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I am not an investment professional. I do not engage in stock or currency trading. I am a blogger and investor who believes currency deflation has created an investment demand for gold, and that gold bullion is the sole means of wealth preservation. The chart of gold, $GOLD, reveals that with... More
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  • In China They Placed Their Faith In Ponzi Lending And Collateral Consisting Of Copper Stockpiles  0 comments
    Report on Credit in China as of October 14, 2011

    In China they placed their faith in ponzi lending and collateral consisting of copper stockpiles, ... after the soon coming global credit collapse, the Chinese will like the Europeans,will place their trust in the seigniorage, that is the moneyness, of diktat.

    The soon coming sovereign armageddon, that is a credit bust and global financial breakdown, is being preceded by a contraction of credit in China, as reflected in the fall of the commodity copper, JJC, which has caused debt deflation, that is currency deflation, across the globe, turning the basic material stocks, XLB, and IYM, particularly, the copper miners, COPX, lower. Both the Chinese shadow banking system bubble and the metals bubble in China are bursting.

    China Stocks CHIX, CHII, CHIM, succumbed to inflation destruction as well as credit destruction stemming from the failure of China’s shadow bank lending system. Bloomberg reports China Lending Shrinks as Wen Wrestles With Inflation Over 6%. China’s bank lending last month was the least since 2009 as inflation stayed above the government’s target, highlighting the risk that efforts to tame prices will trigger a slowdown. New loans were 470 billion yuan ($73.7 billion), central bank data showed today. Consumer prices rose 6.1 percent compared with a 4 percent goal, the statistics bureau said. M2, the broadest measure of money supply, rose 13 percent from a year earlier, the least in almost a decade, and data for foreign-exchange reserves pointed to capital outflows.

    Despite the downward trend in the use of credit, China is still in a massive credit bubble and is starting to experience the delirium tremors of its credit mania withdrawal.

    In many areas in China, there is the shadow banking system, which is a criminal cartel in operation; this is the case in Wenzhou lending, the nation's capital of small and medium sized companies supported by private financing. Bloomberg reports China announced a package of measures to help small companies, including tax breaks and easier access to bank loans, after the collapse of manufacturers in Wenzhou city highlighted growing risks to the economy. The government will provide financial support and preferential tax policies for small companies, the State Council said. The government will be more tolerant of bad loan ratios for small company loans, the Cabinet said. Small companies play an irreplaceable role in job creation, technical innovation and social stability, and the funding difficulties and tax burdens facing some of them deserve high attention, according to the statement. The support comes after Wen visited Wenzhou in Zhejiang province during a public holiday this month, urging greater support for the SMEs. Media hype surrounding reports of Wenzhou factory owners fleeing after failing to pay debts unnerved investors concerned about Chinese banks’ asset quality and a slowdown in the property market, UBS AG said in an Oct. 11 report.

    Gary Dorsch in 321 Gold gives explanation of the price decline in copper. On July 27 Xia Bin, an influential member of the PBoC, told the People’s Daily newspaper that monetary policy should stay relatively tight in the foreseeable future to help tackle inflation. “China should gradually make real bank deposit rates positive and continue to use open market operations and bank reserve requirements to slow money supply,” he said. Bin’s remarks spooked traders in both the Shanghai copper and red-chip markets. Another reason cited for the surprising -35% drop in copper prices to its lowest in 14-months, is the rebound in the value of the US-dollar, against a basket of six currencies. A strong US dollar makes copper and other commodities more expensive for holders.

    I comment that the price of copper declined, as credit tightened; and as the price of copper declined, China Financials, CHIX, declined. Copper is used as collateral in both the recognized banking system and in the shadow banking system. The fall in the price of copper is partially attributable to the fall in China bank stocks.

    Two other words for credit, besides a loan, are trust and faith. These have broken down, as one of the world's most dangerous bubbles, the copper bubble is beginning to burst. Don Martin on April 27, 2011, wrote on the Copper Bubble. The world production of copper is about 5.7 million metric tons a year, so that is a huge amount of phony demand. If this demand had never occurred then the price would be a lot lower and a lot of economic indicators would be less bullish.I have seen this pattern before in America, where people overbuilt the housing market, making GDP bigger because of building an unneeded asset that was falsely labeled as an investment but which was really a losing speculation. The same happened in Ireland. These commodity bubbles are labeled as proof of inflation and proof that a full employment economy is about to occur, when in fact they are simply bubbles.

    The defacto expert on credit bubbles is Doug Noland; he publishes the Credit Bubble Bulletin weekly. He coined the term wildcat finance and writes extensively about the Global Government Finance Bubble which can be seen in chart of BWX. In addition to the financialization of commodities by Wall Street in commodity ETFs, such as DBC, USCI, DBB, JJT, JJN, JJC, LD, JJA, RJA, DBA, FUE, BAL, COW, JO, GRU, USO, DBC, BNO, GAZ, FUE, UGA, CUT, and the securitization of GSE Debt by Mortgage REITS, part of wildcat finance was borrowing from the Bank of Japan at 1% interest to invest in yen carry trades, by going short the Japanese Yen, FXY, and long the emerging market currencies, CEW, and long the world major currencies FXA, FXE, FXM, FXC, ICN, FXS, SZR, FXF, BZF, BNZ, FXRU.

    Investment in Copper, JJC, was financed in significant part by carry trade investing; when it fell, the carry trade investments unwound, causing disinvestment and delveraging globally; especially in hot money flow countries such as IDX, EPU, ECH, RSX, EWA, EWY, EWD, ENZL, EZA, EWZ, INDY, EWO, TUR, EWT. The small cap shares, VSS, the emerging markets, EEM, fell more than the world shares, ACWI; these included RSXJ, KROO, SKOR, SCIN, BRF, and TWON. The emerging market financials, EMFN, were deleveraged more than the world shares. Argentina, ARGT, a credit carry trade investment, suffered very significant deleveraging. The fall lower in the currency yield curve, RZV:RZG, beginning in August 2011 evidences the end of the Milton Friedman Regime. And the fall lower in the ratio of world stocks, ACWI, relative to world government bonds, BWX, in March 2011, reflects the exhaustion of US Federal Reserve Quantitative Easing.

    Whereas the Chinese Financials, CHIX, suffered credit deleveraging from falling copper and simply the mild onset of credit tightening, the US Banks, KRE, and Investment Bankers, KCE, suffered credit deleveraging from awareness that a default union had formed in Europe, VGK, and from awareness that the end of the investment age and the end of the floating currency age, has arrived. The turn lower in Leveraged buyouts, PSP, Junk Bonds, JNK, High Dividend Income, ABCS, and subprime automobile lender, NICK, reflects the beginning of the end of credit. The sharp downturn in Financials, XLF, has deleveraged the US Small Caps, IWM, which are critically dependent upon credit for financing of payroll, replenishing inventory, and restocking inventory.

    The rise of the dollar, $USD, traded by UUP, beginning in September 2011, reflects competitive currency deflation in the world’s currencies, DBV, and the world emerging market currencies, CEW, and the commodity currencies, CCX. Unwinding yen carry trade investing, has deleveraged commodities, and has caused disinvestment from stocks.

    It’s very likely that the US Dollar is seeing a soon coming bottom and will be rising from 76 or 75, as the European Sovereign Debt Crisis goes viral, possibly as soon as October 23, 2011 as Catherine Bremer and Jan Strupczewski of Reuters reported on October 15, 2011, G20 tells euro zone to fix debt crisis in eight days and Liz Alderman of the NYT, in Europeans Struggle Toward Debt Solution quotes France’s finance minister, François Baroin, saying “The results of Oct. 23 will be decisive.” So there is likely to either be a debt fix or a debt collapse; I believe the latter. The death of the Milton Friedman Free To Choose floating currency regime can be seen in the Dollar, $USD, rising since September 1st.

    Nature Economist Elaine Meinel Supkis in the article Currency Devaluation War Rages Ever More Violently The G20 tells euro zone to fix debt crisis in eight days. HAHAHA. This is too funny. The G20 has been at war with itself for quite a while. For over 50 years, the key sovereign wealth nations of the G7 depended on exactly one scheme to enrich themselves: export to the US while refusing to buy from the US except in significantly less quantities. To do this, they all did the exact same thing: they made their own currencies weaker than the dollar via holding US trade profits in various accounts so it didn’t recirculate. They also used these seas of US red ink to bankroll lending. This is why Japan could run up their domestic government debt to over 240% of their GDP. An amazing misbalance, impossible to do without a huge trade deficit with the US.
    Germany’s sovereign wealth is now going down the tubes in order to bail out foreigners who are part of the loose confederation of states which Germany foolishly got enmeshed in. Germans hate bailing out their trade partners. The US isn’t being bailed out by Germany or Japan, on the other hand. Instead, both plot as much as possible to turn the tables and increase the US trade deficit as much as humanly possible, that is, weaken the euro and yen as much as possible.
    This fix will destroy the US. The US has thrown away all tools of the past which were designed to protect us from floods of imports. Since the rulers of the US want to keep expanding our military empire, part of the deal is, as I have laboriously detailed in the past, the game is to put bases in a country, take over their own military and then let them export heavily to the US and thus, become enamored with us and then, become our ‘allies’. The sad fact that this military imperial plan has a gigantic flaw, namely, it destroys the empire’s core,

    Ms Supkis continues: Here is an old story of mine from 2005 on October 11, nearly exactly 6 years ago, where I discuss the implications of the Federal Reserve hiding the true data of money creation within the Fed: Culture of Life Financial News: Federal Reserve Will Conceal M-3 Monetary Aggregate To Hide Inflation
    Stark memo with no mainstream press trumpets, the Fed decided they are fed up feeding us vital financial information. So they will simply hide it from us so we can’t see how much money they are creating out of thin air.
    From the Federal Reserve:
    Discontinuance of M3
    On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.

    Measures of large-denomination time deposits will continue to be published by the Board in the Flow of Funds Accounts (Z.1 release) on a quarterly basis and in the H.8 release on a weekly basis (for commercial banks).
    So, they will still continue to show us large-denomination “time deposits”– but they won’t show their own contribution to this! You can bet in a year, even that will be hidden from view so the mooing herd of investors can’t panic. You know, if you want to kill a lot of cows, you herd them in a large group into an ever tighter corral, smaller and smaller until each one is forced into the ramp that takes them into the slaughter house.
    Restrictions, restrictions. Note the currency that will be hidden from view will be the euro. Can’t let the Europeans see how the yen/dollar black hole operates. They must be kept guessing.
    HA! See! Yes! Nail on the head! I pointed out, with intense fury, that the Federal Reserve didn’t merely want to hide inflation facts from the masses, it also wanted to conceal future bail outs of the euro. These ‘repurchase agreements’ were what the EU bankers and the Fed used in 2008 when the Fed SECRETLY lent them all, many of whom were private bankers and investment firms, over $16 trillion

    And Ms Supkis continues, writing on deflation: There is growing regret in Europe as people slowly figure out why confederations are terrible social systems, do note that many libertarians love the Swiss system and it is now collapsing due to the Swiss money shooting up in value. The Swiss have a strong central bank but foolishly handed it over to the Bilderberg gang and not it is being destroyed and the gold sold off to private bankers who used ZIRP loans to buy it on credit. Mail Online relates Eurozone debt crisis: Euro bailout attempt is utterly dishonest.
    The scale of the euro crisis has made one thing abundantly plain: Europe, Britain and the rest of the world would be better off if the euro had never happened. It would be preferable if it were now dismantled in an orderly manner…Merkel and Sarkozy failed to announce details of their programme. But if reports are correct, one plan is for Europe to use some highly dubious financial wizardry to increase the amount it can borrow — injecting toxic assets directly into the bloodstream of the European financial system as it does so.
    The latest idea is to get the European Central Bank (ECB) to lend up to five times the €440 billion of the bailout fund, taking the total available to more than two trillion euros.
    Basically, there will be this central bank not controlled by any one country that will suck down three trillion dollars in bad government debts that can never, ever be repaid. The countries that represent these debts will be locked in the exact same ZIRP system as the Japanese workers. That is, wages must always fall, systems must be starved until all inflation is eliminated and thus, the central bank has no ‘haircut’ so it can happily lend to bankers, money at ZIRP rates.

    I relate that In 1974, the 300 hundred of the world’s elite met as the Club of Rome, and presented regional economic government as the solution for the chaos that would come from deleveraging and disinvesting that comes with the failure of Mr Friedman’s Free to Choose dream. Their Clarion Call, has been heard by globalists such as Angela Merkel and Nicolas Sarkozy, who in their August 2011 Communique, called for a true European economic government.

    Sovereign armageddon, that is a credit collapse and global financial breakdown, will come out of Gotterdammerung, the clash of the gods, that is the European leaders and the investors together with the rating agencies. This will result in the loss of national debt sovereignty, and extinguishment of state fiscal spending capability.

    Sovereign crisis requires a sovereign solution. One Leader, the Sovereign, and his banker, the Seignior, will arise to speak for and to the Eurozone, which will be transformed into a Federal Europe, as leaders meet in summits and wiave national sovereignty, and implement a Fiscal Union, empower the ECB as a bank, and develop a common European Treasury. Seigniorage, that is moneyness, will no longer be based upon debt, but rather will be based upon the diktat of structural reforms, austerity measures and debt servitude; people will be amazed by this, and place their faith in it, and give it their full allegiance.

    Fate is destroying nations and national sovereignty, and all current forms of economic life, such as Capitalism, and Greek Socialism, by providing a European superstate, a United States of Europe, as part of a ten toed kingdom of regional economic government, where eventually ten kings will rule in each of the ten toes, that is the world’s ten regions.

    Under Neoliberalism, fiscal sovereignty came from sovereign nations issuing sovereign debt. But under Neoauthoritarianism, where nations have lost their sovereign debt authority, the Sovereign and the Seignior will have both sovereign authority and fiscal sovereignty. Credit will not come from the securitization of debt; but rather from the word, will and way of sovereigns and stakeholders appointed from industry and government. Lending will only go firms that are key to the region’s security and prosperity.

    Some make the case for breakup of the Eurozone. Edward Harrison wrote in early September in Credit Writedowns stating breakup of the euro zone is likely. Mike Mish Shedlock in June, wrote “the policy decisions that governments and the EU are making cannot be maintained politically in the periphery or in the core”. Nouriel Roubini wrote the Eurozone could break up over a five-year horizon. And Mr. Shedlock writes: “We both stated that the key to maintaining the euro zone at all was the potential for closer integration of the member states. But the German Constitutional Court decision makes this nearly impossible.” Ambrose Evans Pritchard relates German court curbs future bail-outs, bans EU fiscal union.

    Libertarians and Austrian Economists have a hero in Ron Paul, whose philosophy is fathered by Murray Rothbard, Ludwig von Mises, and Friedrich Hayek, and continued today by Lew Rockwell of the Mises Institute. As a group, those of the Austrian School of Economics envision a world with sovereign individuals and sovereign nations each with its own currency.

    Liberty, freedom and choice are mirages on the Neoauthoritarian desert of the real. Fate is driving the beast regime, which has come from the 1974 Clarion Call of the Club of Rome, with its seven heads, symbolizing mankind’s seven institutions, and ten horns symbolizing the world’s ten region, to rise from the sea of humanity to rule globally. Neoauthoritarianism will manifest as statism and totalitarian collectivism.

    China has extended far more domestic credit relative to GDP than other nations and has probably allocated it less wisely. With export demand falling, will China have the cash flow to bail out its insolvent banks and to rescue its state governments? Will it have to restrain its raw materials acquisition spree to deal with bad loans? Copper prices are a proxy for how well China is doing. Copper’s price move down is indicative of unwinding carry trades as well as collapse in a credit bubble in China.

    The ratio of Chinese Financials, COPX, to copper, COPX, CHIX:COPX, has risen to a value of 0.715; from here it is likely to go lower, suggesting a continuing failure of credit in China. Yes, the seigniorage of copper will once again fail. Tyler Durden relates Chinese Copper Inventories Revealed To Be Double Estimated. The FT reveals for the first time that China's estimated copper inventories is almost double the lower end of the consensus estimate. And millions of domestic businesses operate using Letters of Credit backed by copper.

    In China they placed their faith in ponzi lending and collateral of stockpiles of copper …. After the credit and banking bust, the Chinese like the Europeans will place their trust in the seigniorage of diktat.

    Selected reading on credit in China.
    1) … September 30, 2011. Terence Reiley relatesWe have been pushing the thesis that copper’s move lower is not only predicting a slowdown in China but that it is also indicative of credit bubble bursting. The Chinese economy is slowing and the practice of buying copper to use as collateral for loans is producing a vicious cycle of lower and lower copper prices. Capital calls from lenders are forcing borrowers to sell copper into a weak market. The lower the price of copper the less valuable the copper is as collateral and then more lenders call in their loans.

    There are reports from Market News International that property developers are paying 6-10% a month for financing. The lower copper goes the more developers need to sell. Margin calls in markets are never pretty. This spiral in copper is spreading fear of a hard landing for China around the world.

    2) … October 13, 2011. The WSJ reports China's Bank Cover-Up
    Beijing is not pleased with the signals that the market for Chinese bank shares is sending about bank fundamentals or the state of the economy. So it is doing what it usually does with information it doesn't like: Cover it up. Central Huijin, an arm of China's sovereign wealth fund that is in turn an agent of the State Council, has started buying the shares of Chinese banks listed in Shanghai and Hong Kong to pump up prices. What was the market telling us about Chinese banks before it was so rudely silenced? Shares of Chinese banks and other companies have fallen so low that they seem to be pricing in a collapse in profits. One reason is uncertainty about the extent of bad loans emerging from the 2009 government directed lending binge. The quarterly reports continue to show low nonperforming loans and healthy profits, but nobody believes that.The bigger worry is that the fight against inflation is creating a liquidity squeeze throughout the economy. Inflation has been more stubborn than most people expected and the end is not in sight. This is showing up in bankruptcies of private companies in Wenzhou. Premier Wen Jiabao made a visit to the unofficial capital of the private sector last week and pushed banks to step up lending to small- and medium-sized enterprises. But such companies are increasingly forced to pay higher rates for loans from the curb market.

    The development of shadow banking institutions means that China now has a dual pricing system for credit, with state-owned companies paying the low official interest rate for bank loans and other companies paying more in the open market. This creates opportunities for arbitrage and corruption, and the risk of spectacular failures. The banks are starved of deposits as more and more money leaves accounts that earn negative real interest rates and seeks out trusts and wealth management products with higher returns. The big victims could be the property developers, which are highly leveraged. The government is trying to rein in housing prices, which has hurt sales. Without the revenue from pre-sold apartments, the developers need to borrow even more to finish projects. They are starting to offer big discounts and, like the small companies, are turning to unofficial lenders.If property prices start falling in earnest and investors begin to liquidate empty apartments they have been holding as investments, the property developers may begin to fail. Construction companies would be next. Further down the road, local governments that rely on land sales for revenue would be unable to repay loans for infrastructure projects. Many China analysts profess not to be worried by these risks because the central government has the borrowing capacity to bail out the banks one more time. And perhaps they're right. That may be what the Huijin purchases are really about, reassuring the market that Beijing will step in to maintain confidence as needed. Even so, the market signals shouldn't be ignored.

    China's state-owned banks were beginning to lend according to commercial criteria when the 2008 crisis struck. The bills from the stimulus are coming due, but more importantly Beijing is running out of time to create market-oriented banks, as the shadow banking system shows. A new reform program that reveals the true state of bank balance sheets and makes bank managers accountable to the market rather than the Communist Party is the only way to restore confidence.

    3 … October 3, 2011. Patrick Chovanec China Economy On The Edge Of A Nervous Breakdown. Investment in real estate (in yuan) rose 33% and new construction (in square meters) climbed 26% in the first eight months of 2011, compared to the same period last year data that China’s National Statistics Bureau touts, by the way, as proof that the Chinese economy is still going strong. All of this continued building was predicated on the assumption that China’s cooling policies could not last. In fact, since developers kept building, there was no negative impact on GDP, and no reason for policymakers to pull back. To the contrary, inflation rose, and the cooling measures targeted at real estate were broadened into a more general credit tightening policy aimed at reining in lending. As developers piled up more and more inventory the primary market inventory in Shanghai, for instance, now starts at an all-time high, 12.5% higher than in December 2008 they had to borrow to stay in business. With credit conditions tightening, they systematically ran through the credit lines available: first the banks, then high-yield bonds in Hong Kong, then the private wealth management vehicles that have been popping up all over China, then the loan sharks. Finally, they ran out of options, and had no choice but to start selling some of their inventory at whatever price they could get.

    For a while, I’m sure the opportunity was highly rewarding, with informal interest charges soaring to monthly rates of 4-10%. But eventually the risk caught up. Shanghai Daily reported on Sept. 23 that, in the previous ten days, at least seven local Wenzhou business owners had fled after defaulting on millions of yuan they had borrowed from banks and private creditors, which they in turn lent or invested in real estate and other speculative ventures.

    What’s happening in Wenzhou and Shiji is not an isolated exception. With CPI rising at 6.2-6.5%, and the regulated deposit rate at banks at 3.5%, China’s banks have recently seen a rush of withdrawals by savers seeking higher yields elsewhere. According to China Securities Journal, outstanding deposits at China’s “big four” banks fell by RMB 420 billion (US$ 65.7 billion) in the first 15 days of September. Most of that money, it reports, is being channeled straight into speculative assets, either directly or via “shadow” lending arrangements. I was asked by a reporter the other day what I thought about a Hong Kong-listed baby formula producer that was loading up on loans and relending the money to non-ferrous metals, tungsten, and highway companies. I replied: When companies neglect their core business and start speculating in “hot” sectors they know nothing about, especially with borrowed money, it’s a sure sign the market is out of whack. Sometimes it’s because companies themselves are caught up in the “irrational exuberance” of a speculative bubble. Other times, it’s because inflation, price controls, credit controls, or other factors are distorting normal incentives. In any case, it’s a big red flag that something is seriously wrong.

    For the past decade, China has run surpluses on both its current and capital account. When it comes to both trade and investment, China is a net importer of foreign currency, which places pressure on its own currency to appreciate in order to resolve the imbalance. China has prevented the RMB from appreciating more rapidly than it desires by fixing a price at which it buys dollars (and other foreign currency) and stockpiles them as official reserves. Because that price has always been fixed below the market equilibrium point (the RMB has been kept undervalued), whatever limited trading band was set, the RMB tended to bump up against the upper limit. In other words, the RMB was a one-way bet, always under pressure to appreciate against the dollar.

    Until this week, that is, when it started to bump up against the bottom of the trading band, implying that the RMB wanted to depreciate against the dollar. Why? Presumably because the capital account had flipped, and speculators were now rushing to turn their RMB into dollars in order to take their money out of China. It’s important to clarify what this does and does not mean. It does not mean that the RMB is now suddenly going to collapse in value. China holds US$3 trillion in currency reserves, and can deploy those reserves to support any exchange rate it wishes. Even if China were tempted to devalue (at the cost, it should be noted, of fanning inflation), the mounting political pressure in the U.S. Senate to take action against China for its undervalued currency would pose an obstacle to pursuing that path.

    What the new downward market pressure on the RMB does indicate, however, is that Chin for so long a no-brainer destination for investment has turned into a big question mark. And it suggests that at least some domestic Chinese investors who have been inclined to sock their money into empty villas and condos or big stockpiles of raw materials are now looking for a way out.

    The easiest solution to all of this and one that Chinese policymakers will be sorely tempted to try would be simply to relax the “tightening” policy on money and lending. Let the money keep flowing and, for the moment at least, developers and speculators will have ready cash to pay their bills without selling off properties or jumping out windows. But China’s latest PMI (Purchasing Manager Index) numbers, released on Friday, indicate why that would be a mistake. According to Reuters, “factory inflation in China quickened markedly in September, with the sub-index for input prices climbing to a four-month high of 59.5 in September from 55.9 in August.” Despite the risk of a slowdown, all the money that has been pumped into the Chinese economy expanding M2 by 2/3 since the start of the global financing crisis in order to engineer an investment boom is still putting upward pressure on prices. China’s central bank knows that what might be good for speculators and developer more money could be disastrous for economic and social stability.

    Notice that, throughout the above discussion, I never once mentioned the impact of a renewed global downturn on the Chinese economy. That seems to be the focus of much media discussion these days, but from my perspective, it is only a complicating factor. China’s economy is still based on an export-led growth model, and therefore ultimately derives much of its growth from external demand. But China’s accumulation and sterilization of foreign currency reserves, over the past decade, meant that when that external demand evaporated in late 2008, it could inject previous export earnings into its economy in order to finance a purely domestic investment boom. When it did so, China for a time at least was able to de-couple its fate from the rest of the global economy, tracing a story arc involving high levels of growth, bad debt, and inflation that has followed its own separate logic to their resolution not unlike how Japan’s response to the Plaza Accord propelled it along a similar “bubble” trajectory in the 1980s. External factors, like a fall-off in exports, the fate of the dollar, or the volatile attitudes of foreign investors, may either intensify the forces at work or mitigate them, may accelerate or delay the moment of truth, but the primary forces at work and the primary choices to be made rest with the Chinese and the structure of their own economy, not with factors that have been imposed on China from outside.

    4) … August 31, 2011 Linette Lopez China's Non-Performing Loan Problem Is Getting Bigger
    According to Caixin Magazine, Chinese banks have reported 385.97 billion yuan ($60.25 billion) in non-performing loans (NPLs) since the beginning of 2011. Yesterday, 14 of China's large commercial banks posted their results for the first half of 2011. Of those 14, 11 reported an increase in non-performing loans. Of those 11, 8 reported non-performing loans had increased over 10% since June of last year. Most of these NPLs are in the form of credit card debt, retail loans, and corporate loans. One institution, Minsheng Bank, reported a 750 million yuan ($117.07 million) increase in non-performing corporate loans since last year

    5) .,. May 5, 2011. Mike Mish Shedlock Jungle Ponzi Financing Involving Copper Trade Gone Wild In China
    As I have repeated numerous times, those looking for massive inflation can find it in China, not the United States. Demand for credit is so insane in China, that businesses will go to any length to get it. Note that those companies holding copper, especially those new to this wild financing scheme, are very vulnerable to a decline in the price of copper. Alternatively, those companies taking out loans based on copper collateral then selling the copper back to the exchanges have managed to get loans with no collateral.

    Interestingly, Pettis insists that credit cannot really be considered tight in China, rather demand for credit has gone through the roof. In my model, rapidly expanding credit is a sign of a huge inflation problem. For comparison purposes, many forms of credit are still stagnant or declining in the US. This is supposed to end well? For who?

    6) … April 7, 2011. Adam Wolfe Great Speculations: Why China Is So Bubble-Friendly
    Decades of financial repression have resulted in the broad money supply (M2) expanding to 182% of GDP, providing a massive pool of potential liquidity for speculation, while negative real interest rates on deposits encourage savers to seek alternatives. There are sufficient monetary assets to fund a bubble of stupendous magnitude; no excessive loosening is required. From the end of Q3 2006 to its peak in October 2007, the Shanghai Composite Index increased 230%. In the preceding six quarters, M2 growth outpaced nominal GDP growth by less than a percentage point. It was the velocity of money that spiked, not the quantity. Velocity is more difficult for the People's Bank of China to control, especially with banks' required reserve ratios already at record highs, and current conditions seem ripe for a bubble.

    7) … September 22, 2011 L. Randall Wray The Biggest Bubble of All:Commodities Market Speculation Say what? You thought that was tulip bulb mania? Or, maybe the NASDAQ hi-tech hysteria?

    No, folks, those were child’s play. From 2004 to 2008 we experienced the biggest commodities bubble the world had ever seen. If you looked to the top 25 traded commodities, you found prices had doubled over the period. For the top 8, the price inflation was much more spectacular. As I wrote “According to an analysis by market strategist Frank Veneroso, over the course of the 20th century, there were only 13 instances in which the price of a single commodity rose by 500 percent or more. For example, the price of sugar rose 641 percent in 1920, and in the same year, the price of cotton rose 538 percent. In 1947, there was a commodities boom across three commodities: pork bellies (1,053 percent), soybean oil (797 percent), and soybeans (558 percent). During the Hunt brothers episode, in 1980, silver prices were driven up by 3,813 percent. (A crack up boom)

    Now, if we look at the current commodities boom, there are already eight commodities whose price rise had reached 500 percent or more by the end of June: heating oil (1,313 percent), nickel (1,273 percent), crude oil (1,205 percent), lead (870 percent), copper (606 percent), zinc (616 percent), tin (510 percent), and wheat (500 percent).

    Many other agricultural, energy, and metals commodities have also had large price hikes, albeit below that threshold (for the 25 commodities typically included in the indexes, the average price rise since 2003 has been 203 percent). There is no evidence of any other commodities price boom to match the current one in terms of scope.”

    Now here’s the amazing thing about that bubble. The staff of Senator Joe Lieberman and Representative Bart Stupak wanted to know whether the bubble was just due to “supply and demand”. Relying on the expertise of Frank Veneroso and Mike Masters (two experts on the commodities market), I was able to conclude beyond any doubt that it was a speculative bubble driven by a “buy and hold” strategy adopted by managers of pension funds. Hearings were held in Congress, with guys like Mike Masters testifying as well as representatives from the airlines and other industries.

    The pension funds panicked, realizing that their members would hold them responsible for exploding prices of gasoline at the pump. Pension funds withdrew one-third of their funds and oil prices fell from about $150 per barrel to $50. If you want to read the detailed analysis, go to my paper cited above—it has to do with commodities indexes, strategies pushed by your favorite blood sucking vampire squid (Goldman Sachs), and futures contracts. It gets wonky. To make a long story short, the bubble ended in fall of 2008.

    But then the crisis wiped out real estate markets and the economy. Managed money needed another bubble. They whipped up irrational fears of hyperinflation that supposedly would be caused by Helicopter Ben’s QE1, QE2, and the newly announced QE3.

    Better run to good “inflation hedges” like gold and other commodities. That did the trick. The commodities speculative bubble resumed. And boy, oh boy, what a boom. An April report by expert Jeremy Grantham looks at the last decade’s bubble in commodities; Frank Veneroso expands upon that in a more recent report. Here’s the elevator speech summary. Take the top 33 commodities that are globally traded,everything from gold and oil to to rubber, flaxseed, jute, plywood, and something called diammonium phosphate. Over the past 110 years, an index price of these 33 commodities has declined at an annual rate of 1.2% per year. (Sure there are variations across the commodities—this is the average. And so much for inflation hedges. Commodities prices fell—they did not keep up with inflation. If you liked negative returns, commodities were a good bet.) Although demand for these 33 commodities has increased a lot over the century, new production techniques plus successful exploration has resulted in a declining price trend.

    Further and this is a bit surprising deviations from the trend follow a normal distribution (you learned about this in high school; it is a bell curve with nice properties; chief among these is the finding that about 68% of outcomes fall within one standard deviation; about 95% fall within two standard deviations (once a generation); and you’ve got just about a snowball’s chance in hell of finding outcomes that are three or four standard deviations from the mean).

    But what is more surprising is that over the past decade, the price rises you find for these 33 commodities are just about beyond the realm of possibility 2, 3, and 4 standard deviations away from trend. It is a boom without any precedent. Quite simply, nothing even close has ever happened before, in any market, including hi tech bubbles and real estate bubbles.

    By now you’ve all read about black swans with fat tail a reference to supposedly “unexpected” and highly improbable default rates on subprime mortgages and other toxic waste assets. (Way out the normal distribution’s “tail”.) As an insider quipped, you had once in 100,000 year events happening every day. But that is misleading. These were junk assets that from the get-go had nearly 100% probabilities of default, NINJA loans and so on. The models were flawed, indeed, fraudulent. That was all a scam. Those weren’t black swans with fat tails, they were Hindenburg blimps filled with explosive hydrogen just waiting for someone to light a cigarette.

    By contrast, in the case of commodities, this is real stuff (not IOUs of deadbeats with no prospects). Barrels of oil that someone really wants. Corn to turn into pig and steer fat, or fuel for Midwest automobiles. Or gold to be hoarded by the University of Texas. There really is a demand for it; and someone produces it.

    Yes, commodity bubbles happen, but eventually reality sets in and brings the price back down to reality. You don’t get 3, 4, and 5 standard deviation events. A four standard deviation price rise falls outside 99.994% of all outcomes, one in 100,000 years; a five standard deviation price rise is about one in 2 million years. That pretty much covers the time since our ancestors beat things with big sticks.
    But wait a minute. The standard deviation of price rises for iron (5), coal, copper, corn and silver (4), sorghum, palladium, and rubber (3.5), flaxseed, palm oil, soybeans, coconut oil, and nickel (3), and so on down through jute, cotton, uranium, tin, zinc, potosh and wool (2) are so unlikely that they quite simply could not have happened. Individually. Together, the likelihood that we’ve got an unlikely boom in almost all of the 33 commodities? All at the same time? Impossible. Cannot happen. Not in the lifetime of our sun, let alone our planet. But it did.

    Why? Financialization. Just as homes became financialized (in many ways, including serving as the collateral for “ATM” cash-out home equity loans), commodities became thoroughly financialized. (So did healthcare and death, with peasant insurance and death settlements—topics for another day.)
    Here’s the reason. Believe it or not, commodities markets are tiny; except for soy, oil, and corn they are smaller than tiny. Managed money is huge, tens of trillions of dollars floating around the world looking for high returns. US pension funds alone are three-fourths of US GDP, $10 trillion give or take. If you put even a fraction of managed money into commodities index funds, you blow up the prices.

    They cannot forever live in never-never land with rising prices and collapsing sales. There are many shoes that will drop, bringing back the Global Financial Crisis with a vengeance. Commodities crash, default by a Euro periphery nation, failure of a Euro bank, or the closure of Bank of America or Citi. All of these are likely events, less than one standard deviation from the mean; probably all of them will happen within the next year. No matter what the triggering event is, that commodities nuclear winter will happen.

    An inquiring mind asks, what is going to happen to BHP, KROO, VALE, BRF,COPX, ECH, KOL, when the commodity crash, DBC, and copper crash, JJC, comes via on going competitive currency devaluation, unwinding carry trade investing, and failure of China banking and credit, CHIX? The Age of Deleveraging has only just commenced. Yes, we have only entered into Kondratieff Winter.
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