Good evening Ladies and Gentlemen:
Here are the following closes for gold and silver today:
Gold: $1107.90 up $4.40 (comex closing time)
Silver $14.36 down 13 cents.
In the access market 5:15 pm
First, here is an outline of what will be discussed tonight:
At the gold comex today we had a poor delivery day, registering 0 notices for nil ounces Silver saw 13 notices for 65,000 oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 218.28 tonnes for a loss of 85 tonnes over that period.
In silver, the open interest rose by 2094 contracts despite the fact that silver was down in price by 15 cents on Friday. Again, our banker friends tried to use the opportunity to cover as many silver shorts as they could and failed. The total silver OI now rests at 155,698 contracts In ounces, the OI is still represented by .778 billion oz or 111% of annual global silver production (ex Russia ex China).
In silver we had 13 notices served upon for 65,000 oz.
In gold, the total comex gold OI fell to 412,026 for a loss of 5472 contracts. We had 0 notices filed for nil oz today.
We had no changes in tonnage at the GLD, thus the inventory rests tonight at 678.18 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold. It sure looks like 670 tonnes will be the rock bottom inventory in GLD gold. It looks to me that China has taken the last amounts of physical gold from the GLD. I guess the only place left for China to receive physical gold will be the FRBNY and the comex. In silver, we had another huge withdrawal in silver inventory at the SLV to the tune of 1.145 million oz /Inventory rests at 320.915 million oz.
We have a few important stories to bring to your attention today…
1. Today, we had the open interest in silver rose by 2094 contracts up to 155,698 despite the fact that silver was down by 15 cents in price with respect to Friday’s trading. The total OI for gold fell by 5472 contracts to 412,026 contracts, as gold was down by $6.00 on Friday.
2.Gold trading overnight, Goldcore
3. Trading overnight from China commencing at 9:30 pm est last night
14. USA stories/Trading of equities NY
i) For 17 days the VIX continues into backwardation/totally unheard of
ii) Obama renegs on Obamacare for 400,000 immigrants.
15. Physical stories:
- Koos Jansen reports on the Peter Hambro story where England has run out of gold. (Koos Jansen)
- A Russian bank is caught with fake gold as official reserves. The “gold’ is tungsten (zero hedge)
- ted Butler on the upcoming silver shortage/Ted Butler
- Eric Sprott on investing in a depressed market for gold/silver
- Bill Holter’s commentary for today is titled: “No salvation for the securities industry..”
- Nevada is producing less than 5 million oz for the first time since 1988 (Whalley/GATA)
- Lawrie Williams writes that the retreating markets will see a run into gold/silver
- Mike Kosares talks about the two big stories of last week i.e. the Peter Hambro story where he reveals that gold is non existent in London and the second story by Ronan Manley on the change in number of gold refined by the LBMA from 6600 tonnes down to 4200 tones.
and well as other commentaries…
Let us head over and see the comex results for today.
September contract month:
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz||16,644.939 oz
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz||nil oz|
|No of oz served (contracts) today||0 contracts
|No of oz to be served (notices)||110 contracts (11,000 oz)|
|Total monthly oz gold served (contracts) so far this month||20 contracts
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||208,713.2 oz|
Total customer deposit: nil oz
JPMorgan has only 0.6133 tonnes left in its registered or dealer inventory. (19,718.722 oz) and only 863,683.63 oz in its customer (eligible) account or 26.86 tonnes
September silver initial standings
September 14 2015:
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory|| 914,916.990oz
(CNT,Scotia, HSBC, Delaware)
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||1,361,804.280 JPMorgan,,Delaware,Scotia|
|No of oz served (contracts)||13 contracts (65,000 oz)|
|No of oz to be served (notices)||450 contracts (2,250,000 oz)|
|Total monthly oz silver served (contracts)||1033 contracts (5,165,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||nil|
|Total accumulative withdrawal of silver from the Customer inventory this month||11,956,069.1 oz|
Today, we had 0 deposit into the dealer account:
total dealer deposit; nil oz
total customer deposits: 1,361,804.280oz
total withdrawals from customer: 914,916.99 oz
And now SLV:
Sept 14./we had another withdrawal of 1.145 million oz from the SLV/Inventory rests at 320.915 million oz
Sept 11.2015: no changes in silver inventory at the SLV/inventory rests at 322.06 million oz
Sept 10.2015: we had no changes in silver inventory at the SLV/rests tonight at 322.06 million oz
we had another huge withdrawal of 1.336 million oz of silver from the vaults of the SLV/Inventory rests at 322.06 million oz
Sept 8/we had a huge withdrawal of 1.524 million oz of silver from the SLV/Inventory rests tonight at 323.396 million oz.
Sept 4.2015:no changes in inventory at the SLV/rests tonight at 324.923 million oz
sept 3/we had a small withdrawal of 140,000 oz of silver from the SLV/Inventory rests at 324.923 million oz
Sept 2: we had a small withdrawal of 859,000 oz of silver from the SLV vaults/inventory rests tonight at 325.063 million oz
September 1/no change in inventory over at the SLV/Inventory rests tonight at 325.922 million oz
August 31.a huge addition of 954,000 oz were added to inventory today at the SLV/Inventory rests at 325.922 million oz
August 28.2015: no change in inventory at the SLV/Inventory rests tonight at 324.698 million oz
August 27.no change in inventory at the SLV/Inventory rests at 324.698 million oz
Sprott formally launches its offer for Central Trust gold and Silver Bullion trust:
SII.CN Sprott formally launches previously announced offers to CentralGoldTrust (GTU.UT.CN) and Silver Bullion Trust (SBT.UT.CN) unitholders (C$2.64) Sprott Asset Management has formally commenced its offers to acquire all of the outstanding units of Central GoldTrust and Silver Bullion Trust, respectively, on a NAV to NAV exchange basis. Note company announced its intent to make the offer on 23-Apr-15 Based on the NAV per unit of Sprott Physical Gold Trust $9.98 and Central GoldTrust $44.36 on 22-May, a unitholder would receive 4.45 Sprott Physical Gold Trust units for each Central GoldTrust unit tendered in the Offer. Based on the NAV per unit of Sprott Physical Silver Trust $6.66 and Silver Bullion Trust $10.00 on 22-May, a unitholder would receive 1.50 Sprott Physical Silver Trust units for each Silver Bullion Trust unit tendered in the Offer. * * * * *
Silver Bullion – “Potential From Today’s Levels Remains Enormous”
Silver has had a rough year, slumping to major new secular lows. After sliding on balance for years now, even the diehard silver bulls are losing faith in their metal.
Despite its vexing slumber, silver’s price-appreciation potential from today’s levels remains enormous. Between radical under-investment and very high speculator silver futures shorting, silveris poised to see massive buying as gold recovers.
Like all markets, silver is forever cyclical. It perpetually meanders from in favor to out of favor and back again. And after falling on balance for years as QE3 sucked capital and interest away from portfolio diversification with alternative investments, silver is way overdue to reverse into its next major bull.
The brave contrarians willing to buy silver and its miners low before this becomes widely apparent stand to earn fortunes.
Editors note: Adam Hamilton of Zeal Speculation and Investment was one of the few contrarian analysts who correctly predicted that silver would rise from below $5 to nearly $50 per ounce in the early 2000s. Adam is calling for similar gains for depressed silver today and his latest research is well worth a read – “Silver’s Vexing Slumber“
Today’s Gold Prices: USD 1108.00, EUR 977.98 and GBP 716.97 per ounce.
Friday’s Gold Prices: USD 1106.35, EUR 980.85 and GBP 716.87 per ounce.
On Friday, gold ended with a loss of nearly 0.5% to result in a weekly loss of 1.6%. Silver lost 14 cents, or 1%, to $14.51 an ounce, for a weekly loss of 0.3%. Platinum was 2% lower for the week while palladium bucked the trend and gained 2.4% for the week.
Gold was marginally lower in gold trading in Singapore and was flat in European trading. Prices are near $1,108/oz, not far from a one-month low of $1,098.35 reached in the previous session.
Investors await a Federal Reserve policy meeting on Wednesday and Thursday for clarity on when the U.S. central bank might hike interest rates.
Gold price: all eyes on Fed as ‘test’ of lows predicted – The Week
Gold hovers near one-month low as traders eye Fed meeting – Reuters
Fischer’s 2014 Why-Wait Wisdom Points to Fed Liftoff This Week– Bloomberg
Gold Bulls Can’t Shake Fed Woes as $2.6 Billion Wiped From ETPs – Bloomberg
Solid gold key to Clerys worth €12,000 comes to light – The Irish Times
Bank Caught Using Fake Gold As Reserve Capital In Russia
Over the past several years, incidents involving fake gold (usually in the form of gold-plated tungsten) have emerged every so often, usually involving Manhattan’s jewerly district, some of Europe’s bigger gold foundries, or the occasional billion dealer. But never was fake gold actually discovered in the form monetary gold, held by a bank as reserve capital and designed to fool bank regulators of a bank’s true financial state. This changed on Friday when Russia’s “Admiralty” Bank, which had its banking license revoked last week by Russia’s central bank, was reportedly using gold-plated metal as part of its “gold reserves.”
According to Russia’s Banki.ru, as part of a probe in the Admiralty bank, the central bank regulator questioned the existence of the bank’s reported quantity of precious metals held in reserve. Citing a source, Banki.ru notes that as part of its probe, instead of gold, the “regulator found gold-plated metal.”
The Russian website further adds that according to “Admiralty” bank’s financial statements, as of August 1 the bank had declared as part of its highly liquid assets precious metals amounting to 400 million roubles. The last regulatory probe of the bank was concluded in the second half of August, said one of the Banki.ru sources. Another source claims that as part of the probe, the auditor questioned the actual availability of the bank’s precious metals and found gold-painted metal.
The website notes that shortly before the bank’s license was revoked, the bank had offered its corporate clients to withdraw funds after paying a commission of 30%. This is shortly before Russia’s central bank disabled Admiralty’s electronic payment systems on September 7.
Admiralty Bank was a relatively small, ranked in 289th place among Russian banks in terms of assets. On August 1 the bank’s total assets were just above 8 billion roubles, while the monthly turnover was in the order of 40-55 billion rubles. The balance of the bank’s assets was poorly diversified: two-thirds of the bank’s assets (4.9 billion rubles) were invested in loans. The rest of the assets, about 30%, were invested in highly liquid assets.
Or at least highly liquid on paper: according to Banki.ru the key reason for the bank’s license revocation was the central bank’s insistence that the bank had insufficient reserves against possible loan losses.
The Russian central bank has not yet made an official statement.
The first question, obviously, is if a small-to-mid level Russian bank was using gold-plated metal to fool the central bank about the quality of its “gold-backed” reserves, how many other Russian banks are engaged in comparable fraud. The second question, and perhaps more relevant, is how many global banks – especially among emerging markets, where gold reserves remain a prevalent form of physical reserve accumulation – are engaging in comparable fraud.
Finally, what does this mean for gold itself, whose price on one hand is sliding with every passing day (thanks in part to what is now a record 228 ounces of paper claims on every ounce of physical gold as reported before), even as it increasingly appears there is a major global physical shortage. If the Admiralty bank’s fraud is found to be pervasive, what will happen to physical gold demand as more banks are forced to buy the yellow metal in the open market to avoid being shuttered and/or prison time for the executives?
An extremely important story as Peter Hambro goes to the media and exclaims that England is out of gold and silver.
We brought this story to you yesterday but it is worth repeating
(courtesy Koos Jansen/Peter Hambro/GATA)
Peter Hambro: “It’s Virtually Impossible To Get Physical Gold In London”
Just after my colleague Ronan Manly wrote a very extensive article on how much gold is left in London (not much), Petropavlovsk Chairman and Co-Founder Peter Hambro discusses gold at Bloomberg Television. He, like Manly, concludes there is very little physical gold left in London. From Mr Hambro:
My baseline is they [the Chinese] have been buying and the Indian have been buying in enormous quantities. It’s virtually impossible to get physical gold in London to ship to those countries. We get permanent requests from Russia, would we please sell our physical gold to India and China. Because there is no physical, only endless promises. And I really worry that the market, that paper market, could be stamped on and people will say “sorry we’ll have a financial close out”, and it’s all over.
Perhaps this quote explains why UK gold export directly to China in June was not a net outflow from the UK – because there is little gold left in London (Manly, Hambro) and thus the UK had to ramp up import from the US in June to send forward to China.
The Financial Times reported on similar gold shortages in London. From the FT (2 September):
The cost of borrowing physical gold in London has risen sharply in recent weeks. That has been driven by dealers needing gold to deliver to refineries in Switzerland before it is melted down and sent to places such as India, according to market participants.
“[The rise] does indicate there is physical tightness in the market for gold for immediate delivery,” said Jon Butler, analyst at Mitsubishi.
I’ve also asked BullionStar CEO Torgny Persson in Singapore what he’s currently seeing in the precious metals markets. He replied there are shortages in both the gold and silver market. From Mr Persson:
I just got off the phone with A-Mark which is one of the world’s largest wholesalers. They are reporting that they have no gold and silver at all live available, that they have stopped taking orders for Silver Maples and Silver Philharmonics altogether and that Silver Eagles are available first in the end of November. For Pamp, there is similarly long delivery times for all minted gold bars.
We still have most products in stock because we stocked up as massively as we could in the last weeks but for many products, we are unable to replenish as of now when we run out.
Big squeeze with shortages starting now both on the wholesale/retail level and at the bulk level… Unless the paper price is reverting up, it may not subside this time around and then the paper fiat mess (including paper prices of gold and silver) is in trouble. If it goes to the point of shortages at the bulk level like 1kg gold bars and 1000 oz silver bars, the emperor will stand without clothes.
To be continued…
(courtesy Eric Sprott/GATA)
Eric Sprott discusses contrarian investing and metals price suppression
Submitted by cpowell on Sat, 2015-09-12 14:32. Section: Daily Dispatches
10:30a ET Saturday, September 12, 2015
Dear Friend of GATA and Gold:
Sprott Inc. Chairman Eric Sprott has given a comprehensive interview to Sprott Global’s Tekoa Da Silva, discussing, among other things, efforts in the paper markets in gold and silver to keep prices down and the need to be a bit of a contrarian in investing. The interview is posted at the Sprott Global Internet site here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
This is a good story. The once booming gold fields of Neva are falling in output: For the first time since 988 output has dropped below 5 million oz. Not good for the two principal miners in Nevada: Barrick gold and Newmont.
Once booming, Nevada gold output falls to 1988 level
Submitted by cpowell on Sun, 2015-09-13 13:51. Section: Daily Dispatches
By Sean Whaley
Las Vegas (Nevada) Review-Journal
Saturday, September 12, 2015
CARSON CITY, Nevada — Gold production in Nevada fell to less than 5 million ounces in 2014, the first time since 1988 that output of the precious metal has dipped so low.
A new state Division of Minerals report shows 4.94 million ounces of the precious metal was taken from 30 Nevada mines in 2014. There was about 5.5 million ounces of gold produced in Nevada in 2013.
The peak year in recent memory was 1998, with just under 9 million ounces.
Richard Perry, administrator of the Division of Minerals, said it appears production has leveled off in the 5 million ounce range over the past five years. While production has fallen, Nevada mines still throw off gold valued at $5.5 billion, at $1,100 per ounce, he said.
“We need better gold prices to see more projects and new mining,” Perry said. …
… For the remainder of the report:
(courtesy Mike Kosares/GATA)
Mike Kosares: Reflections in a golden eye
Submitted by cpowell on Sun, 2015-09-13 14:10. Section: Daily Dispatches
10:09a ET Sunday, September 13, 2015
Dear Friend of GATA and Gold:
USAGold’s September newsletter, edited by proprietor Mike Kosares, has nine “reflections in a golden eye,” including some on gold mining entrepreneur Peter Hambro’s recent appearance on Bloomberg Television, GATA consultant Ronan Manly’s calculation of the gold bars left in the London market, and Jim Rickards’ warning that financial warfare threatens some assets more than others. The newsletter is posted at USAGold’s Internet site here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
(courtesy Bill Murphy/GATA)
GATA chairman discusses surreptitious intervention in markets by government
Submitted by cpowell on Sun, 2015-09-13 14:19. Section: Daily Dispatches
10:18a ET Sunday, September 13, 2015
Dear Friend of GATA and Gold:
GATA Chairman Bill Murphy, interviewed this week by Dunagun Kaiser of Reluctant Preppers, discusses the counterintuitive developments in the financial markets, including gold and silver, that are likely caused by surreptitious government intervention. The interview is 17 minutes long and can be heard at You Tube here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
This is an important piece as the BIS is ganging up on central banks:
(courtesy London’s Telegraph/BIS)
Dovish central banks distort bunds, linkers, mortgages, BIS says
Submitted by cpowell on Sun, 2015-09-13 14:38. Section: Daily Dispatches
By Anchalee Worrachate
Sunday, September 13, 2015
Central-bank policies are producing unintended consequences for assets such as German bonds, European inflation-protected securities, currencies, and Swiss mortgage rates, according to the Bank for International Settlements.
The European Central Bank’s purchases of government bonds to stave off deflation risk have probably added to a drop in liquidity, consequently increasing price swings of German government bonds, the region’s benchmark security, the institution said in a report released Sunday:
It noted that banks’ scaling down on their inventory holdings of fixed-income assets is part of the long-term trend of a decline in liquidity.
Ultra-long German bonds, securities with remaining maturity longer than 12.5 years, were affected the most, the report said. The size of transaction that can be executed at the best available bids and offer prices for these securities, a market gauge known as order-book depth, has dropped to 16 million euros ($18 million) from 25 million euros in the first half of the year. Lower order-book depth means even a relatively small increase in trading volume can lead to larger price swings.
“Reduced market liquidity and central-bank actions may have played a role,” the institution said. Some observers suggested the ECB’s bond purchases, which started in March, “may have further reduced the supply of tradable German bonds, which had already been fairly strained due to low issuance volumes.”
The ECB’s QE program, which included index-linked bonds, also distorted an inflation-expectation signal traditionally extracted from the market, according to the BIS, which was formed in 1930 and acts as a central bank for the world’s monetary authorities. …
… For the remainder of the report:
Article commented upon below as well:
The BIS is now fearing a meltdown due to the emerging market maelstrom especially if the Fed tightens:
(courtesy Ambrose Evans Pritchard/ see below as well)
BIS fears emerging market maelstrom as Fed tightens
Submitted by cpowell on Sun, 2015-09-13 14:49. Section: Daily Dispatches
By Ambrose Evans-Pritchard
The Telegraph, London
Sunday, September 13, 2015
Debt ratios have reached extreme levels across all major regions of the global economy, leaving the financial system acutely vulnerable to monetary tightening by the U.S. Federal Reserve, the world’s top financial watchdog has warned.
The Bank for International Settlements said the wild market ructions of recent weeks and capital outflows from China are warning signs that the massive buildup in credit is coming back to haunt, compounded by worries that policymakers may be struggling to control events.
“We are not seeing isolated tremors but the release of pressure that has gradually accumulated over the years along major fault lines,” said Claudio Borio, the bank’s chief economist.
The Swiss-based BIS said total debt ratios are now significantly higher than they were at the peak of the last credit cycle in 2007, just before the onset of global financial crisis. …
… For the remainder of the report:
ted talks on the upcoming shortage in silver
(courtesy Ted Butler)
The Coming Silver Shortage
September 14, 2015 – 8:19am
From the very beginning of my epiphany 30 years ago about a silver price manipulation on the COMEX, was the unavoidable conclusion that if prices were artificially depressed as I believed, then at some point a physical shortage must develop. If the price of any commodity were set too low for too long a period of time, then the dynamics of the law of supply and demand would eventually crimp supply and encourage demand to such an extent that a physical shortage must develop and end the manipulation.
I was never much of a geopolitical or monetary analyst or even a conspiracy theorist, as my background and interest was always in commodity supply and demand analysis. As such, I knew that the most potent force for driving prices higher was an actual commodity shortage. If there is not enough of a commodity to meet demand, then the price must go to whatever high level is necessary to satisfy demand. That is a primal market force few would argue with.
What drew me to silver in 1985 was that its price appeared to be too low and not in conformity with credible evidence that more silver was being consumed than was being produced, which necessitated a steady drawdown in world silver inventories. In trying to reconcile these two conflicting circumstances – low price in spite of current demand being greater than current production – I stumbled on concentrated short selling on the COMEX and, much later, leasing. The discovery only convinced me more that this must end with silver in a pronounced physical shortage; as excessive COMEX paper short selling and the uneconomic dumping of actual metal (leasing) couldn’t last indefinitely or invalidate forever the law of supply and demand.
The long term consumption deficit in silver did end, after being in force every year since WW II, but not until 2006, more than 20 years after my discovery about manipulation. But the damage to world silver inventories had already been done and to this day, world silver inventories are down more than 90% from where they were at the start of WW II. In 2006 silver finally crossed the $10 price barrier convincingly on its way to $20 in 2008 and nearly $50 in 2011. That was a much longer period of time than I ever envisioned and the subsequent grind down in price since the peak was also more than I ever envisioned. But at least my unshakable belief that a physical shortage is the most potent upward force possible in a commodity held true, because the price peak in 2011 was a result of a developing physical silver shortage. True, a sharp deliberate price takedown nipped that developing shortage in the bud by disrupting growing investment demand, but there is nothing to suggest that can be arranged permanently.
When I speak of a coming silver shortage or the close call in early 2011, I am referring to a shortage in the prime wholesale form of silver – industry standard 1000 oz bars. There is a current pronounced shortage in retail forms of silver, as has occurred previously over the past few years, but by definition such a retail shortage only impacts the premiums on individual forms of retail silver, not the price of 1000 oz bars (upon which the premiums are based).
That’s not to say that there isn’t some connection between a retail silver shortage and a wholesale shortage. For one thing, we are talking about the same substance, just in different forms. But more important than that is the highly unique nature of investment demand in this commodity. Both retail and wholesale silver demand is based upon investment demand. In the case of retail forms of silver, demand is 100% investment demand, while wholesale demand is only part investment demand (although investment demand is the “wild card” in wholesale demand).
Which brings me to the main point about a coming wholesale silver shortage. Of all the basic commodities that are consumed, be those commodities, oil, copper, corn or any other commodity, only silver has the kicker of investment demand in addition to the utilitarian consumption demand it shares with all other commodities. This doesn’t apply to gold, simply because so little gold is consumed industrially that virtually all demand is investment or jewelry demand. As such, while gold can go to any price buyers and sellers agree on, since it isn’t industrially consumed, it’s hard for me to see how it could go into a genuine commodity shortage.
With all consumable commodities, whenever a shortage occurs, invariably that shortage owes its origins to some type of supply side disruption. Examples include a crude oil shortage coming as a result of a unilateral cutback in OPEC production, or a weather induced crop failure or some unforeseen restriction to production. Years ago, I was involved in a big orange juice play as a result of an unexpected freeze. The other day I read in the Wall Street Journal of a shortage in glass for new skyscrapers brought on by many glass manufacturers going belly up in the real estate crash.
One reason it’s rare for an industrial commodity shortage to develop primarily from the demand side, as opposed to the supply side, is that commodity demand usually doesn’t spike with no warning. The per capita consumption of coffee, for instance, is not likely to change as radically as the supply side in the event of a killing frost in Brazil or Columbia. Therefore, disruptions to the supply side of any commodity are more likely to occur than disruptions on the demand side.
That is not the case in silver and this is the key premise to an eventual physical shortage. Simply put, the highly unique dual demand feature in silver – vital industrial commodity and universal investment asset – gives silver something not present in any other commodity, the possibility of a demand surge capable of creating a physical shortage. I suppose silver could also be subject to a supply side disruption, just like any other commodity; but only silver has the potential of a demand side disruption as well.
This can be seen in the current shortage of many retail forms of silver. It’s not that the US Mint has suddenly reduced its production of Silver Eagles, having produced more over the past five years (200 million) than it did over the first 24 years of the Bullion Coin Program (150 million). The Mint has already produced more Silver Eagles this year than in any year to this point; yet there is a shortage of Silver Eagles. Clearly, the shortage in Silver Eagles is as a result of surging investment demand and not any disruptions on the supply side.
But wait – we’re told that surging investment demand for retail forms of silver is a whole different animal than surging investment demand for 1000 oz bars. Is it really? I don’t think so. While I would agree that a sudden surge in investment demand for physical ownership of soybeans, crude oil, copper or live cattle is highly unlikely, it seems to me that such a surge in investment buying in 1000 oz bars of silver is not only inevitable, but has occurred previously. Certainly, anything that has occurred before makes it possible to occur again, particularly in the case of silver where all the circumstances that I monitor indicate an investment surge is more likely to occur than ever before.
It’s important to define “shortage”. The first definition appearing on Google is a situation in which something needed cannot be obtained in sufficient amounts. In the free market, when a commodity goes into a shortage the price is bid higher until it is available to those willing to pay more than others. This is particularly true for investment assets because potential buying is not limited to those using commodities in their usual day to day businesses.
Silver’s dual demand means just that – it is demanded by those who need it for industrial and other purposes and by those who want to hold it as an investment asset. Silver’s dual demand profile has a multiplier effect on demand, something no other commodity has to any practical extent. When investment demand for 1000 oz bars of silver surges, as I believe is inevitable, industrial and other fabrication demand for silver doesn’t go on holiday until the investment demand subsides. Dual demand means both remain in force at the same time.
Against the dual demand for silver is situated a dual source of supply – the net new supply of metal mined and recycled and the supply made available from existing inventories. The true amount of “new” silver is that which is available for investors after all other industrial and other fabrication demand is met. This “left over” amount is no more (by my calculations) than 100 million oz annually, or in dollar terms at current prices, no more than $1.5 billion annually. It’s important to note that new silver supply becomes available on a day to day basis as it is taken from the ground and refined; whereas demand knows no daily limitation. As far as “old” silver, of the 1.3 billion oz of silver in the form of 1000 oz bars, the percentage available for sale near current prices is very small (as is the case in everything).
The important point is that the investment side of silver’s dual demand can explode at any time (as has recently been seen in retail silver), while the supply side is much more constrained and will only expand with time and at much higher silver prices. And the age-old collective human trait of jumping on the investment bandwagon when prices of investment assets move higher would seem to guarantee that investment demand for silver will increase as prices move higher.
So, on the one hand we have potentially exploding investment demand for 1000 oz bars, given that this is the form offering the greatest current relative value and is what the COMEX and world ETFs are denominated in and what industrial users will rush to when the shortage becomes apparent and their deliveries are delayed; and on the other hand a we have a very limited potential supply. This is the stuff of which constitutes a potential historic shortage.
If the coming silver shortage is as inevitable as I suggest, then why hasn’t it occurred yet? The short answer is that COMEX futures trading has come to so dominate the price of silver (and now other commodities) that the surest sign of a physical commodity shortage, a rising price, is blunted. The price of silver is not depressed because of a surplus of real metal, retail or wholesale, or a lack of physical demand, it is depressed by a surplus of derivatives contracts. In essence, the artificial price emanating from the COMEX is short-circuiting the true functioning of the law of supply and demand.
What it comes down to is how much longer the COMEX-orchestrated price can delay the physical silver crunch and shortage to come? I don’t have the answer, but I am confident that this is the right question. I am also confident that once a wholesale physical silver shortage kicks in, that shortage can’t be further contained by derivatives trading and most likely will have to burn itself out the old-fashioned way – by allowing the market to discover the true clearing price. The trick, of course, is to be positioned before the physical shortage is reflected in price.
September 14, 2015
(courtesy Lawrence Williams/Lawrie on Gold)
GOLD, SILVER, PGMS, MINING AND GEOPOLITICAL COMMENT AND NEWS
New York closed Friday with the gold price at $1,108.40, up $1. This morning gold was trading at $1,108.00 in Asia. In the euro this was 976.60 down €12.99. This morning the dollar index started the day at 95.09 one full point down from 96.09 on Friday. The LBMA gold price was set at $1,008.00 up 25 cents from Friday. The euro equivalent was €978.80 down again by €11.86 reflecting the remarkable strength of the euro. Ahead of New York’s opening gold was trading at $1,106.90 and in the euro at €978.09.
The silver price was down 25 cents on Friday down from $14.75 down to $14.50 in New York. Ahead of New York’s opening silver was trading at $14.45.
The euro is rising strongly to trade against the dollar at $1.1344. Before the turmoil in the last month the euro was at $1.07 then it rose to $1.17 at the height of the turmoil. We then saw more Q.E. from the E.C.B. which should have dropped the euro. But here we are with the euro strengthening as the Shanghai Composite index resumes its fall at the start of the week.
US forward interest rates are persistently above those in the Eurozone and yet the euro is strengthening. It would appear that measures of market liquidity support the conjecture that strained market liquidity conditions are at least partly to blame for the increased volatility. We are bracing ourselves for another bout of turmoil!
The ‘carry trade’ is particularly sensitized to increased potential volatility, which appears to be imminent and likely already taking the euro higher. Perhaps this is due to the coming FOMC statement on interest rates and pushing them to adjust their positions for the worst. The most vulnerable markets are developed world equity and bond markets but the emerging world is bracing itself for body blows to their exchange rates, in particular those of gold-loving nations. With the E.C.B. buying sovereign bonds [particularly ‘bunds’] liquidity is being sucked out of these markets, making them much more volatile.
What prospects for gold and silver this week? If turmoil returns as seen in the last month, we expect investors in the developed world to retreat into these precious metals. Confidence in financial markets will be lessened by such turmoil. And this will happen at a time when global demand, particularly in Asia is moving to a seasonal high point. This should bode well for gold and silver prices.
We did not see a sale or purchase into or from the SPDR gold ETF but did see a sale of 0.45 of a tonnes from the Gold Trust, on Friday. This leaves the holdings of the SPDR gold ETF at 678.183 tonnes and 159.90 tonnes in the Gold Trust.
Silver was much stronger than gold last week and is likely to be so this one too
And now Bill Holter
(courtesy Holter-Sinclair collaberation)
No salvation for the securities industry..
The original plan for this writing was to point out how volume has dried up from the retail side and the machines have taken over. Wall Street has ruined its own “golden egg” by fleecing the public too many times. The little guy has left and for the most part does not have the extra income to invest any more. When I mentioned this writing to Jim, he cam back with:
1 Chinese yuan vs USA dollar/yuan rises in value, this time at 6.3627/Shanghai bourse: deeply in the red and Hang Sang: green
2 Nikkei down 298.52 or 1.63.%
3. Europe stocks all in the green /USA dollar index up to 95.14/Euro down to 1.1323
3b Japan 10 year bond yield: rises to .356% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 120.60
3c Nikkei now below 18,000
3d USA/Yen rate now just above the important 120 barrier this morning
3e WTI: 44.60 and Brent: 47.79
3f Gold down /Yen up
3gJapan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil down for WTI and down for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund falls to .658 per cent. German bunds in negative yields from 4 years out
Greece sees its 2 year rate rises to 11.81%/Greek stocks this morning down by 0.58%: still expect continual bank runs on Greek banks /
3j Greek 10 year bond yield rises to : 8.83%
3k Gold at $1105.00 /silver $14.46 (8 am est)
3l USA vs Russian rouble; (Russian rouble up 27/100 in roubles/dollar) 67.72,
3m oil into the 44 dollar handle for WTI and 47 handle for Brent/Saudi Arabia increases production to drive out competition.
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation (already upon us). This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar.
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning .9700 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0983 well above the floor set by the Swiss Finance Minister. Thomas Jordan, chief of the Swiss National Bank continues to purchase euros trying to lower value of the Swiss Franc.
3p Britain’s serious fraud squad investigating the Bank of England/
3r the 4 year German bund now enters in negative territory with the 10 year moving closer to negativity to +.658%
3s The ELA lowers to 89.1 billion euros, a reduction of .6 billion euros for Greece. The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Greece votes again and agrees to more austerity even though 79% of the populace are against.
4. USA 10 year treasury bond at 2.17% early this morning. Thirty year rate below 3% at 2.94% / yield curve flatten/foreshadowing recession.
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Futures Fade Early Euphoria After Chinese Stocks Resume Slide
Yesterday when we commented on the Chinese open for trading, we noted that US equity futures, up between 10-15 points at the time on hopes for even more central bank intervention (even if a September rate hike is now largely off the table as far as the market is concerned) we warned that algos still appear unaware that the most bullish catalyst – Gartman’s short position – has been stopped out and as such “algos are flying blind.” Since then US futures have trimmed their gains by half and at this rate we may even open red, depending on whether Gartman once again flop-flipped, this time to bullish.
But while any moves in the US stock market ahead of Thursday are largely irrelevant, as only Yellen’s statement in 4 days will unleash epic algo buying or short covering (yes, according to JPM the Fed statement is bullish no matter what), it is what happened in China that is concerning, because while we had expected Chinese stocks to go nowhere in particular now that index future trading volumes have plunged by 99% or perhaps rise on hopes of even more easing after the latest terrible economic data, the Shanghai Composite dropped 2.7%, but it was the retail darling Shenzhen Composite which tumbled 6.7% – its worst selloff since August 25, while China’s Nasdaq, the ChiNext crashed -7.5%.
Is China starting to losing control again? Judging by the latest PBOC data, namely that China sold CNY723.8 billion ($114 billion), or the biggest monthly FX outflow on record, things behind the scenes in Shanghai are far worse than they seem. Keep a close eye on Copper – and thus Glencore CDS – for validation.
Elsewhere in Asia equity markets traded mostly lower as investors remained cautious ahead of Thursday’s FOMC. The Nikkei 225 (-1.2%) was pressured by weakness in telecoms (-6.9%) after Japanese PM Abe said he seeks a reduction in cell phone rates, while ASX 200 (+0.5%) bucked the trend in the region amid gains in large banks. JGBs traded lower as the BoJ unexpectedly refrained from conducting any asset purchases under its bond purchase program. Barclays has decreased its 2015 Chinese 2016 GDP forecast from 6.6% to 6.0%, 2015 GDP forecast decreased from 6.8% to 6.6%.
In spite of the release of yet another round of weak macroeconomic data from China and well as the raft of looming risk events, stocks in Europe traded higher. The FTSE-100 index outperformed (+0.6%), bolstered by material names, which is the best performing sector in Europe after a sector wide positive broker move by JP Morgan. Elsewhere, the upside by stocks failed to weigh on fixed income, with Bunds and Gilts trading the unchanged mark, while peripheral bond yield spreads narrowed by a mere 1bps, which only highlights the fragile nature of recent gains by equities. Of note, trade may be on the light side today due to the Rosh Hashanah holiday, the Jewish New Year.
In Fx, GBP was bid across the board in early European trade, with GBP/USD just off highs and ahead of touted offers at 1.5475, while EUR/GBP has also bounced off lowest levels of the session, which coincides with the 200DMA line at 0.7326. This comes after comments over the weekend from BoE’s Weale who said interest rates need to be increased “relatively soon”. Of note Weale is considered to have a hawkish stance, however at the last meeting he voted to keep rates on hold, and therefore these comments could be interpreted as an indicator he may soon vote for a hike.
Elsewhere, analysts at Goldman Sachs wrote in a note that EUR and JPY are set to be pressured by further monetary easing by their respective central banks at some stage , with GS also reiterating their call for the Fed to refrain from tightening this week. Of note, the Australian PM Abbott faces a vote today as to whether he will remain head of the party, with Malcolm Turnbull challenging for party leadership.
In commodities, the release of less than impressive macroeconomic data from China failed to buoy demand for commodity prices, with the likes of bother WTI and gold trading flat heading into the North American crossover as market participants are forced to contend with a potential hawkish Fed later on in the week. At the same time, copper trended lower, with analysts at Barclays also noting that the demand hasn’t been strong enough to indicate a turnaround in China. Analysts point to a large surplus of 381 kt in Q4, which should reverse recent gains.
Elsewhere, iron ore futures on DCE rose in reaction to the latest Chinese data which showed that Chinese crude steel output rose 1.7% in August from a month earlier, it fell 3.5% from a year earlier and dropped 2% the first eight months. The upside came in spite of the fact that the latest release only adds to the increasing concerns of an oversupply.
In summary: Europe’s Stoxx 600 little changed as of 10:45am CET time, after dropping 2.2% in 2 sessions, with the basic resources and media sectors outperforming. ajor miners rally; JPMorgan upgrades sector on limited downside. Stoxx 600 Follows EuroStoxx 50, DAX, S&P with death cross signal. China fixed-asset investment tumbles to lowest since 2000; industrial production trailed analyst estimates
- Shanghai Composite -2.7%, Nikkei 225 -1.6%
- S&P 500 futures little changed
- Europe’s Stoxx 600 little changed
- FTSE 100 up 0.4%, CAC 40 up 0.1%, DAX little changed, IBEX 35 up 0.2%, FTSE MIB down 0.6%, Euro Stoxx 50 up 0.1%
- Brent Futures down 1.4% at $47.5/bbl
- LME 3m Copper down 0.6% at $5340/MT
- Euro spot up 0.03% at 1.1341
- V2X down 2.6% at 30.8
Overnight Bulletin Summary from Ransquawk and Bloomberg
- In spite of the release of yet another round of weak macroeconomic data from China and well as the raft of looming risk events, stocks in Europe traded higher
- GBP was bid across the board in early European trade after comments over the weekend from BoE’s Weale who said interest rates need to be increased “relatively soon”
- Barclays has decreased its 2015 Chinese 2016 GDP forecast from 6.6% to 6.0%, 2015 GDP forecast decreased from 6.8% to 6.6%
- Treasuries gain led by long end, curve flattens as traders position for Fed decision Thursday, decision and updated SEP at 2pm followed by Yellen presser.
- China’s industrial output rose 6.1% in August, less than expected; fixed-asset investment increased 10.9%, also less than forecast
- EU ministers will try to bridge a divide over the surging refugee crisis a day after Germany reinstated border controls, curbing the freedom of movement across the continent
- Draghi’s promise that the ECB is willing to step up its stimulus if needed is resonating with economists, who see the euro-area recovery as too shallow to be sustained
- Jeremy Corbyn, the U.K. Labour Party’s most socialist leader in at least three decades, is facing his first challenge in uniting the party following a victory that sparked resignations by a string of Labour’s most senior figures
- Sovereign 10Y bond yields mostly lower. Asian stocks lower, European stocks and U.S. equity-index futures rise. Crude oil, gold and copper lower
- 9:30pm: Reserve Bank of Australia releases meeting minutes
- 11:00pm: Bank of Japan policy statement, Kuroda news conference
DB’s Jim Reid completes the overnight event wrap
Well it’s the week we’ve all been waiting for. Will Janet Yellen start taking away the epidural from financial. We’ve been convinced the Fed won’t raise rates but a hawkish hold which is most likely could easily leave October or December on the table so we could still be wrong on this. From here until year-end I think more depends on global risk and China than on US economic data for the Fed’s decision. Had China not caused such global grief over the last few weeks I suspect they would have hiked this week whether it would have been the right decision or not. So the Fed’s desire to hike has been stronger than we thought it would be, they just don’t have the global backdrop to be able to do it now.
Market pricing for a hike on Thursday has stayed relatively stable for the last couple of weeks and we’re at 28% as we go to print this morning which is where we closed Friday evening after some slightly softish US data. The difference between market pricing and the views of economists has been noted on the wires a few times and it’s interesting to see that Bloomberg is showing that 50% of economists surveyed (96 of them) are forecasting for a 25bps hike, although it’s worth warning that some of the estimates were made a couple weeks ago. In any case, with markets both fragile and volatile at the moment, a decision by the Fed to go against the market could be a dangerous game to play while a lot will rest on Yellen’s post meeting statement should they stay put for now.
With regards to China and the data out over the weekend, while some of the headline numbers disappointed, our colleagues in China noted that most activity indicators have stabilised. August retail sales edged up three-tenths last month to 10.8% yoy (vs. 10.6% expected). Industrial production was up a tenth to 6.1% yoy, although less than the 6.5% expected while fixed asset investment growth disappointed, falling three-tenths to 10.9% yoy (vs. 11.2% expected) and the lowest since 2000. DB’s Zhiwei Zhang noted however that investment amounts for projects under construction and newly started projects have both picked up notably and in addition, real growth of retail sales stabilised in August. He also warns that the August data indicators may have suffered a one-off negative impact from the preparation for the September military parade. Meanwhile, leading indicators were supportive with property sales momentum continuing (7.2% yoy from 6.1% in July) and total funds available for investment increasing seven-tenths to 7.6% (3mma yoy). Zhiwei believes that the stabilisation of economic activities was driven to a large extent by fiscal policy easing. He continues to expect growth to rebound in Q4 to 7.2% from 7.0% in Q3 and does not expect the government to announce another grand fiscal stimulus package based on the latest leading indicators, although he does expect one more RRR cut.
In addition, much of the headlines out of China this weekend were focused on the report by Xinhau News Agency on the unveiling of reforms for SOE’s. There’s a lack of details so far, but the reports notes that its set to include partial privatisation and various managerial changes to help drive a shakeup of the sector. ‘Decisive results’ are expected by 2020 according to the report with the aim of achieving ‘higher economic vitality, higher control and greater influence’.
Despite some signs of stabilisation in the leading indicators perhaps, markets don’t necessarily agree and have kicked off the week on a down note in Asia with losses being led out of China. At the midday break the Shanghai Comp is down -3.20%, while there are decent losses for the CSI 300 (-3.51%) and Shenzhen (-4.53%) too. Elsewhere the Hang Seng (-0.10%), Nikkei (-1.48%) and Kospi (-0.84%) have all been led lower by the move having initially opened on a positive note. Despite the losses in equity markets, Asia credit is actually trading a basis point tighter, while S&P 500 futures are more or less unchanged.
Looking back at another cautious day for markets on Friday. Having traded as much as -0.7% down intraday shortly following some disappointing data, the S&P 500 rallied back in the last hour of trading to close up +0.45% and in turn cap the best five-day return (+2.07%) in eight weeks. This came after a weak session in Europe with the Stoxx 600 tumbling -1.01% following another choppy session in Asia. The moves in the Vix have garnered some attention of late and with a 4.8% fall on Friday, the index is now down 18% in September so far following a 135% surge last month. It was a quieter day in the credit space on Friday, with US indices little changed but the story of the week was the 34 issuers pricing over $54bn in the holiday-shortened week.
The disappointment in the US dataflow on Friday was the preliminary September University of Michigan consumer sentiment reading which fell 6.2pts to 85.7 (vs. 91.1 expected), the lowest level in a year and the largest one-month decline since the end of 2012. In the details the current conditions index fell to an 11-month low of 100.3 from 105.1 last month, while the 6-month expectations index fell 7pts to 76.4 and the weakest in a year. August’s PPI reading showed a better than expected print at both the headline (0.0% mom vs. -0.1% expected) and core (+0.3% mom vs. +0.1% expected). That helped the headline annualised rate stay unchanged at -0.8% yoy while the core edged up three-tenths to +0.9% yoy. The Dollar had a softer day Friday, the dollar index finishing down 0.27% to cap a 1.1% decline over the week while 10y Treasury yields fell for the first time in a week, closing down 3.4bps at 2.189% and 2y yields fell 2.8bps to 0.707%.
Unlike in the US, dataflow in Europe and specifically in Germany didn’t offer any surprises with the final August CPI reading of 0.0% unrevised, keeping the annualised rate steady at +0.2% yoy. Yields in the region nudged lower, with 10y Bunds down 4.3bps to 0.650% and the lowest in nearly 3 weeks. Over the weekend in Europe much of the attention has been on geopolitical issues related to the refugee crisis with Germany announcing that they have temporarily reinstated border control with Austria in response to the huge surge in migrant numbers. This follows an in-depth look by DB’s Mark Wall and his team on Friday in the Focus Europe publication looking at the impact of migration. Mark noted that Germany alone expects 800k asylum seeker applicants this year and that immigration is now the EU’s most important political problem according to opinion polls. Mark points out that the economic impact on the EU and Germany will be negligible at least in 2015. The medium-term impact on the demand side could be more pronounced however. Germany especially seems to be predestined to benefit substantially, given Germany’s high demand for labour at present and its ageing workforce which also will markedly shrink without immigration. However, noteworthy supply-side effects will only emerge to the extent that Germany is able to integrate the newcomers into the labour market which is a challenging task and furthermore asylum seekers will face administrative obstacles in efforts to gain labour market access.
Turning to this week’s calendar now. It’s a fairly quiet start to the week today with just Euro area industrial production and Italian CPI, with no data due out in the US this afternoon. It’s busier on Tuesday however with French and UK CPI (along with RPI and PPI in the latter), followed closely by the Euro area employment and trade data along with the German ZEW survey reading for September. That’s before a bumper data session in the US on Tuesday with retail sales, empire manufacturing, industrial and manufacturing production, capacity utilization and business inventories all due. In Europe on Wednesday all eyes will be on the Euro area CPI print, while UK employment indicators are also expected. In the US the focus will be on the August CPI print in what’s set to be the last important data print prior to the FOMC meeting. Average weekly earnings data and the NAHB housing market index are also due Wednesday. We start in Japan on Thursday with trade data before we get UK retail sales closer to home. Prior to the FOMC decision in the early evening and subsequent Yellen press conference we’ll get US housing starts, building permits, initial jobless claims and Philadelphia Fed business outlook readings ahead of the main event. Ending the week on Friday in Asia will be property prices data out of China. In Europe we’ll get French wage data before the conference board leading indicators out of the US in the afternoon.
China : 9’30 pm Sunday night/Monday morning 9″30 am Shanghai time: China starts out negative (and ends deeply in the negative)
(courtesy zero hedge)
US Futures Jump Unaware Gartman Short Has Been Stopped Out, China Hugs Flatline
Following a string of weak economic news out of both Japan and the US, it was China’s turn to disappoint which it did over the weekend with the worst fixed-asset investment data – the primary driver of China’s GDP – since 2000, as well as yet another miss in Chinese industrial output, just the latest two indications that China’s economy is grinding to a halt if not slamming into reverse.
The result: just like with Japan’s latest dramatic economic deterioration, China’s data was merely taken as yet another indication the PBOC will be forced to ease more in the coming days. As Reuters reported, “the data add to expectations that Beijing will respond with more measures to prop up the economy. “The numbers fit with our view that China will have to roll out more monetary easing,” said Fumio Nakakubo, Japan CIO at UBS’s wealth management division.”
Because if it hasn’t worked so far, it is only because not enough has been applied right?
That, however, may not work for Japan where there has been a resurgence in calls for more easing out of the BOJ although as we first noted last year, and as the IMF confirmed last week, the BOJ no longer can boost QE simply because there is nothing incremental it can buy. It also explains why Reuters reported earlier that “Bank of Japan policymakers are in no mood to expand monetary stimulus this week, sources familiar with their thinking say, even as poor data challenges their presumption that economic recovery will boost inflation to its 2 percent target next year.”
There is still hope for an October rate hike, but just like September, the closer we get to the date, the more unlikely such a hike will “suddenly” become as even the BOJ is now officially out of QQE boosting ammo, and the best it can hope for is to last until 2017 without prematurely tapering.
And while the Shanghai Composite opened green only to turn red moments ago as doubt starts to creep in that someone, anyone will ease more…
… we don’t expect much of a move from China. As the following chart shows, ever since the Chinese government killed trading in Chinese index futures last week, the “market” is anything but – and has literally flatlined as virtually nobody trades anymore. In other words, China has successfully CYNKed its entire stock market.
Earlier, the PBOC modestly raised the Yuan, pushing it higher by 0.02% to 6.3709, up from 6.3750, although even that move seems rather unremarkable by recent standards – as if even China is now waiting for the Fed.
For now, US equity futures are higher on the day, rising by 9 point after being 14 points higher ealier, driven mostly by USDJPY correlation algos, and perhaps by Goldman’s conviction that the Fed will not hike in September and may delay hiking until 2016 altogether.
However, we expect this initial euphoria higher to fade momentarily, once the vacuum tubes realize that the catalyst of Friday’s surge higher, namely Gartman’s latest flipflopping is no longer on the table. As a reminder, this is how we paraphrased Dennis in “A Warning For The Bears: Gartman Goes Short S&P Futures, “Very Worried In Catholic Terms”
NEW RECOMMENDATION: we wish to sell the S&P futures short this morning, fearing that a major top has developed and that the recent consolidation in the stock market is precisely that: a consolidation before the next leg downward.
We’ll sell the S&P future short and will buy the December T-note at the same time, with the S&P trading 1933.00 as we write and with the Dec T-note future trading 127 ¼. We’ll risk no more than 1.5% on either position and we look for the consolidation in the S&P to resolve itself sharply lower as discussed at length above.
Well, as of tonight, just 1 trading day after his latest reco, Gartman has been stopped out as his 1.5% limit was hit when futures rose above 1962 this evening.
So with Gartman no longer a 100% assured fade, the algos are now flying blind and anything is possible.
That said, for the real action we will just have to wait until Thursday when the Fed either proceeds with the first rate hike in 9 years or, far more likely, postponed once again… due to “risk management” considerations of course.
An Angry China May Cancel Xi Trip To Washington Over US Cyber Sanctions
A little over a week ago, FT suggested that the US was set to slap China with sanctions in retaliation for what the US claims are a series of cyber attacks. The news came a month after the NSA leaked a “secret” map to the press which purported to show the locations of hundreds of cyber intrusions which NBC said were used “to steal corporate and military secrets and data about America’s critical infrastructure, particularly the electrical power and telecommunications and internet backbone.”
Furthermore, the report continued, “the prizes that China pilfered during its ‘intrusions’ included everything from specifications for hybrid cars to formulas for pharmaceutical products to details about U.S. military and civilian air traffic control systems.” NBC cited “intelligence officials.”
The release of the map and subsequent indication that the Obama administration felt it needed to send a message in the wake of the OPM hack described as “the largest theft of US government data ever,” marked the culmination of a long cyber propaganda campaign which began with accusations that North Korea had attempted to sabotage the release of a Seth Rogen film and reached peak absurdity when Bloomberg reported that Chinese hacker spies had taken control of the Penn State engineering department.
Ultimately, all of this prompted the administration to “prepare a raft of sanctions to respond to [the] mounting commercial espionage,” FT reported. The problem with applying the sanctions now however, is that Xi Jinping is preparing to visit Washington and as anyone who knows anything about Xi is fully aware, he is not a man who enjoys being embarrassed, a fact that’s led some officials to voice concerns about the wisdom of leveling the sanctions now as opposed to after Xi and Obama have met and the Chinese President is back home in Beijing. The thinking is essentially this: “why risk making things awkward when the US could just wait and apply the sanctions later, allowing Xi to save face?”
Well sure enough, it now looks like the very idea that Washington is set to move ahead with the sanctions may be enough to prompt Xi to cancel the trip altogether. The Hill has more:
Sanctions punishing China for hacking U.S. companies could drive Beijing to cancel President Xi Jinping’s upcoming U.S. visit, according to experts and former administration officials.
The Asian power is increasingly anxious about the potential of economic penalties ahead of what’s seen as an important summit for the future of the U.S.-China relationship.
“The Chinese right now are getting very concerned because they understand this will create embarrassing optics around the visit for them,” said Samm Sacks, China analyst at the Eurasia Group, a political risk consulting firm, who has advised government agencies on Chinese tech policy.
While some experts and former White House cybersecurity officials are wary the administration will aggravate Beijing just days before Xi lands in Washington, current officials have privately indicated sanctions may be imminent.
Then again, The White House is also concerned that itsreputation (or whatever is left of it as it relates to relations with China) will be damaged if the US allows a diplomatic visit to dictate America’s response to what’s been billed as aggressive cyber warfare:
“If they don’t announce the sanctions soon,” Sacks said, “it makes the Obama administration look weak.”
But when those penalties hit is a major question.
Many see little upside to timing the sanctions this close to the meetings. After months of anticipation, such a move would eliminate any chance of a worthwhile dialogue on cybersecurity at the summit and compound the inevitable blowback, policy specialists agreed.
“You’re not going to get any better chance to talk to them than right now,” said Jason Healey, a former director of cyber infrastructure protection at the White House. “If I were Obama, I would want some running room.”
Healey and others believe the rumors are meant simply as a message to the Chinese delegation as it prepares to make the trip stateside.
“My sense was that the leaks were happening to try and create some kind of pressure on the Chinese as they come into the summit, to get some type of traction with them,” said Chinese cyber policy expert Adam Segal, a senior fellow at the Council on Foreign Relations.
Others have heard the leaks were not intentional, and came from hard-liners within the administration who want to press forward with sanctions.
Either way, the U.S. is in a rare position to apply cybersecurity pressure on China. Many believe the White House has less to lose than its counterpart during the upcoming summit.
Within the Obama administration, “there’s a tolerance of having a bad visit,” Sacks said.
Beijing officials are more concerned about the international community’s perception of the meetings, foreign policy experts agreed.
“They want to send the signal about [Xi’s] arrival on the international stage,”Segal explained.
In the end, this is just further evidence of worsening relations between the US and China. If the situation is so tenuous that sanctions related to hacking have the potential to derail a meeting between the leaders of the two countries which now preside over a world that’s returned to bipolarity for the first time since the fall of the USSR, then constructive dialogue around issues like China’s military buildup in the Spratlys or, more recently, the presence of the Chinese navy off the coast of Alaska may be all but impossible going forward and as Russian foreign minister Sergei Lavrov reminded the US last week, when dialogue isn’t possible, “unintended incidents” are more likely to occur.
Of course something tells us Xi wasn’t really looking forward to the trip in the first place so we doubt he’ll be losing sleep…
A Major Bank Just Made Global Financial “Meltdown” Its Base Case: “The Worst The World Has Ever Seen”
When it comes to the epic bubble in China’s economy, it really boils down to one – or rather two – things: a vast debt build up (by now everybody should be familiar with McKinsey’s chart showing China’s consolidated debt buildup) leading to a just as vast build up of excess capacity, also known as capital stock accumulation. And/or vice versa.
It is how China resolves this pernicious, and self-reinforcing feedback loop, that is a far greater threat to the global economy than even what happens to China’s bad debt (China NPLs are currently realistically at a 10-20% level of total financial assets) or whether China successfully devalues its currency without experiencing runaway capital flight and a currency crisis.
One bank that is now less than optimistic that China can escape a total economic meltdown is the Daiwa Institute of Research, a think tank owned by Daiwa Securities Group, the second largest brokerage in Japan after Nomura.
Actually, scratch that: Daiwa is downright apocalyptic.
In a report released on Friday titled “What Will Happen if China’s Economic Bubble Bursts“, Daiwa – among other things – looks at this pernicious relationship between debt (and thus “growth”) and China’s capital stock. This is what it says:
The sense of surplus in China’s supply capacity has been indicated previously. This produces the risk of a large-scale capital stock adjustment occurring in the future.
Chart 6 shows long-term change in China’s capital coefficient (= real capital stock / real GDP). This chart indicates that China’s policies for handling the aftermath of the financial crisis of 2008 led to the carrying out of large-scale capital investment, and we see that in recent years, the capital coefficient has been on the rise. Recently, the coefficient has moved further upwards on the chart, diverging markedly from the trend of the past twenty years. It appears that the sense of overcapacity is increasing.
Using the rate of divergence from past trends in the capital coefficient, we can calculate the amount of surplus in real capital stock. This shows us that as of the year 2013, China held a surplus of 19.4 trillion yuan in capital stock (about 12% of real capital stock).
Since China is a socialist market economy, they could delay having to deal directly with the problem of capital stock surplus for 1-2 years through fiscal and financial policy.However, there is serious risk of a large-scale capital stock adjustment occurring in the mid to long-term (around 3-5 years).
Daiwa then attempts to calculate what the magnitude of the collapse of China’s economic bubble would be. Its conclusions:
Even in an optimum scenario China’s economic growth rate would fall to around zero
We take a quantitative look at the potential magnitude of the collapse of China’s economic bubble to ensure that we can get a good grasp of the future risk scenario. If a surplus capital stock adjustment were to actually occur, what is the risk for China and how far would its economy fall?
Chart 7 shows a factor analysis of China’s potential growth rate. The data here suggests that (1) China’s economy has gradually matured in recent years, and this has slowed progress in technological advancement, (2) Despite this fact, it has continued to depend on the accumulation of capital mainly from public spending to maintain a high economic growth rate, and (3) As a result, this has done more harm than good to technological advancement. Between the years 2012-15 China’s economy declined, yet still was able to maintain a high growth rate of over 7%.However, 5%pt of the growth rate was due to the increase in capital stock. Labor input and total factor productivity contributed only 2%pt.
The major decline in the rate of contribution from total factor productivity is especially noteworthy, as it had maintained an annualized rate of 5% for thirty years straight since the introduction of the reform and opening-up policy and on through the era of rapid globalization.
According to a DIR simulation, if a capital stock adjustment were to occur under such circumstances, China’s potential growth rate would fall to around 4% at best. This adjustment process is shown in the bottom left Chart 7. As far as can be determined from the capital stock circulation diagram, capital spending at the level seen in 2014 should not have been allowable without an expected growth rate of over 10%. Hence if adjustment progresses to the point where the potential growth rate is only 4%, the situation for capital spending will continue to be harsh. If the adjustment process lasts from the year 2016 to 2020, capital spending will likely continue in negative numbers on a y/y basis. If this scenario becomes a reality, the real economic growth rate will hover at around zero as is shown in the lower right portion of Chart 7.
All of this is well-known by most (or at least those who are willing to accept reality at face value instead of goalseeking it away with Keynesian theories that serve to merely perpetuate fallacious groupthink). It does, however, underscore the severity of China’s economic situation and the follow-through linkages to the rest of the world.
But where the Daiwa stands out from every other report we have read on this topic, and where it truly goes where no other research has dared to go before, is quantifying the probability of China’s worst case scenario. Here is what it says:
Meltdown scenario: World economy sent into a tailspin
We have already stressed that the scenario discussed in the previous section is the optimum or bestcase scenario. What is just as likely or possibly more likely to occur is the following. If the expected growth rate declines and the progress of the capital stock adjustment causes the bad debt problem to become even more serious, the economy could spiral out of control, lapsing further into a meltdown situation.
The stunning punchline:
“Of all the possible risk scenarios the meltdown scenario is, realistically speaking, the most likely to occur. It is actually a more realistic outcome than the capital stock adjustment scenario. The point at which the capital stock adjustment is expected to hit bottom is at a much lower point than in the previously discussed capital stock adjustment scenario (see Chart 8). As shown in the bottom right portion of this chart, the actual economic growth rate will continue to register considerably negative performance. If China’s economy, the second largest in the world, twice the size of Japan’s, were to lapse into a meltdown situation such as this one, the effect would more than likely send the world economy into a tailspin. Its impact could be the worst the world has ever seen.”
Translated: Daiwa just made a Chinese “meltdown” and global economic “tailspin” its “realistically speaking, the most likely”, base case scenario.
And here we were thinking our calls (since 2011) that China’s debt and excess capacity bubble would negatively impact global growth, are audacious.
The question, now that Daiwa has broken the seal on Chinese and global doomsday scenarios, is whether and how soon other banks will follow in Daiwa’s path, and predict an armageddon scenario which sooner or later, becomes a self-fulfilling prophecy even without the help of China’s increasingly clueless micromanagers.
More data coming in suggesting that China’s economy is continuing to crumble. It is the worst in 15 years:
(courtesy zero hedge)
China’s Economy Continues To Crumble As Key Data Is Worst In 15 Years
When China transitioned to a new currency regime midway through last month, the PBoC triggered a veritable meltdown in emerging markets.
Make no mistake, part of the carnage was due to the fact that by devaluing the yuan, Beijing was effectively robbing the world of export competitiveness at a very precarious time. Fears that a weaker yuan would put upward pressure on regional REERs while further dampening onshore demand exacerbated an already tenuous situation across EMs, and in at least one case, forced the abandonment of a currency peg.
Having said that, the yuan devaluation was perhaps more significant for what it telegraphed about China’s economy. That is, the yuan had appreciated by some 15% in REER terms in the space of just 12 months, and the fact that Beijing hadn’t gone the nuclear devaluation route (i.e. had “merely” resorted to multiple policy rate cuts) was seen by some as an indication that perhaps the economic situation wasn’t as bad as many people feared. The devaluation effectively crushed that theory and indeed, there are some indications that behind the scenes, China is targeting a devaluation on the order of some 20% which would have the effect of adding back 20 percentage points of export growth on the way to – hopefully- resuscitating output.
On Sunday, we got still more evidence to suggest that China’s economy isn’t growing at anywhere near the clip the official figures suggest as industrial production came in light of expectations and FAI rose at the slowest pace since 2000. Here’s WSJ:
The data released Sunday pointed to continued weakness across large swaths of the world’s second-largest economy, heaping more pressure on the government to seek to further stimulate activity.
“This is very disappointing data,” said ANZ economist Li-Gang Liu.“It’s very difficult to see Premier Li Keqiang getting his 7% growth target this year.”
China’s industrial production grew 6.1% year-over-year in August, according to the National Bureau of Statistics. While this was marginally faster than July’s 6.0% level, it compared with an already very low reading in August of 2014 and fell well below a median 6.6% forecast by 12 economists in a Wall Street Journal survey.
Fixed-asset investment in nonrural areas of China rose 10.9% in the January-August period compared with the year-earlier period. This was also below expectation and slower than the 11.2% increase recorded in the January-July period.
Amusingly, even the NBS was cautious about the outlook going forward:
The statistics bureau warned of continued headwinds. “The foundation for the recovery is not solid,” it said on its website. “External and internal demand for industrial products remains weak and industrial production still faces relatively big downward pressure.”
And here’s a bit more color from Bloomberg:
“The economy is showing no sign of recovery,” said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong. “From the perspective of monetary policy, the government has done what it can, but demand from the real economy needs to pick up to really make use of that.”
The weakening economic figures underscore the challenge the government faces in meeting its growth target of 7 percent this year, as exports decline and producer price deflation deepens.
Investment in real estate development rose 3.5 percent in the first eight months of the year, down 0.8 percentage point from the January to July period. That reading was less than a tenth of the pace during the same period five years earlier.
Of course none of this should come as a surprise. Comparing China’s headline GDP prints to individual data points betrays the extent to which Beijing is quite clearly fabricating the numbers. Here, courtesy of RBS, is a chart which vividly demonstrates the disconnect:
And here’s a look at FAI components:
As Roberto Gallo notes, “investment cannot go on forever without demand” and indeed, excess capacity in China is one of the main reasons why the global economy is careening headlong into the deflationary doldrums.
As for what happens when China eventually goes through an inevitable capital stock “adjustment,” well, let’s just say that if Daiwa turns out to be correct, our projections will look generous by comparison…
Bank Of Japan Buying Power Runs Dry: “If They Don’t Increase Now, It’s Going To Be A Shock!”
Since 2010, The Bank of Japan has ‘openly’ – no conspiracy theory here – been a buyer of Japanese stock ETFs. Their bravado increased as the years passed and Abe pressured them from their independence to ‘show’ that his policies were working to the point that in September 2014, The BoJ bought a record amount of Japanese stock ETFs taking its holdings to over 1.5% of the entire market cap, surpassing Nippon Life as thelargest individual holder of Japanese stocks.
Having stepped in a stunning 76% of days to ensure the market closed green, it appears, as Bloomberg reports, time (or money) is running out for Kuroda and the BoJ having spent 78 percent of its allotment as of Sept. 7. “They’ve only got a little bit left in their quota,” notes one trader, “The BOJ had a big role in supporting the market,” he implored, “if they don’t increase purchases now, it’s going to be a shock.”
On Sept. 8, as the stock market slumped, investors were surprised to find the Bank of Japan, normally a buyer of exchange-traded funds on the Tokyo bourse, absent.
What happened? The central bank, which is authorized to purchase about 3 trillion yen ($25 billion) in equity ETFs a year, is running out of ammunition, having spent 78 percent of its total as of Sept. 7.Because the BOJ usually buys on days the market falls, it sped up amid a rout in the Topix index.
Now it must slow down for the rest of 2015 or increase its allotment, according to Mitsubishi UFJ Morgan Stanley Securities Co.
“They’ve only got a little bit left in their quota,” said Seiji Arai, a strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “I think they’ll vow to increase yearly purchases by 1 or 2 trillion yen in October.”
With just 670 billion yen to go until its limit, the central bank has shrunk the amount it buys each time by 15 percentfrom its first purchase of the year to 31.7 billion yen in September. It stuck to that amount with a purchase on Thursday.
As the Topix recorded its worst monthly loss since 2012, the central bank purchased 302 billion yen in ETFs. Without that, the rout would have been much worse, according to Arai.
As he concludes – so perfectly summing up the farce that so many call “markets”…
“The BOJ had a big role in supporting the market,” he said. “If they don’t increase purchases now, it’s going to be a shock.”
We have been talking about the death of the USA Petrodollar. Are we to welcome in the Petroyuan scheme?
(courtesy zero hedge)
The Petroyuan Cometh: Launch Of Renminbi-Denominated Oil Futures Contract Imminent
Whenever one talks about the death of the petrodollar, the unspoken question lurking just beneath the surface is this: is the rise of the petroyuan just around the corner?
This year, we’ve gotten quite a bit of evidence to suggest that the answer to that question may indeed be a resounding “yes.” In May for instance, Russia surpassedSaudi Arabia as the largest oil supplier to China and what’s especially notable there is that beginning in 2015, Gazprom began settling all of its crude sales to China in yuan meaning that, at least partly, the petrodollar was supplanted just as soon as its death became inevitable.
Now, just as China has moved to play a greater role in determining the price of gold by participating in the LBMA auction and by establishing a yuan-denominated fix, it’s moving quickly to create a yuan-denominated oil futures contract. Here’s Reuters:
China’s push to establish a crude derivatives contract has been met with early scepticism, but oil executives say the country’s growing economic influence means a third global crude benchmark is inevitable.
A derivatives contract would give the Shanghai International Energy Exchange, known as INE, a slice of an oil futures market worth trillions of dollars, offering a rival to London’s Brent and U.S. West Texas Intermediate (WTI).
And while others have tried and failed, China brings its might as the world’s biggest oil buyer, a strong dose of political will and the alignment of its financial and banking system for a yuan-denominated contract.
“The energy industry is still manned, literally, by people from the West. But the world moves on, and there’s a change of guard,” said a senior market executive, speaking on the sidelines of a major industry gathering in Singapore this week, at which delegates spoke on condition of anonymity.
“China has become the world’s biggest oil trader, and that means that an oil price will be set there, like it or not.”
To be sure, some people do not and China’s recent adventures in propping up both the stock market and the yuan have, in the minds of many, served to reinforce the notion that when things aren’t going Beijing’s way, it will simply force the issue. Some fear the same thing could well happen with RMB crude futures:
“The market doesn’t like the idea of a benchmark dominated by the world’s biggest consumer, where the regulator is suspected of having the goal of lowering prices,” said an executive with a non-Chinese exchange in Asia, speaking at the same event.
But skeptics may have to choose between the lesser of two (perceived) evils because as we saw last month in Singapore, pricing off Dubai leaves everyone subject to perplexing anomalies like what happens when mysterious trading between two Chinese SOEs ends up throwing the market into backwardation at a time when common sense dictates that everyone should be doing the contango tango.
The current benchmark for pricing oil in Asia in the absence of a derivatives contract is the Dubai crude assessment, run by Platts, part of McGraw Hill Financial, where trading in a specified time-frame is used to assess a daily price.
Yet traders have been concerned at heavy trading by China’s state-owned Chinaoil and Unipec, which pushed up Middle East grades even as other grades were being pressued lower, and left other companies struggling to take part.
Essentially, it looks like Chinaoil and Unipec may be gaming the Platts Dubai MoC (although no one knows exactly why) and that has implications for all kinds of people including (obviously) Saudi Arabia, Iran, and Iraq, as well as refiners and traders like Mercuria and Glencore. The hope is that a RMB contract will help solve the “problem.”
In any event, it makes no more sense to exclude the world’s largest oil buyer from crude benchmarking than it does to keep the world’s largest producer and consumer of gold out of the gold price-setting process, which is why, in short order, China will be heavily involved in both. And as for widespread adoption of the new contract, that, like the internationalization of the yuan and the demise of the petrodollar, is only a matter of time:
“One-by-one, the oil-majors will start to participate, then others will follow,” said an executive with a Western oil major. “While it might take some time to establish itself due to choppy markets and regulatory hurdles as well as the fact that it would introduce a foreign exchange element to crude futures, it is overdue for a Chinese contract to established.”
Russian Tanks, Artillery Massing Near Syrian Airfield, US Officials Tell Reuters
While the build up of Russian military forces in Syria has hardly been unexpected or a surprise, as it is a repeat of what happened in the summer of 2013 when in response to foreign provocations the Assad regime was once again on the edge of collapse and only Russian intervention prevented the fall of Syria to ‘western’ forces, the question has emerged in the past week: just how much of the military build up is real and verifiable, and how much is a function of the western media euphoria now intent on scapegoating the upcoming land invasion into Syria by US-supported al Nusra (and ISIS) forces as a retaliation for Russian military build up which in itself is a reaction to the now-confirmed western strategy to oust Assad.
In many this is a mirror image of the recent debate: is Russia retaliation to the NATO build up on its borders, or is NATO amassing forces on the Russian border to deter Russian expansion. The answer naturally depends on one’s bias and no amount of proof or factual evidence can sway opinion one way or another.
The latest report from Reuters is precisely such an example: in it we read that “Russia has positioned about a half dozen tanks at a Syrian airfield where it has been steadily building up defenses.” The sources of this material escalation: two U.S. officials… speaking on condition of anonymity to discuss the matter. Just like the “sources” on all Greek developments over the past 5 years.
Reuters also notes that “one of the U.S. officials said seven Russian T-90 tanks were seen at the airfield near Latakia, a stronghold of Syrian President Bashar al-Assad. The two U.S. officials said Russia had also positioned artillery there” adding that “the two U.S. officials said Russia had also positioned artillery, which they said appeared.”
T-90 stock photo
We can only hope the “anonymous” US officials will soon provide photographic evidence of their claims.
One irony is that both Moscow and Washington say their enemy is Islamic State, whose Islamist fighters control large parts of Syria and Iraq. But Russia supports the government of Assad in Syria, while the United States says his presence makes the situation worse, which promptly eliminates ISIS as the proximal cause for any military action in the middle east and confirms that the only fulcrum issue is the political future of Syria with the latest conflict merely yet another proxy war waged on behalf of commodities.
The second irony is that the events of the summer/fall of 2015 in Syria are a replica not only of the Syrian showdown of 2013 when nobody was hiding their military intentions, or inventory for that matter, in the Syrian region but also of the summer of 2014 when the US was accusing Russia, and Russia was correspondingly denying, that Russian troops/equipment were present in east Ukraine.
That particular escalation point fizzled out, however since it was all a grand rehearsal for the Syrian Showdown 2.0, this time we expect that the tit-for-tat build up, both in the press and on the battlefield to continue as both sides play coy for media purposes, until finally it becomes clear that an armed showdown over the future of the Qatar gas pipeline is virtually inevitable.
Meanwhile, hundreds of thousands of mostly innocent Syrian refugees continue to flow out of the country to avoid becoming collateral damage in what is almost assured to become a shooting war, and after receiving a warm welcome in Europe if only for a few months, have now found themselves non grata in the German promised land which has shut its borders to the Syrians. This happens as they have also found their “closest and richest neighbors” namely Saudi Arabia, want nothing to do with them.
Which now leaves the “noble” US as the last and only willing recipient of hundreds of thousands of Syrian migrants. Perhaps they can all find shelter at the White House?
With the flood of refugees coming especially to Germany, Merkel finally said farewell to Schengen as border controls are being dispatched to both Germany and the Czech Republic.
(courtesy zero hedge)
Farewell Schengen: Germans, Czechs Return To “Border Controls” With Austria, Riot Police Dispatched To Contain Refugee Crisis As It Spirals Out Of Control
Two weeks ago, in what was the first official shot across the bow to Europe’s long-standing “Schengen” customs union, we reported that the Italian province of Bolzano across from the Austrian border announced it is willing to “temporarily suspend Schengen” and “restore border controls” following a request by the German state of Bavaria.
Today, none other than Europe’s master state, Germany itself, is about to launch an ICBM at Schengen when, as BBC reports, “Germany is to reintroduce some form of controls on its border with Austria to cope with the influx of migrants, German and Austrian media report.” While the BBC said that it is not clear what measures would be introduced, it is likely that a full return to the pre-Schengen era, with extensive customs checks of every border crosser is imminent.
BBBC further reports that”more than 13,000 migrants arrived into Munich alone on Saturday. Germany’s vice-chancellor said the country was “at the limit of its capabilities”. Germany’s Bild newspaper and Austria’s Kronen Zeitung said controls would be in place on the Bavaria-Austria border. Germany expects 800,000 migrants to arrive this year.”
Also, according to Germany’s Spiegel, German Interior Minister, Thomas de Maiziere, would make an announcement in the coming hours. Since last month, Mr de Maiziere said the Schengen agreement, which allows free movement between a large number of European countries, could be suspended, it is quite likely that as of today, Europe’s customs union will officially be halted if only temporarily.
Kronen Zeitung said that Bavarian police will begin to carry out checks “to determine immediately who is entitled to asylum”, but it is not clear how such checks would be made.
Earlier on Sunday, Germany’s Vice-Chancellor Sigmar Gabriel, who is also economy minister, warned the country was being stretched to its limits by the new arrivals.
“Europe’s inability to deal with the migrant crisis has brought even Germany to the limit of its capabilities,” he told Der Tagesspiegel newspaper. “It is not just a question of the number of migrants but also the speed at which they are arriving that makes the situation so difficult to handle.”
Which is somewhat ironic considering the full-court media propaganda press eager to make Germany seem like the promised land for hundreds of thousands of Syrian refugees: just ealier today CBS had an article on “Angela Merkel: From debt villain to migrant heroine” in which it said “In the space of two months, German Chancellor Angela Merkel has gone from being portrayed as the heartless villain in Europe’s debt crisis to the heroine of those flooding in to find refuge on the continent.”
Her insistence that Germany and its fellow members in the 28-nation European Union all have a duty to shelter people fleeing civil wars has cemented something similar among hopeful migrants. Some have held aloft pictures of Merkel, and she was greeted with applause and cheers at a Berlin refugee home Thursday.
Oops, may want to rewrite that one quickly, especially following a report from Bild that the German government “will send 2,00 riot police to the Bavarian border, where they will “help the State to secure the border.”
Not only that but Express reported that the “German Defence Minister has admitted that the country verges on “an emergency” after cracks have begun to emerge in the ‘German generosity’ and that some 4000 German troops have been put on standby.
Germany has been viewed as a leader on Europe’s worst refugee crisis for 70 years, with Chancellor Angela Merkel’s expectation that the country will take in 800,000 this year alone.”
However, the move appears to have backfired as German towns struggle to process the unprecedented number of arrivals.
Defence Minister Ursula von der Leyen said: “For this weekend alone we have put 4,000 soldiers on standby.”
He added that the troops would be able “to pitch in in an emergency”.
Putting Germany’s generosity, which just ended in perspective, “More migrants have arrived at Munich’s train station since the start of September than in the whole of 2014.”
The good news for Germany is that at least the tens of thousands of Muslims migrants will have a place to pray: just as “generously” Saudi Arabia – in lieu of actually accepting any asylum seekers – offered to help Germany cope by building at least 200 mosques. The Gulf state said it would build one mosque for every 100 Middle Eastern refugees who entered Germany. It will be busy building a lot of mosques.
The bad news for Germany is that not only will the migrant situation not improve any time soon, but it is now in a lose-lose situation, with the facade of its former faux generosity crumbling, just as countless more migrants are set to lose their lives on their way to a promised land that no longer is.
And confirming just that, moments ago Xinhua reported that 28 migrants were killed as a boat capsized off Greece.
For now, however, one thing is certain: Europe may still have the Euro now that Greece is a permanent German debt colony, but the true heart of Europe, its customs union, is about to go on into indefinite V-fib as nation after nation follows in Germany’s footsteps and closes its doors to all those refugees it so generously welcomed until now.
EM FX Bloodbath Continues As Lira Slides To New Low, Tenge Plunges
In the four weeks since China shifted to a new currency regime, the pressure on emerging markets and commodity currencies has been both palpable and persistent.
The possibility (however unlikely) that the Fed might make a “policy error” this month by hiking rates and accelerating outflows from EMs has only made the situation worse as has the growing realization that China’s economy may be decelerating faster than even the most pessimistic observers had suspected.
And there are of course idiosyncratic, country-specific factors such as the political turmoil in Turkey, Malaysia, and Brazil and the disconnect between the ruble and the Kazakh tenge, with the latter having finally forced Kazakhstan to move to a free float last month as the yuan devaluation was the straw that broke the camel’s back for central Asia’s largest energy exporter who was already suffering from a severe reduction in trade competitiveness thanks to the tenge’s relative overvaluation.
After regaining its footing, the tenge has hit the skids again, with Monday marking the seventh consecutive day of losses.
On Friday, Sabit Khakimzhanov, head of research at Halyk Finance, told Bloomberg that with tax payments in the rearview, the tenge re-entered the crosshairs:
Local companies accumulated the currency for tax payments. Now that the tax payments are over and the government is transferring cash to local government accounts and to pay civil servants’ salaries, there are more tenge in circulation, which is pushing the price down.
On Monday, with the tenge plunging by nearly 8%, Khakimzhanov says rates are simply too low in Kazakhstan to take the pressure off. From 12%, rates would need to rise by at least 400 bps to change the market’s perception another analyst contends. Here’sBloomberg again:
The central bank interest rate is “too low,” Sabit Khakimzhanov, head of research at Halyk Finance, a unit of the country’s second-largest lender by assets, said via phone. “If interest rates stay so low, the weakening of the tenge will continue and we will leapfrog Russia.”
Contrast that with comments out of Citi earlier this month after the NBK introduced the new base rate: “The 12% base rate looks elevated against the backdrop of below-target inflation, but is consistent with NBK’s medium-term outlook.”
In any event, one country where rates are almost certainly too low given the confluence of factors weighing on the currency is Turkey. The country’s central bank had an opportunity to stem the lira’s decline last month, but balked, instead insisting that Turkey would not hike until the Fed moves. That, combined with a poorly communicated strategy regarding how the country plans to react to DM policy normalization, rattled the market significantly and the lira’s slide continued unabated with political upheaval and escalating violence serving to exacerbate an already precarious FX situation.
For their part, Citi is “puzzled by the CBT’s ever-growing tolerance for a weaker lira”:
All in all, we believe that the CBT doesn’t have the luxury to carry out a gradual experiment under current circumstances. Our findings suggest that conditions are ripe for a rate hike and that, under current conditions, the CBT’s single policy should be around 11% or even higher. We believe that weak capital inflows and the challenging inflation outlook will test the CBT’s resolve to keep its wait-and-see approach. It is, however, clear to us that delaying a rate hike is likely to require an even sharper response later – a painful experience that the markets endured at least twice during the CBT’s bumpy unorthodox journey.
The pain continued on Monday as the lira hit a new record low in the wake of Prime Minister Ahmet Davutoglu’s re-election as AKP chairman at a party conference which also saw Erdogan loyalists named to executive committees, underscoring the strongman’s iron grip on Turkish politics. In a hilariously absurd piece of agitprop, Davutoglu said that “suddenly, the PKK, the DHKP-C, the Islamic State, with their foreign support, pressed the button to destroy all of the accomplishments of the AK Party’s 12, 13 years in power.”
“While they are taking action to achieve their evil aims, the AK Party cadres are taking action for a new democracy on Nov. 1,” Davutoglu added. That, of course, couldn’t be further from the truth. It was in fact Erdogan who “suddenly” decided to “press the button” that sent the country careening into chaos and the weak lira is a reflection of that.
Meanwhile, the central bank has remained obstinate, choosing to eschew an emergency rate hike even as market calls for action have grown quite loud. Here’s a bit of color from Nomura (via Bloomberg):
Turkish central bank’s reluctance to raise interest rates before Nov. 1 general election means the lira “might end up taking the strain,” Nomura’s Tim Ash says by e-mail.
- “The central bank will only look to move if the TRY underperforms its EM peers, and ends up appearing the EMFX front line. Today, that appears to be the case’’
- If Fitch downgrades Turkey, central bank might be forced to repeat its emergency rate hike of Jan. 2014 to try and stem losses in the lira – “bad for growth, and not really helping the AKP’s re-election chances”
- AKP’s leadership convention over weekend shows President Recep Tayyip Erdogan retains his grip over the party, “and the future of Babacan, Simsek, et al is unclear”
- “Turkish markets will remain under pressure now until re-run elections, and some resolution on the domestic political front’’
Moving away from the specifics, it’s important to reiterate that these are precisely the types of fragile situations which make it extraordinarily difficult for the Fed to embark on a rate hike cycle.
After seven years, ZIRP has become the norm and unconventional monetary policy has become not only conventional, but expected. In other words, there’s a certain degree to which the “normalization” of Fed policy is actually a move towards something that’s veryabnormal in the post-crisis world. Just as we would suspect that ZIRP and trillions in QE would have a dramatic effect (if only on asset prices and flows) when suddenly brought to bear on markets which had never seen such a vast experiment in monetary insanity, so too should we expect the rollback of those policies to have an equally dramatic (but now inverse) effect on markets which have spent the better part of a decade under the new normal.
Ambrose Evans Pritchard talks about the dire straits in Brazil as these guys were reduced to junk over the weekend.
(courtesy Ambrose Evans Pritchard/UKTelegraph)
By Ambrose Evans-Pritchard
Brazil’s currency has plummeted to an all-time low and borrowing costs have tightened viciously after Standard & Poor’s slashed the country’s debt to junk status, warning that the budget deficit has reached danger levels.
The downgrade is a painful blow to a nation that thought it had finally escaped the Latin American curse of boom-bust cycles and joined the top league of rich economies.
It is the second of the big emerging market (EM) economies to be stripped of its investment grade rating this year after Russia crashed out of the club in January. Little remains of the BRICS allure that captivated the world seven years ago, and now looks like a marketing gimmick.
The Brazilian real tumbled to 3.90 against the US dollar as markets braced for parallel moves by Fitch or Moody’s. The currency has lost 31pc of its value this year and more than 60pc since early 2011, when slums in the favelas of Rio were selling for the price of four-bedroom houses in the US.
“The numbers are going to get much worse before they get better. We see nothing on the horizon that could be perceived as ‘good’ news,” said Win Thin from Brown Brothers Harriman.
Mr Thin expects the real to reach 4.50 over the next three to six months in a cathartic overshoot, with the Bovespa index of equities likely to fall by another two-fifths, testing its post-Lehman low of 29,435 as the excesses of the credit bubble come home to roost.
Investors have begun to shed holdings of Brazilian debt, afraid that some funds may be forced to eject Brazil from their indexes and liquidate holdings if a second agency joins S&P. Yields on 10-year domestic bonds spiked almost one percentage point to 15.6pc in panic trading in Sao Paolo on Thursday.
S&P said Brazil’s government has failed to get a grip on rampant over-spending as tensions erupt between President Dilma Rousseff’s Workers Party (PT) and her coalition partners, and the economy slides into deep recession, leaving it badly exposed as the US Federal Reserve starts to drain liquidity from the global economy.
“We now expect the general government deficit to rise to an average of 8pc of GDP in 2015 and 2016,” it said.
Mrs Rousseff said Brazil would “pay all its bills and meet all its obligations”. Yet it is unclear how long she can last as momentum builds for impeachment over her role in the Petrobras corruption scandal. Signatures were accumulating at 30,000 an hour on the pro-impeachment website on Thursday.
“People are sick of this government, which has yet to offer any way out of the crisis. It is utterly incapable of governing,” said opposition leader Mendoca Filho.
The country is now in a classic stagflation trap. S&P expects the economy to contract by 2.5pc this year and 0.5pc next year, causing the debt ratio to ratchet up quickly.
Mrs Rousseff is being forced to tighten policy into the recession in a belated bid to salvage credibility, just as the commodity slump eats into export revenues from iron ore and other raw materials. The current account deficit is 4pc of GDP.
Gabriel Gersztein, from BNP Paribas, said nothing short of a 400 to 500 point rise in rates would stabilize the currency, but the central bank cannot plausibly do this because it would deepen the downturn, playing havoc with debt dynamics.
Bhanu Baweja, from UBS, said public debt is likely to reach 72.5pc of GDP by 2018 and could rise relentlessly after that as the country passes its demographic sweet spot and starts to age rapidly. “The clock slowly ticks on, asking ever louder questions about public debt sustainability,” he said.
Mr Baweja said Brazil wasted the dividend of the commodity boom and let rip with unhealthy levels of debt, mostly to finance a consumption bubble. Savings and investment have been woefully low.
The country is not facing a meltdown. Short-term external debt is trivial. The currency has been able to take the strain, avoiding the mistake made by Asian countries in 1997-1998 when they burned through reserves trying to defend a dollar peg.
Nevertheless, it has made a catalogue of errors and is now languishing in the middle income trap. The country ranks 120 in the World Bank’s Ease of Doing Business index, with catastrophic scores for infrastructure, enforcement of contracts and starting a company. The PT has back-pedaled on reforms under Mrs Rousseff, holding down prices artificially and tinkering with protectionism, though the rot set in long before she took office.
Brazil fell victim to the “Dutch Disease” during the boom, becoming dependent on commodity exports to China, while the manufacturing base shrivelled to 10pc of GDP. The real became far too strong, made worse by a fatal policy mix: inflationary budget spending, which the central bank had to counter with high interest rates.
The open question is whether or not Brazil’s travails imply broader EM trauma as global liquidity tightens. “Those countries like South Africa, Turkey and Indonesia that have both a current account deficit and political paralysis are in trouble, but it is an economic problem rather than a liquidity crisis, and you can’t compare it to 1998,” said Marc Chandler from Brown Brothers Harriman.
David Rees, from Capital Economics, said there is plenty to worry about but EM debt is mostly long-term and in local currencies, and the commodity slump has probably hit bottom already. “We do not think that the downgrade marks the beginning of a systemic emerging market sovereign debt crisis,” he said.
Citi Just Made “Global Recession In 2016” Its Base Case Scenario
Over the weekend, we reported that in a dramatic turn of events, the research division of Japan’s second biggest brokerage house, Daiwa, did what nobody else has done before and released a report in which it made a global financial “meltdown”, one resulting from nothing short of a Chinese economic cataclysm its base case scenario, its base case. It added that the impact of this global meltdown would “be the worst the world has ever seen.” To wit:
Of all the possible risk scenarios the meltdown scenario is, realistically speaking, the most likely to occur. It is actually a more realistic outcome than the capital stock adjustment scenario. The point at which the capital stock adjustment is expected to hit bottom is at a much lower point than in the previously discussed capital stock adjustment scenario (see Chart 8). As shown in the bottom right portion of this chart, the actual economic growth rate will continue to register considerably negative performance. If China’s economy, the second largest in the world, twice the size of Japan’s, were to lapse into a meltdown situation such as this one, the effect would more than likely send the world economy into a tailspin. Its impact could be the worst the world has ever seen.
We ended the post with the following rhetorical question: “now that Daiwa has broken the seal on Chinese and global doomsday scenarios, how soon other banks will follow in Daiwa’s path, and predict an Armageddon scenario which sooner or later, becomes a self-fulfilling prophecy even without the help of China’s increasingly clueless micromanagers.”
Today we got the answer: 48 hours – that’s how long it took Citi’s chief economist Willem Buiter to issue a report which was just as dire as Daiwa’s, but because Citigroup is much more reliant on keeping it traditionally bullish clients as happy as possible, one had to read between the lines to get to the bottom line.
This is Citi’s punchline: “A global recession starting in 2016, led by China is now our Global Economics team’s main scenario. Uncertainty remains, but the likelihood of a timely and effective policy response seems to be diminishing.”
Some of the other points from Buiter:
- China continues to dominate much of the current debate; specifically the extent to which the now well publicized economic slowdown could have wider contagion effects. Citi’s Global economics team, led by Willem Buiter, believes that China could be the driving force behind a global recession during the next two years.
- Last week we presented four scenarios based on different outcomes for Chinese and US economic growth. One of those scenarios; a global recession in which China’s slowdown drags other emerging markets and eventually the advanced economies down with it, has been examined in detail by our Global Economics team.
* * *
- Any global recession is likely to originate in emerging markets with China in particular at risk of a hard landing
- If the global economy slides into a recession of moderate depth and duration during 2016, it will most likely be dragged down by slow growth in a number of key emerging markets, and especially in China. We see such a scenario as increasingly likely.Indeed, we consider China to be at high and rapidly rising risk of a cyclical hard landing.
- There has been a long history in China of the official GDP data understating true GDP during a boom and overstating it during a slowdown. Citi’s own best prediction of ‘true’ real GDP growth for 2015 is 4% or less. Other activity indices overwhelmingly suggest an economy in which the growth of industrial production and capital expenditure is slowing rapidly.
- Recession in China and other EMs would likely slow DM growth too Should China enter a recession, with Russia and Brazil already in recession, we believe that many other EMs will follow, driven in part by the effects of China’s downturn on the demand for their exports and, for the commodity exporters, on commodity prices. We also consider it likely that, should the EMs enter recession territory, the advanced economies or developed markets (DMs) will not have enough resilience, either spontaneous or policy-driven, to prevent a global slowdown and recession. The large DMs may not experience recessions themselves but will likely grow more slowly; possibly more slowly than potential, and almost certainly more slowly than expected.
But why so much skepticism when central banks have historically done everything in their power to kick the can on the inevitable collapse, so far with passably successful results? Precisely that: Buiter now says tthat “the likelihood of a timely and effective policy response seems to be diminishing.”
The key for markets will be the policy response in China and, of course, the way in which DM central banks react to greater volatility, rising risk premia in asset prices and the implied tightening in financial conditions. Recent rhetoric still suggests that raising rates is still right in the middle of the Fed’s radar screen, but markets are suggesting that this may not be possible, with a September hike certainly being priced lower and lower. If the markets are right and there is an offsetting policy response to weaker equity and commodity markets, it will bring to mind parallels with 1998. This would suggest that it might be premature to turn too bearish on DM equities. If, however, EM growth concerns do spill-over to DM, we can envisage a time when we may want to reverse our preference for DM over EM, but that time is not here yet.
So, as expected, with Daiwa daring to first notice the ‘naked emperor’ the scramble to be next has been unleashed. Citi was first, who is next, and how soon until the market finally realizes that central banks are losing control of not only the economy and markets, but most importanly, the “confidence” narrative?
And as for the bigger question: how many months after the Fed hikes and unleashes said global recession, does the Fed unhike and launch QE4 or QE Air or QE Pro, or whatever Tim Cook advises Janet Yellen to call it.
Behold The European Recovery: Deutsche Bank To Fire 25% Of All Workers
Deutsche Bank has witnessed an exodus of executives this year in what’s been a tough stretch for the German lender. Here’s a brief recap of the bank’s recent trials and travails for those who need a refresher:
The bank, which has paid out more than $9 billion over the past three years alone to settle legacy litigation, has become something of a poster child for corrupt corporate culture.
In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee) and subsequently paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion.
But it was out of the frying pan and into the fire so to speak, because early last month, the DoJ announced it would seek to extract a fresh round of MBS-related settlements from banks that knowingly packaged and sold shoddy CDOs in the lead up to the crisis. JP Morgan, Bank of America, and Citi settled MBS probes when the DoJ was operating under the incomparable (and we mean that in a derisive way) Eric Holder but now, emboldened by her pyrrhic victory over Wall Street’s FX manipulators, new Attorney General Loretta Lynch is set to go after Barclays PLC, Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings PLC, Royal Bank of Scotland Group PLC,UBS AG and Wells Fargo & Co.
As for the employee exodus:
Co-CEOs Anshu Jain and Jürgen Fitschen were shown the door (well, technically they resigned, but with shareholder support plummeting amid skepticism about both financial targets and ongoing legal problems, it’s easy to read between the lines) in June after which the bank’s global head commercial real estate Jonathan Pollack defected to BlackStone. Pollack’s departure came just one month after the bank’s head of structured finance Elad Shraga left to start his own fund. Shraga was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt.” Shraga had been with Deutsche Bank for 15 years.
Well now – and this follows similar cuts across Wall Street and underscores the extent to which Mario Draghi hasn’t succeeded in printing the EMU back to economic prosperity – quite a few more employees will be departing, only this time, the departures will be … how should we put this … oh yes, “mandatory.” Here’sReuters:
Deutsche Bank (DBKGn.DE) aims to cut roughly 23,000 jobs, or about one quarter of total staff, through layoffs mainly in technology activities and by spinning off its PostBank (DPBGn.DE) division, financial sources said on Monday.
That would bring the group’s workforce down to around 75,000 full-time positions under a reorganization being finalised by new Chief Executive John Cryan, who took control of Germany’s biggest bank in July with the promise to cut costs.
Cryan presented preliminary details of the plan to members of the supervisory board at the weekend.
A spokesman for the bank declined comment.
The bank is primarily reviewing cuts in the parts of its technology and so-called back office operations that process transactions and work orders for client-facing staff. A significant number of the some 20,000 positions in that area will be reviewed for possible cuts, a financial source said.
Whether or not the move will do anything to appease impatient shareholders (the same shareholders who ultimately forced out Jain and Fitschen for foot-dragging on efforts to boost profitability) or, more importantly, to improve the bank’s utterly corrupt corporate culture remains to be seen but we can’t say we’re optimistic.
The cuts, it should be noted, aren’t unexpected. As Cryan noted after taking the helm, “the investment bank’s securities and derivatives trading businesses can’t continue to soak up capital. We cannot afford that luxury. Reducing this reliance should not place us at a competitive disadvantage as the market has anyway already moved in that direction.” Fair enough. We just hope there are still some competent people around to manage this:
UniCredit To Fire 10,000 As EU Bank Pink Slip Pandemonium Continues
Hours ago, it was revealed that Deutsche Bank is set to fire some 23,000 people or around a quarter of its workforce. The move comes as new CEO John Cryan works to cut costs and boost profitability after the bank’s co-CEOs Anshu Jain and Jürgen Fitschen were shown the door as investors became impatient with efforts to boost profitability and as a string of settlements and seemingly endless accusations of malfeasance underscored deep seated problems with the bank’s corporate culture.
Of course as we noted this morning, the layoffs at Deutsche don’t say much for Europe’s economic “recovery” either and may also suggest that far from creating jobs, the persistence of ZIRP has crimped margins forcing banks to make up the difference by getting leaner.
In any event, Deutsche Bank isn’t the only European lender that’s axing people. As tipped by CEO Federico Ghizzoni earlier this month, UniCredit is now set to layoff 10,000 employees across its Italian, Austrian, and German operations. Here’s Reuters:
UniCredit (CRDI.MI), Italy’s biggest bank by assets, is planning to cut around 10,000 jobs, or 7 percent of its workforce, as it seeks to slash costs and boost profits, a source at the bank told Reuters on Monday.
The planned cuts will be concentrated in Italy, Germany and Austria, several sources said, adding that they include 2,700 layoffs in Italy that have already been announced.
A UniCredit spokesman declined comment beyond noting that the bank’s CEO Federico Ghizzoni had on Sept. 3 said there were no concrete numbers on potential lay-offs, after a report said it was considering eliminating 10,000 positions in coming years.
Ghizzoni is reworking a five-year strategic plan, unveiled only last year, that will aim to boost revenue and cut costs. The revised plan is expected to be announced in November.
UniCredit, which has 146,600 employees across 17 countries, is under pressure to boost its profits as low interest rates are expected to keep hurting its earnings in coming years.
And there, ladies and gentlemen, is your European recovery – 33,000 pink slips in a single day.
WTI Tumbles To $43 Handle As Iran ‘Price Cut’ Sparks Supply Surge
Having traded above $46 on Friday, WTI Crude is back to a $43 handle as it appears Iran’s price cut, as we detailed here, sparked demand from China and India driving up Iran exports to 1 million barrels per day.
As Bloomberg reports, Iran is exporting 1m B/D of Crude Oil as China Leads Buyers
China buying 400k b/d, followed by India at 250k b/d, official Islamic Republic News Agency reports, citing Mohsen Ghamsari, dir. of intl affairs, National Iranian Oil Co.
S. Korea, Japan, Turkey also importing
On a side note, though not reflected in today’s pricing,Bloomberg reports that OPEC trimmed estimates for supplies from outside the group in 2016 as the slump in prices takes its toll on the U.S. shale-oil industry.
The Organization of Petroleum Exporting Countries cut 2016 estimates for non-OPEC output by 110,000 barrels a day, its Vienna-based secretariat said Monday in its monthly market report. Still, the group sees non-OPEC supply expanding slightly next year, while the International Energy Agency on Friday predicted a contraction of 500,000 barrels a day, the biggest since 1992. Saudi Arabia told OPEC it curbed output in August to a six-month low.
“There are signs that U.S. production has started to respond to reduced investment and activity,” OPEC said in the report. “Indeed, all eyes are on how quickly U.S. production falls.”
* * *
The fight between Saudi budgets and Fed cheap money continues… though the latter seems to be losing for now as defaults re-emerge and spreads re-peak.
The real story behind the shale industry:
(courtesy zero hedge)
Shale Oil’s “Dirty Little Secret” Has Been Exposed
On Friday, on the way to diving into Goldman’s $20 crude call, we recapped our characterization of low crude prices as a battle between the Fed and the Saudis, a battle which is now manifesting itself in budget troubles in Riyadh and a concurrent FX reserve burn. Here’s what we said:
When Saudi Arabia killed the petrodollar late last year in a bid to bankrupt the US shale space and secure a bit of leverage over the Russians, the kingdom may or may not have fully understood the power of ZIRP and the implications that power had for struggling US producers. Thanks to the fact that ultra accommodative Fed policy has left capital markets wide open, the US shale space has managed to stay in business far longer than would otherwise have been possible in the face of slumping crude. That’s bad news for the Saudis who, after burning through tens of billions in FX reserves to help plug a yawning budget gap, have now resorted to tapping the very same accommodative debt markets that are keeping their competition in business as a fiscal deficit on the order of 20% of GDP looms large.
Still, as we went on to point out, it looks like the Saudis have dug in for the long haul here and the strain on non-OPEC production is starting to show as the IEA now says“the latest tumble in the price of oil is expected to cut non-OPEC supply in 2016 by nearly 0.5 million barrels per day (mb/d) – the biggest decline in more than two decades, as lower output in the United States, Russia and North Sea is expected to drop overall non-OPEC production to 57.7 mb/d.”
“US light tight oil, the driver of US growth, is forecast to shrink by 0.4 mb/d next year,” the agency adds.
Still, the Saudis know that the war is still far from won, which again is why the kingdom is now borrowing to supplement the use of their petrodollar reserves. But as we’ve documented in great detail, the Saudis face a unique set of challenges when it comes to managing fiscal spending. The cost of maintaining the average Saudi’s lifestyle as well as the cost of financing one (and soon two) proxy wars translates to a tremendous amount of budget pressure. Add in defending the riyal peg and you have yourself a problem. So even as the Saudis have ample room to borrow (debt-to-GDP is negligible at present), Riyadh would rather US production fold sooner rather than later and with the next round of revolver raids coming up in October, and with the bond market set to cast a wary eye towards HY going forward, the kingdom just might get its wish. Citi has more on shale’s “dirty little secret”:
Easy access to capital was the essential “fuel” of the shale revolution. But too much capital led to too much oil production, and prices crashed. The growth of North American shale a critical underlying factor in the oil market “regime change” from a $100/bbl world until 2014 to a sub-$50/bbl world today (see Oil and Trouble Ahead in 2015 ). Saudi Arabia’s shift to defending market share rather than price decisively confirmed this new reality.Above $100/bbl, returns to shale investment are so attractive that the kingdom realized it could not sustain its historical strategy of propping up prices or shale would simply erode its market share. As a result, the oil markets returned to competitive economics not seen for decades. And the economics of shale in particular are now set to be a decisive factor in balancing global oil markets and setting global prices.
The shale sector is now being financially stress-tested, exposing shale’s dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow. In the aggregate North American crude producers do not generate positive free cash flow (Figure 1), although some stronger producers do.
Capex has consistently exceeded cash flow, causing some prominent critics to argue the business model of shale production is fundamentally unsustainable.
Capital markets plugged shale’s “funding gap” from 2009 through the first half of 2015, but they are now tightening, reducing access to liquidity for some producers and shaping their ability to drill. With eight bankruptcies already announced this year, weaker producers may live or die by the whims of capital providers. The sector is by no means homogenous, but those producers with poor asset quality, high leverage, little hedging protection, and/or dwindling free cash flow look most exposed.
If OPEC traditionally set the marginal supply and served as a coordinated price setting mechanism, capital markets are becoming a new balancing mechanism: a set of highly dynamic, diffuse investment decisions that shape shale production and a large portion of the global marginal supply. Shale oil financing and production is different from what the oil market had become accustomed to over the past few decades. In particular, shale 1) is produced by many smaller, innovative producers who depend on capital markets for financing; 2) is a faster drilling process with smaller, more discrete investment decisions that respond more quickly to market conditions. These factors accelerate the classic commodity cycle of high prices leading to over-investment, which crashes prices, then leading to underinvestment, which raises prices, starting the cycle again.
So what’s the endgame, you ask? According to Citi, “two things become clear in an analysis of the financial health of US hydrocarbon production: 1) the sector is not at all homogenous, exhibiting a range of financial health; 2) some of the sector indeed looks exposed to distress [and] lifelines for distressed producers could include public equity markets, asset sales, private equity, or consolidation. If all else fails, Chapter 11 may be necessary.”
Got it. So essentially, with HY all but closed, banks re-evaluating credit lines, and the cost of funding set to rise, there are essentially only three options: liquidation of assets, tap the dumbest of the dumb money by selling more shares, or else throw in the towel.
Of course there’s another possibility: oil prices rise sharply. And while everyone seems to think that’s highly unlikely, the irony of ironies here is that if Saudi Arabia continues to beat the war drums in Yemen and Syria, Riyadh could end up being shale’s savior.
“There’s Just No Cash” Oil Price Increase Will Not Come Fast Enough To Save Alberta
“There’s just no cash.” That’s the Coles Notes from a senior banker describing the book of oil service loans he manages for one of Alberta’s leading lenders. There’s simply not enough cash flow to support current levels of debt.
Bankers and borrowers have kicked the can down the road about as far as they can as more oilfield service (OFS) and exploration and production (E&P) companies default on their loans and seek more relief on lending covenants. While a significant oil price increase to lift all the sinking boats will surely come, it won’t happen soon enough. More of the same won’t work.
Oil industry debt is everyday news. But the discussion is about the symptoms, not the ailment.
Companies cannot borrow their way out of debt. Equity capital is only available at distressed valuations. Specialized OFS assets will fetch only a fraction of replacement cost—if somebody actually wants them. Although oil and gas reserve valuations are down by half, borrowers are being forced to sell them anyway to repair balance sheets. The last four months of 2015 will be very difficult for any company with meaningful amounts of debt. Same for their lenders, the other signatories to the loan agreement.
As the banker said, “There’s just no cash.” Here’s what it means.
The foundation of global credit markets is based upon the borrower’s capability, obligation and commitment to pay the money back. The amount of money anybody can or should borrow is dependent upon free cash. Not forecast cash flow, not earnings before interest, taxes, depreciation, and amortization (EBITDA), not good intentions. Free cash. How much money is available to service debt after all the other bills are paid. This is the key factor behind every credit application, from a car loan or home mortgage to an operating line of credit or senior secured term debt. The more free cash you generate, the more you can borrow. When free cash drops, the opposite is true.
But what happens when an entire industry can no longer service previous levels of debt?
ARC Financial produces a weekly chart calculating revenue, spending and upstream cash flow for the entire Canadian E&P sector for the current and preceding 14 years. Selected data has been reproduced below. MNP added 1998, 1999 and 2000 from prior reports. ARC calculates total revenue from all oil and gas produced, then deducts direct lifting and operating costs, taxes and royalties and the administrative cost of running the business. The result is “after-tax cash flow,” which is the free cash available for exploration, development, dividends and, of course, debt servicing.
Gross revenue from production sales is in blue and after-tax cash flow in red. The green line is 2015’s estimated cash flow compared to prior years. The figures are not corrected for inflation.
While the 2014 numbers aren’t finalized, ARC estimates total revenue was an all-time record $149.2 billion, generating after-tax cash flow of $67.1 billion, the second-highest in history. Combined with capital inflows from debt and equity and inter-company transfers, E&Ps invested $75 billion on conventional and oilsands capital expenditures (CAPEX, not shown). CAPEX in 2014 was also at an all-time record which created fabulous revenue and earnings for OFS.
This year is brutal. ARC expects revenue to plunge 33.6 percent to $99 billion, the lowest number since 2009. Except for the recession, you have to go back to 2004 to find total revenue that low. But because today’s production mix is increasingly composed of high-cost oilsands, cash flow is expected to be only $28.9 billion, 43 percent of 2014’s levels. This is the lowest level of after-tax cash flow generated by producers since 2001.
ARC’s estimated CAPEX this year is only $39.1 billion, 52 percent of last year’s levels. That’s why the active rig count is the lowest in years.
If the whole industry only has 43 percent of 2014’s cash flow, then in theory it can only carry 43 percent of last year’s debt. Of course, debt is not evenly distributed but the point is clear; the industry’s macro balance sheet is under severe stress. When Canada’s Big Six banks reported their earnings for the third quarter ended July 31, 2015 it was noted these lenders had total exposure to the upstream oil and gas industry of about $44 billion. Including other sources of debt (bonds, other banks, equipment leasing companies), this figure is likely only a fraction of total obligations. It could easily be $60 billion, probably much more. With so many private operators complete figures are impossible to compile.
At current oil prices, too many producers are not generating enough free cash for their debt levels.For oilsands, some bitumen is undoubtedly produced at a cash loss. Success at current prices is based entirely on geology. Some reservoirs are less price sensitive than others. Some E&Ps have less debt than others. Hedges on future production locked in last year at much higher prices cushioned the problem. As they expire, they cannot be replaced.
When you see reports that some producers are cutting staff, slashing dividends and selling properties, that’s because they’ve hit the debt-to-free-cash wall. OFS is also in tough shape. E&Ps have demanded suppliers cut prices and vendors have complied. Free cash from operations is either nominal or non-existent. Some are in default, some are in special credit and some are insolvent. Service companies are also slashing or cancelling dividends. Like E&Ps, you pay your shareholders AFTER you have paid your banker.
So, if too many outfits are seriously over-levered for current prices, now what? How this affects different companies is as diverse as the companies themselves. The quickest way to de-lever balance sheets is to sell things—either shares or assets—to raise cash. But to whom? At what price? What if this can’t be done?
Lenders are also in this mess up to their nostrils.They’ve been hoping this problem would just go away, a strategy with significant merit considering the alternative. The first quarter of 2015 was mostly shock and awe as prices tumbled. Where’s the bottom? It came on March 17 when benchmark West Texas Intermediate (WTI) crude closed US$43.39. Or so everyone thought. The first quarter average price was US$48.54. Awful, but surely it couldn’t get worse.
The second quarter looked promising as WTI recovered significantly, reaching US$61.36 on June 10. The average price in Q2 was US$57.85. There was optimism that the worst was over. Borrowers requesting covenant waivers and forbearance letters were, for the most part, accommodated. No need to panic. Rising oil prices saved the day in 2009. Perhaps this would happen again.
But the summer of 2015 has been brutal and set the tone for the rest of the year. Oil started to slide in July, averaging only US$50.90, and fell further in August until WTI reached a new six year low of US$38.22 on August 24. It closed on Friday September 4 at US$45.77. Futures markets, which showed materially higher forward prices earlier this year, indicate few believe crude will recover soon. The October 2016 WTI price was only US$51.59 on September 4. October 17 was US$55.47. No hedging opportunities now.
What will lenders do? When Canada’s Big Six banks reported results for the quarter ended July 31, 2015, they declared Gross Impaired Loans of $13.8 billion, about $1.8 billion more than the same period in 2014. They set aside more funds for bad oil and gas loans but also published explanations of how their oilpatch exposure was manageable. But things got much worse in August. This figure will surely rise for year-end reports prepared as of October 31, 2015.
In the next few months, non-performing loans (offside of covenants) will be split into two categories: salvageable and hopeless. The former could live to fight another day. The latter may end up with new owners, new lenders or completely insolvent with assets auctioned to the highest bidder.
Salvageable loans will be those where management has demonstrated its understanding of the seriousness of breaching covenants and will have done everything possible to work with the bank, keep the credit in place and preserve shareholders’ equity. This includes cutting costs, slashing or eliminating dividends and raising equity or selling assets to reduce debt and de-leverage. Key elements include lender relationship management, presentation of all relevant data, credible forecasts and respect for who is really driving the bus. Covenants will be amended and stretched. There will be a serious effort by lenders to keep these borrowers and loans solvent to maintain the debt as an asset on their own balance sheets.
Hopeless loans will be dealt with increasingly expeditiously. These are companies with business models that no longer work or companies which are unable or unwilling to present the information lenders require to further amend credit terms that have already been amended. Impossible demands for cash will be made from asset sales or equity injections. When this can’t be done, the file will be moved to special credit. There, the lender will do whatever it must to recover as much cash as possible. Options include selling the debt or the assets at whatever price can be secured. Shareholders’ equity will be zero, current management will likely be replaced and companies may disappear.
Back in the last half of the 1980s, things were equally awful. Then, at least one major bank converted its loan to a drilling contractor to equity, in the form of preferred shares, coined “distress prefs.” The covenants were as rigid as the debt, but it worked. Whether lenders and borrowers will become this creative this time is not yet known. The story goes the largest drilling contractor in Canada in the 1980s was the Royal Bank of Canada. It’s safe to say they don’t ever want to get back into this business.
There are significant pools of capital – equity and debt – waiting patiently to exploit opportunities. Valuations and calling the bottom have been major obstacles. Lenders will take care of that. Owners and equity holders on the wrong side of their debt will no longer be in a position to dictate price or value. Deals will get done.
There is great remorse on all sides. Companies are realizing when business was good they got greedy and tried to grow faster than cash flow permitted, and used debt instead of equity to lever shareholder returns. Lenders are realizing they loaned money to management teams which talked a good story but in the end didn’t have the business model or know-how to manage the company through a serious and prolonged slump.
To remain competitive, the Canadian oilpatch must seriously de-lever. Everybody – lenders and borrowers – will be taking a haircut until total debt is in line with free cash. Many companies will become “second owner businesses” as new lenders or owners restructure and reduce debt until it reaches a level the market can support.
It would be great to be wrong but oil prices will not solve this problem anytime soon.
Euro/USA 1.1323 down .0008
USA/JAPAN YEN 120.31 down .265
GBP/USA 1.5415 down .0009
USA/CAN 1.3256 up .0019
Early this Thursday morning in Europe, the Euro fell by 8 basis points, trading now well above the 1.13 level falling to 1.1323; Europe is still reacting to deflation, announcements of massive stimulation, a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, an imminent default of Greece and the Ukraine, rising peripheral bond yields, flash crashes and today crumbling bourses from Japan and China. Last night the Chinese yuan raised in value . The USA/CNY rate at closing last night: 6.3627, falling .0058 (Yuan rising)/
In Japan Abe went all in with Abenomics with another round of QE purchasing 80 trillion yen from 70 trillion on Oct 31. The yen now trades in a northbound trajectory as settled up again in Japan up by 27 basis points and trading now just above the 120 level to 120.31 yen to the dollar.
The pound was down this morning by 9 basis points as it now trades just above the 1.54 level at 1.5415.
The Canadian dollar reversed course by falling 19 basis points to 1.3256 to the dollar. (Harper called an election for Oct 19)
We are seeing that the 3 major global carry trades are being unwound. The BIGGY is the first one;
1. the total dollar global short is 9 trillion USA and as such we are now witnessing a sea of red blood on the streets as derivatives blow up with the massive rise in the rise in the dollar against all paper currencies and especially with the fall of the yuan carry trade. The emerging market which house close to 50% of the 9 trillion dollar short is feeling the massive pain as their debt is quite unmanageable.
2, the Nikkei average vs gold carry trade (blowing up)
3. Short Swiss franc/long assets (European housing/Nikkei etc. This has partly blown up (see Hypo bank failure).(blew up)
These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>
The NIKKEI: this Monday morning: down by 298.52 or 1.63%
Trading from Europe and Asia:
1. Europe stocks all in the green
2/ Asian bourses mixed … Chinese bourses: Hang Sanggreen (massive bubble forming) ,Shanghai red (massive bubble ready to burst), Australia in the green: /Nikkei (Japan)red/India’s Sensex in the green/
Gold very early morning trading: $1105.00
Early Monday morning USA 10 year bond yield: 2.17% !!! down 1 in basis points from Friday night and it is trading well below resistance at 2.27-2.32%. The 30 yr bond yield rises to 2.94 down 1 basis point.
USA dollar index early Monday morning: 95.24 up 14 cents from Friday’s close. (Resistance will be at a DXY of 100)
USA/Chinese Yuan: 6.3664 down .0071 (Chinese yuan up/on shore)
China Churn & Fed Fears Spark Sleepy Stock Slippage
It’s just a harmless little 25bps rate hike…
The market’s implied probablity of a September rate hike was flat at 28% today…
But today’s weakness started in China when – just as the greater fools thought it was safe to relever into stablity – Chinese stocks tumbled most in a month…
Which weighed heavily on an exuberant ‘panic-buying’ US futures market overnight… from the start of Friday’s meltup close…
Cash markets tried an initial squeeze but failed and drifted lower into the European close…
Once again, stocks tracked oil.. .until NYMEX closed…
The Nasdaq remains the only index in the green since the end of QE3…
BABA sums it all up nicely… “trust” the analysts…
VIX and Stocks remain decoupled – which appears like traders lifting front-end hedges (and th eunderlying exposures) or just rolling hedges (as the curve remains notably inverted)…
Treasury yields could not decided what to do today and traded in a very narrow range… 2Y closed higher by 2bps, rest of the curve closed lower in yield…
The US Dollar closed practically unchanged but followed the sell Asia, buy Europe pattern once again…
Gold was very quiet today but copper, crude, and silver all slipped together from overnight pre-China highs…
But the crude contango is back in force as Brent’s 13th vs 1st spread is now at $9.23 – its highest since February and re-igniting the “storage arb” trade (with a 20% premium over front-month)
Bonus Chart: The only chart that matters for The Fed’s “Dow-Data-Dependence”…
VIX Has Not Done This Since The USA Was Downgraded
The VIX term structure has been inverted (spot higher than 3rd futures) for 17 days – that is the longest period of backwardation since August 2011, when uncertainty soared around the USA credit rating downgrade. In fact, much of the VIX term structure is higher today than it was at the peak of the crisis on Black Monday as both government shutdown and Fed rate hike fears dominate the forward curve…
The longest streak of VIX curve inversion since the USA credit rating downgrade in 2011…
And longer-term VIX trades higher than it did on Black Monday…
With record VIX longs…
We are sure this will all end well.
(courtesy zero hedge)
Obamacare Backfires – 400,000 Immigrants Lose Benefits
With tens of thousands of “lucky” Syrian immigrants due to arrive on American shores, it appears these hope-full refugeese may face life in the US is not as ‘free’ as they hoped. As AP reports, new government procedures have caused more than 400,000 current immigrants to lose healthcare coverage they received under Obamacare this year. The change in procedure shortens the timeframe during which foreign-born citizens can resolve eligibility issues, which has caused 423,000 people to lose their state-sponsored benefits –more than four times more than last year.
As AP reports, the number of coverage terminations could actually be higher. The 423,000 figure only represents states served by the federal health insurance market. That does not include immigrant-rich California and New York, which run their own insurance exchanges.
The Obama administration says it is following the letter of the law, and this year that means a shorter time frame for resolving immigration and citizenship issues. Butadvocates say the administration’s system for verifying eligibility is seriously flawed, and consumers who are legally entitled to benefits are paying the price.
“Same dog, different collar,” said Jane Delgado, president of the National Alliance for Hispanic Health, evoking an old Spanish saying about situations that do not seem to change. “The bottom line is people got taken off health insurance when they applied in good faith.”
The National Immigration Law Center says it believes the overwhelming majority of the 423,000 people whose coverage was terminated are legal U.S. residents and citizens snared in a complicated, inefficient system for checking documents.
Angel Padilla, the center’s health policy analyst, said it defies common sense that that many immigrants without legal authorization to be in the country would risk alerting a federal agency by applying for taxpayer-subsidized benefits.
“Somebody who is trying to submit documents over and over … is someone who believes they have an eligible immigration status,” Padilla said. By comparison, a total of 109,000 people lost coverage because of citizenship and immigration issues during all of 2014.
President Barack Obama’s health care law specifies that only citizens and legal U.S. residents are entitled to coverage through the new insurance markets that offer subsidized policies. The administration says this year the law provides just a 95-day window for resolving documentation issues that involve citizenship and immigration.There was no such clock in 2014 because it was the first year of HealthCare.gov’s coverage expansion.
Last year, “we had the authority to provide consumers more flexibility — we were not taking action on the strict timeline,” said Ben Wakana, a spokesman for the Department of Health and Human Services. “In 2015, we moved to the timeline of about three months, so consumers need to act quickly to submit supporting documentation.”
Does this then mean that in one swoop, the Democrats just lost 400,000 potential voters and the ‘boomerang’ of Syrian refugees suddenly saw their window of free healthcare opportunity shrink dramatically?
Well that about does it for tonight
I will see you tomorrow night