Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Friday, January 24, 2014
Something Ominous May Be Coming Our Way - Let's connect some dots ! First , Earlier this week 30-day/4-wk T-Bills were auctioned off a 0% rate. Intra-day, after the auction, the rate went negative. Negative short term rates were last observed in 2008, before the Lehman/AIG/Goldman collapse occurred - as an addendum , NOTE HSBC Restricts Large cash withdrawals unless an explanation that HSBC apparently approves of is given by the customer withdrawal - large withdrawal in some cases defined as 5,000 pounds ....... Second , JP Morgan Gold Vault sees its biggest one day withdrawal -- ever ! Third , we read China considering teaching investors a lesson in moral hazard with allowing a Trust Default ( China faces a very significant test of its reform policy pursuit rhetoric. With China's Bank regulator set to issue an alert on coal-industry loans - "as a result of output cuts, they don't have much cash flow and thus they can't repay loans and debt," the massive growth in wealth products such as the CEG#1 (which offered a 10% yield for a 3 year term) based on these loans leaves the Chinese with a moral hazard dilemma - bailout or no bailout. ICBC has made it clear it wil not bailout investors since reputational damage would be "well manageable," and former-PBOC adviser Li Daokui adds that "a controlled default is much better than no default," noting critically that trust defaults "will teach future investors a very important lesson." ) Fourth , in addition to swooning stock markets globally , look at certain credit default swaps and consider the country specific issues ( Argentina faces another bout of bond turbulence , currency crisis bubbling along .... Venezuela - confiscation policies of Maduro and currency issues causing various shortages including food products , toilet paper , electronic and appliances retailers already wiped out ... Turkey - political and corruption scandals knocking the Lira and economy...... South Africa - manipulated prices for precious metals impacting their mining industries , more strikes looming from platinum miners ) Fifth , there remains the " other balls " in the air : Ukraine protests becoming violent and moving toward a revolt ; Thailand - another protest with the potential to overthrow the government in the process ; the daily mayhem of Iraq , Libya , Syria and Afghanistan - Pakistan war theaters . All of these events bubbling along without the US as a island of stability and respected nations with answers to the tough questions and thorny problems on tap !
Earlier this week 30-day/4-wk T-Bills were auctioned off a 0% rate. Intra-day, after the auction, the rate went negative. Negative short term rates were last observed in 2008, before the Lehman/AIG/Goldman collapse occurred. Of course, Lehman was allowed to implode and Goldman, who's ex-CEO was the Treasury Secretary, was bailed out. AIG was the beneficiary of that bailout because Goldman had impaled itself on AIG nuclear waste.
The point here is that negative T-bill rates only occur when very big investors are concerned about the return OF their money and not the return on their money. Think about what a negative T-bill rate means. It means that someone is paying more for the T-bill than they get in return when it matures a few weeks later. Why would someone do that? It's the "safest" place to park large sums of cash.
A big institutional fund or very wealthy investor pays for a T-bill because they they see something which indicates that the risk of the Government defaulting in the next four weeks is less than the risk of parking that money in a bank or a money market fund. We're talking millions and tens of millions in short term money. Bank deposits are insured only up to a small amount. After 2008, it has been decided that money market funds will no longer be bailed out by the Government/Fed.
In other words, big big investors with cash that needs to be parked are seeing something that gives them concern about the financial system. The negative rates on T-bills means that whatever was spooking big money in 2008 is spooking it again. My best guess right now is that there is massive risk of derivatives default. This would be the derivatives that blew up the system in 2008 but that the Fed/Government quickly monetized. The problem was never fixed, contrary to Obama's recent end zone dance on the safety of the banking system.
In fact, the Fed swallowed a portion of the bad derivatives and has been using the better part of the $85+ billion per month it's been printing since early 2009 to monetize the rest. In other words the catastrophic problems were kicked down the road. Worse, the big banks went out and replaced the crap the Fed took off their balance sheets with even more crap. Accounting rules were changed, and ratified by BOTH political parties plus Obama, which enabled the big banks to hide the problem.
But now the financial system is wearing the Scarlet Letter of negative T-bill rates. The source that is lighting the fuse is emerging market problems, reflected in the currency devaluations by Argentina and Venezuela. But the currencies of other important emerging market economies have been plunging against the dollar as well. The cost of derivatives "insurance" on the sovereign debt of these countries has suddenly increased at a rate that would make Obamacare insurance providers blush.
What the currency plunge/derivatives blow-out implies is that sovereign bond defaults are on the horizon. This is not just confined to "emerging" economic countries. Spain, Portugal, Italy and France are on the ropes financially and economically as well, despite the official European story-line that Europe is in "recovery."
The issue for the U.S. here is that the Too Big To Fail banks are the ones who have underwritten most of the credit insurance derivatives associated with the sovereign debt that may be at risk to default. They also hold a lot of it on their balance sheet. That's why the Fed's Excess Reserve accounts of the big banks have ballooned up in correlation with amount of QE that has been printed. The Fed has monetizing the derivatives exposure but that works only up to the point of a default event.
In other words, a big nuclear derivatives may be coming at our system. Another interesting tidbit to think about. While the paper price of gold was being plunged using Comex futures by the Fed-backed big banks, a major portion of the gold held in the GLD Trust was removed. The common narrative scooped up like dog crap and tossed in our face by Wall Street analysts was that the decline of the gold in GLD was indication of a new bear market in gold.
Essentially gold bottomed in price on June 28th, with a retest of that bottom at the end of December. Based on the $1180 bottom, gold has risen $90 since since the end of June. But guess what? Another 179 tonnes of gold - or 19% - of the amount of gold in the GLD trust at the end of June has disappeared. If gold is rising again, shouldn't gold be flowing back into GLD? The 500+ tonnes of gold that has been removed from GLD in a little over a year has disappeared down the rabbit hole. There's no way to know for sure but I'm sure a large portion, if not all, has been shipped to China.
But maybe not all of it. In addition to the huge ratio of gold to physical gold visible on the Comex, according to the latest OCC bank derivatives report the top 4 banks - JPM, Citi, Goldman, Bank of America - are long over $81 billion in gold OTC derivatives. That's the equivalent of about 1800 tonnes of gold at current at the current price. 1800 tonnes is slightly less than than the annual amount produced globally by gold mines. That amount dwarfs by many multiples the ratio of paper/gold on the Comex that has drawn everyone's attention. Maybe that's why the Comex publishes as much data as it does about Comex futures positions and inventory. It draws everyone's attention from the much bigger gold derivatives problem.
Following research last week suggesting thatHSBC has a major capital shortfall, the fact that several farmer's co-ops were unable to pay back depositors in China, and, of course, the liquidity crisis in China itself, news from The BBC that HSBC is imposing restrictions on large cash withdrawals raising a number of red flags. The BBC reports that some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it. HSBC admitted it has not informed customers of the change in policy, which was implemented in November for their own good: "We ask our customers about the purpose of large cash withdrawals when they are unusual... the reason being we have an obligation to protect our customers, and to minimise the opportunity for financial crime." As one customer responded: "you shouldn't have to explain to your bank why you want that money. It's not theirs, it's yours."
Some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it, the BBC has learnt.Listeners have told Radio 4's Money Box they were stopped from withdrawing amounts ranging from £5,000 to £10,000.
HSBC admitted it has not informed customers of the change in policy, which was implemented in November.
The bank says it has now changed its guidance to staff.
"When we presented them with the withdrawal slip, they declined to give us the money because we could not provide them with a satisfactory explanation for what the money was for. They wanted a letter from the person involved."
Mr Cotton says the staff refused to tell him how much he could have: "So I wrote out a few slips. I said, 'Can I have £5,000?' They said no. I said, 'Can I have £4,000?' They said no. And then I wrote one out for £3,000 and they said, 'OK, we'll give you that.' "
He asked if he could return later that day to withdraw another £3,000, but he was told he could not do the same thing twice in one day.
Mr Cotton cannot understand HSBC's attitude: "I've been banking in that bank for 28 years. They all know me in there. You shouldn't have to explain to your bank why you want that money. It's not theirs, it's yours."
HSBC has said that following customer feedback, it was changing its policy: "We ask our customers about the purpose of large cash withdrawals when they are unusual and out of keeping with the normal running of their account. Since last November, in some instances we may have also asked these customers to show us evidence of what the cash is required for."
"The reason being we have an obligation to protect our customers, and to minimise the opportunity for financial crime.However, following feedback, we are immediately updating guidance to our customer facing staff to reiterate that it is not mandatory for customers to provide documentary evidence for large cash withdrawals, and on its own, failure to show evidence is not a reason to refuse a withdrawal. We are writing to apologise to any customer who has been given incorrect information and inconvenienced."
But Eric Leenders, head of retail at the British Bankers Association, said banks were sensible to ask questions of their customers: "I can understand it's frustrating for customers. But if you are making the occasional large cash withdrawal, the bank wants to make sure it's the right way to make the payment."
The arrogance is incredible...
Yeah , something ominous is coming our way ...... let's face facts , HSBC has installed capital controls on their customers. The questions of course are why should customers have to " explain " to their bank - in this case HSBC , why they need to withdraw their own money ? As a corollary question , what happened with HSBC in November that warranted the imposition of this capital control policy on an unannounced basis ( from the standpoint of the customer ) ? Third question - does HSBC have a 80 billion capital shortfall ?
Curious why over the past few months JPM has quietly been accumulating a substantial amount of eligible physical gold (even as its registered gold inventory is the lowest it has ever been at just 87K ounces since December 13, 2013when 147K ounces of gold was withdrawn - keep that date in mind for a few minutes)? This may have something to do with it: moments ago the daily Comex gold vault report confirmed what many expected, namely that the JPM accumulation was merely in advance anticipation of major withdrawals. How major? Well, on January 23, JPM saw 321,500 ounces of gold depart in one day. This was tied for the single biggest daily withdrawal in history!The last time JPM had an identically sized withdrawal? December 13.... 2012.
Something tells us the next few days will see matching withdrawals from JPM's gold vault, which at last check was officially owned by the Chinese.
And for those wondering how JPM's total gold holdings look over time here it is:
China faces a very significant test of its reform policy pursuit rhetoric. With China's Bank regulator set to issue an alert on coal-industry loans - "as a result of output cuts, they don't have much cash flow and thus they can't repay loans and debt," the massive growth in wealth products such as the CEG#1 (which offered a 10% yield for a 3 year term) based on these loans leaves the Chinese with a moral hazard dilemma - bailout or no bailout. ICBC has made it clear it wil not bailout investors since reputational damage would be "well manageable," and former-PBOC adviser Li Daokui adds that "a controlled default is much better than no default," noting critically that trust defaults "will teach future investors a very important lesson." Belief that contagion can be "contained" brings back memories of 2008 in the US but a total (or even partial) bailout will merely increase the leverage and risk-taking problem and signal government talk of policy reform is not real.
China’s banking regulator ordered its regional offices to increase scrutiny of credit risks in the coal-mining industry, said two people with knowledge of the matter,signaling government concern about possible defaults.
The China Banking Regulatory Commission also told its local branches to closely monitor risks from trust and wealth-management products, said the people, who asked not to be identified as the matter isn’t public. The commission issues such alerts for matters that it judges may pose significant risks to banks, the people said.
Coal prices fell 16 percent last year, according to data tracked by Bloomberg. Prices fell below the break-even point for most small and medium-sized producers, forcing them to reduce output, Helen Lau, an analyst at UOB Kay Hian Ltd. in Hong Kong who covers the coal industry, said by phone.
“As a result of output cuts, they don’t have much cash flow and thus they can’t repay loans and debt,” Lau said. “The fact that the government is giving warnings and not bailing out defaults will be good for industry consolidation, indicating it is letting the market shoulder the burden of its own risks.”
Larger companies have also suffered. ... The market is “quite worried” about the coal industry, Rainy Yuan, an analyst at Masterlink Securities Corp. in Shanghai, said by phone today. “Coal is a pillar industry in the economy and banks’ exposure to the sector should be quite substantial.” China is the world’s largest producer and consumer of coal.
ICBC Chairman Jiang Jianqing told CNBC the lender won’t compensate investors for losses tied to a 3 billion-yuan ($496 million) product distributed by the bank, and the that the incident will be a lesson for investors on risks.
But Trust products like this have exploded in recent years:
Products like the ICBC-distributed Credit Equals Gold No.1, which has a tenure of three years and boasted a 10 percent annual return for investors, have mushroomed in China as part of a surge in shadow finance outside the traditional banking system. Payment on Credit Equals Gold No. 1 is due Jan. 31. Assets managed by China’s 67 trusts soared 60 percent to $1.67 trillion in the 12 months ended September, according to the China Trustee Association, even as policy makers sought to curb money flows outside the formal banking system.
China needs to let investors in a troubled trust-investment product suffer losses to demonstrate the true risks and let interest rates reflect market forces, a former central bank adviser said.
“A controlled default is much better than no default,” economist Li Daokui said in an interview yesterday at the World Economic Forum in Davos, Switzerland, when asked if a product distributed by Industrial & Commercial Bank of China Ltd. should default. Putting a structure in place to let some of the investors take losses, “is also much better than uncontrolled default,” he said.
The first default of a trust product in at least a decade would shake investors’ faith in their implicit guarantees and spur outflows that may trigger a credit crunch, according to Bank of America Corp.
As CLSA warns:
Risk facing authorities is that a default in which holders aren’t bailed out in full might precipitate panic outflows across the trust and related wealth-management product asset class, triggering a liquidity crisis, which would also ricochet into Hong Kong
If there is a total bailout -- or perhaps even worse bailout through the backdoor as some speculate -- it will be a signal that the government’s talk of pursuing reform isn’t perhaps for real
This will increase macro risks, with China’s trust assets now totalling more than 10t yuan; cites another estimated 11t yuan of wealth-management products issued by banks, citing China Reality Research
Mesanwhile Nomura is a little more concerned at the macro picture:
Maintains view of one-in-three likelihood of a hard economic landing commencing before end-2015
The last time markets scrambled for protection against sovereign defaults was over European country collapse in the summer of 2012 around the time Mario Draghi introduced a non-existent measure to allow Europe's nations to engage in zero reforms while their bond yields plunged. This time it is the emerging markets.
Argentina +139bps at 2562.07bps, hit highest since Sept.
Venezuela +81bps at 1398.19bps, highest since 2010
Turkey +11.6bps at 276.7bps, highest since June 2012
South Africa +10bps at 236bps, highest since Sept.
Of course, CDS aren't telling us anything (capital-controlled) FX hasn't already made quite clear.
Chinese CDS Worsens As Post-Year-End Liquidity Needs Spike
The PBOC has injected around CNY 400 billion into China's banking system in the last week focused in the 7-day reverse-repo maturity. While this has been greeted with moderation of the spiking trend in ultra-short-dated funding costs, there is a problem still. With the CEG#1 Trust maturing on 12/31 coinciding with the farce that is the 'confess all mismatched sins' debacle that occurs every Chinese Lunar New Year, the need for liquidity through that maturity is becoming extreme (while shorter-dated not so much). 14-day repo is now at 7.2% - almost 300bps above 7-day repo (which matures before year-end). In fact, it seems those concerned about possible Chinese contagion effects are buying protection aggressively as 5Y CDS jumped over 5bps to 102bps - the widest in 7 months (since the credit crunch in the Summer). This is far from over...
7-day repo in less demand (or over-supplied for now) as 14-day repo (which will see banks through the year-end) are seeing rates spike...at its widest today banks were willing to pay almost 250bps to extend the reverse-repo from 7 to 14 days - quite a curve!!!
And Chinese CDS are blowing wider still...
Given our earlier note on the depositor problems at some banks, we though Nomura's comment very apt:
Media reports that some farmers’ financial cooperatives are failing to pay depositors may be another sign of rising financial stress in China as interest rates rise and economy slows, Zhiwei Zhang, China chief economist at Nomura, wrote in note yesterday.
Continues to see credit defaults to occur in corporate, LGFV and shadow banking sectors in 2014
The fact that CNR, a major official news agency in China, reported on co-ops may suggest govt stance on financial risks is to acknowledge problem, strengthen regulations
Bear in mind that China has injected more this week than in 2012's year-end and that this all has to be withdrawn in a week or so... (see blue bars) if the PBOC policy reforms are to hold any credibility at all...