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.
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