds inspiration in high fuel prices, pollution and climate change. The cars of the future don’t run on petrol. They charge on solar panels, and they look like this. This technology is already here. Driving one proves an epiphany for even the most committed skeptics.
Jon Stewart sheds some humor on the Bitcoin phenomenon: “It is the Tamagotchi of currency…It’s a proud moment when a little baby currency takes its first steps…towards full-on corruption”.
But Stewart also correctly points out that Bitcoin has nothing on some of the frauds perpetrated by the big banks the past few years. Here is a direct video link available on The Comedy Network in Canada.
Just because we’ve had a system of central banking for 100 years doesn’t mean we ought to. In fact, it’s starting to look like central banks do more harm than good. From obscuring the true cost of credit to causing confusion about good investments, central bankers end up papering over economic problems. And when they send the wrong messages to savers and consumers trying to coordinate their plans, boom and bust cycles lengthen and worsen. Here is the direct video link.
Corruption in developing and newly industrialized countries has been greatly aided the past many years by the financialization of the global economy which has funded an unethical, extractive, destructive spending addiction in the west.
“Those who spend more than they earn need to maintain excellent relations with their bankers. Over the past few decades, North American governments have become increasingly dependent on the kindness of lenders. Such support now forms the bedrock of our incredibly indebted nations. Spend-thrift leaders are repeatedly elected to help the masses spend our way to prosperity. The majority is evidently not keen on electing fiscal restraint. A leader who suggests a life of restraint and paying down debt is, so far, unlikely to win the popular vote. The financial machine provides the products and the funding to support the vision of the have-mores. And so the vested interests favor the continued borrowing and spending today without worrying about tomorrow.” – Juggling Dynamite (2007) p. 70.
“The center of Russian corruption is in British tax havens, London property, Swiss banks, Austrian banks accounts and property all over the European Union…Russian corruption works like this, huge amounts of money, billions and billions are extracted out of the Russian budget and Russian State companies and brought to the west to be “secured.” Over the past 10 years, Putin has watched how western Europe elites desperate for money in an era of low growth have been willing to launder this money and this has convinced him that Europe will do absolutely nothing to kill the Oligarch golden goose that feeds them…Putin sees that today the west has the morality of a Hedge Fund, make money and move it off shore.”
“Fragile Empire” Author Ben Judah and Bloomberg Contributing Editor Richard Falkenrath discuss the Russian and Ukrainian standoff.”Here is a direct video link.
“Russia has been showing the world glistening scenes of the Winter Olympics. It’s a rare opportunity to brighten a national image that often skates on the thin ice of corruption. One authority estimates that 20 percent of the Russian economy is skimmed by graft and a lot of that by government officials. It may be that no one knows more about this than American-born businessman Bill Browder.
Browder tells a story of thievery, vengeance and death worthy of a Russian novel. He’s a thorn in the side of Vladimir Putin and he has torn a rift between Moscow and Washington. When you hear what he has to say about Russia you’ll know why Russia thinks of Bill Browder as an enemy of the state.” Here is a direct video link.
Wolfgang Beltracchi fooled the experts for decades in an art scam that netted him and his partners millions of dollars. Many art experts acknowledge he is the most successful art forger in this and, perhaps, any other time in history. Here is a direct video link.
There are mountains of evidence that investment banks and other participants have been price-fixing, hoarding, trading on non-public information,front-running, pumping and dumping pretty much every financial asset and market on the earth over the past several years. I have no doubt they have been up to the same antics in the gold market as well.
Trouble is most market participants have a long-side bias: they only complain about manipulation when the assets they hold drop in value. They never complain when asset prices surge in value courtesy of the exact same culprits and activities; and yet high price is the very essence of investment risk. When Gold was $1900 and silver near $50, one didn’t hear the precious metal chorus screaming about manipulation then. Oh no, at that point, after prices had soared 660% over 10 years, precious metals bugs were delighted to explain the rational reasons for all those gains and many more that they predicted. All very justified fundamentals according to them. But after prices plunged into the 1100′s in 2013, why then it was all about routing out the evil “manipulators” they alleged were causing the downside.
We are reminded of President Hoover’s call for investigation by the Senate into the short-sellers he admonished as having caused the crash of 1929, but with no similar inquiry requested about all the risk-sellers who pumped asset markets to financially suicidal levels leading up to the crash. Human behavior is nothing if not predictable…
The London gold fix, the benchmark used by miners, jewelers and central banks to value the metal, may have been manipulated for a decade by the banks setting it, researchers say. Here is a direct video link.
“An explosive critique about the investment industry: provocative and well worth reading.” Financial Post
“Juggling Dynamite, #1 pick for best new books about money and markets.” Money Sense
“Park manages to not only explain finances well for the average person, she also manages to entertain and educate, while cutting through the clutter of information she knows every investor faces.” Toronto Sun