Let’s see. Between July 2007 and January 2009, the median US residential housing price plunged from $230k to $165k or by 30%. That must have been some kind of super “tax cut”.
In fact, that brutal housing price plunge amounted to a $400 billion per year “savings” at the $1.5 trillion per year run-rate of residential housing turnover. So with all that extra money in their pockets consumers were positioned to spend-up a storm on shoes, shirts and dinners at the Red Lobster.
Except they didn’t. And, no, it wasn’t because housing is a purported “capital good” or that transactions are largely “financed” at upwards of 85% leverage ratios. None of those truisms changed consumer incomes or spending power per se.
Instead, what happened was the mortgage credit boom came to a thundering halt as the subprime default rates became visible. This abrupt halt to mortgage credit expansion, in turn, caused the whole chain of artificial economic activity that it had funded to rapidly evaporate.
And it was some kind of debt boom. The graph below is for all types of mortgage credit including commercial mortgages, and appropriately so. After all, the out-of-control strip mall construction during that period, for example, was owing to the unsustainable boom in home construction—especially the opening of “new communities” in the sand states by the publicly traded homebuilders trying to prove to Wall Street they were “growth machines”.
Soon Scottsdale AZ and Ft Myers FL were sprouting cookie cutter strip malls to host “new openings” for all the publicly traded specialty retail chains and restaurant concepts—–along with those lined-up in a bulging IPO pipeline. These step-children of the mortgage bubble were also held to be mighty engines of “growth”. Jim Cramer himself said so—-he just forgot to mention what happens when the music stops.
A similar kind of credit bubble chain materialized in the hospitality segment. As the mortgage debt spiral accelerated, households began tapping their homes ATM machines through a process called cash-out finance or MEW (mortgage equity withdrawal). At the peak of the borrowing frenzy in 2006-2007, the MEW rate was in the order of $500-$800 billion annually. Accordingly, upwards of 10% of household DPI (disposable personal income) was accounted for not by rising wages and salaries or even by more generous taxpayer financed transfer payments from Washington.
Actually, it was far easier than that. American families just hit their home ATM cash button , and applied the proceeds to bigger, better and longer vacations, among other things. Soon, hotel and vacation resort “revpar” (revenue per available room) was soaring owing to surging occupancy and higher room rates.
On the margin of course, the incremental demand that sent hotel revpar soaring was derived from mortgage credit confected out of thin air by the financial system. Yet in the short-run is was a strong signal for more investment in hotel rooms and that’s exactly what materialized.
As it happened, of course, the revpar surge was a false signal and the hotel room building spree was a giant malinvestment. Construction spending on new hotels exploded from $10 billion to $40 billion annually during the 70 months after early 2003. Except….except that when the mortgage boom stopped and the frenzied MEW extraction halted, revpar plunged and the hotel room construction boom retraced back below the starting line in barely 20 months.
In all, between Q4 2000 and Q4 2007, US mortgage credit expanded by the staggering sum of $8 trillion. “Staggering” is not hyperbole. The growth of mortgage debt outstanding during that 84 month period exceeded by nearly 20% all of the mortgage debt that existed at the turn of the century. The CAGR for that period was 12% annually or orders of magnitude higher than the sustainable growth capacity of output and incomes. So mortgage credit went from 65% of GDP to 100% in an historical flash.
The tsunami of mortgage credit exceeded anything previously imaginable by even the most egregious “easy money” populists. But here’s the preposterous part. The monetary politburo watched this tidal wave rising and did not become alarmed in the slightest. Indeed, Greenspan and Bernanke thought MEW was a wonderful tool to goose household spending and thereby justify its spurious belief that a handful of central bankers could deftly guide the $14 trillion US economy to the nirvana of permanent full employment prosperity.
The above parabolic curve by no means represents the free market at work. For that kind of borrowing explosion to occur without causing interest rates to soar sky-high (and thereby soon choke off the borrowing spree), there would need to have occurred a powerful upsurge in the US savings rate, permitting the market to clear at prevailing interest rates.
It does not take much deep historical research to remind that didn’t happen. Not in the slightest. Indeed, the US household savings rate had been sinking ever since the Greenspan money printing regime got off the ground in response to the 25% stock market crash in October 1987. And once the Maestro went all-in opening up the monetary spigots in January 2001, thereby driving money market rates from 6% to 1% during the next 30 months, household savings resumed their tumble into the sub-basement of history.
As shown below, by the peak of the mortgage boom when demand for savings was at high tide, the savings rate had actually vanished, reaching hardly 2.5% of personal income. That compared to pre-Greenspan rates of 10-12.5% (based on current NIPA measurement concepts), meaning that the US economy was parched of savings at the very time it was bursting with new mortgage debt issuance.
Stated differently, the mortgage credit boom exploded uncontrollably in the run-up to the financial crisis because free market pricing of debt and savings had been totally distorted and falsified by the monetary central planners at the Fed. The resulting $8 trillion eruption of mortgage credit, in turn, funded bubble style spending and investment throughout the warp and woof of the US economy—–setting the stage for the subsequent painful liquidation and reversal.
The housing bubble and bust, in fact, was a dramatic if painful lesson on the danger of central bank generated financial repression. Drastic mispricing of savings and mortgage debt in this instance touched off a cascade of distortions in spending and investment that did immense harm to the main street economy because they induced unsustainable economic bubbles to accompany the financial ones.
The boom and bust of residential construction and the related whip-sawing of employment and supplier industry production is obvious enough. But the violent surge and plunge pictured below is not some unique artifact of a once-in-100-years housing anomaly. Instead, it was a predictable and generalizable effect of central bank driven mispricing of debt and equity capital and the availability of vast gobs of fiat credit.
The only way to describe the above happening is that it represents the violent liquidation of bubble economics. After doubling between mid-2000 and mid-2006 owing to the home price and mortgage bubble, residential construction spending plunged by 65% during the next 36 months. That was not exactly Bernanke’s “Great Moderation” so insouciantly pronounced in March 2004—hardly 24 months before the above cliff dive commenced.
And its not a matter purely for future study by the Princeton economics department, either. As President Obama would be wont to say, “some folks” got hurt along the way. In fact, nearly 50% of all employees in residential construction at the 2006 peak were out of work a few years after the bust.
Substitute the term “E&P expense” in the shale patch for “housing” investment and employment in the sand states, and you have tomorrow’s graphs—–that is, the plunging chart points which are latent even now in the crude oil price bust. But the full story of the housing bust also reminds that the long caravans of pick-up trucks which will soon be streaming out of the Bakken in North Dakota will represent only the first round impact.
The real problem with central bank financial repression is that it plants financial land-mines in hidden places throughout the financial system and real economy. Indeed, the one thing that the Keynesian money printers are correct about is that a “multiplier” effect is actually operative. That is, the chain of distortions which results from the mispricing of capital and the ballooning of fiat credit multiplies many times over as it cascades through the economic system.
So that is why its important at this juncture to review the Maestro’s favorite chart during the housing boom. During the better part of three years more than one-half trillion dollars per year entered the household spending stream right out of home equity piggybanks. By some estimates the peak rate was nearly $800 billion annualized or, as indicated above, upwards of 10% of total disposable income.
Needless to say, this artificial spending boom washed through the length and breadth of the US economy, generating sales of Coach handbags, pilates equipment, big screen TVs, time-share resort units and countless more that would otherwise not have happened. So when the air came out of the mortgage debt bubble, real PCE dropped for 20 straights months—–unlike anything previously experienced in the post-war era.
But as shown below, that was not due to some mysterious disappearance of Keynesian “aggregate demand”. Consumption spending faltered because America’s home ATM’s went dark.
Here’s the point. In an honest free market for debt and capital there would have been no MEW eruption in the first place. The incipient boom in mortgage credit would have throttled itself. That is, had the Fed not had its big fat thumb on the price of debt, interest rates would have soared, and American households would have been incented to add cash to their nest eggs, not strip mine the equity from their homes.
And that leads exactly to the next bubble——the energy boom that is now hitting the wall. The trillions of MEW that US households falsely extracted from the inflated equity value of their homes did not stay within the confines of a closed model US economy. Instead, over the decade or so before the financial crisis a goodly portion flowed into demand for shirts, shoes, electronics and other gadgets from Mr. Deng’s export factories in East China.
And during that debt-fueled US consumption boom, interest rates did not remain low because the workers in China’s new sweatshops had an outsized appetite for savings, as per the sophistry spewed out by Greenspan and Bernanke. No, it was the People’s Printing Press of China that had an humongous appetite—–that is, for mercantilist economic growth obtained by pegging their exchange rates at artificially low levels in order to keep their export factories booming.
So countering the Fed’s fat thumb on the domestic cost of debt in the US, the PBOC keep its thumb on the RMB exchange rate, thereby flooding its domestic economy with the most fantastic expansion of credit fueled investment in industrial capacity and internal infrastructure that the world had ever seen. Between 2000 and 2014, China’s credit outstanding soared from $1 trillion to $25 trillion. Consequently, its credit swollen GDP expanded from $1 trillion to $9 trillion in a comparative heartbeat; and its crude oil consumption soared from 2 million barrels per day to 8 million.
In short, the Fed exported bubble finance to the entire world, but most especially China and the EM. The upshot was an extended era of booming but phony global growth, and a consequent artificially high oil prices at $115 per barrel.
When central bank inflated oil prices were coupled with lunatic junk bond yields in the US shale patch at barely 300 bps over the central bank repressed yield on the US treasury note, the result was the same old bubble thing. Namely, a half trillion dollar flow of high yield bonds and loans to the energy sector, and a wholly artificial explosion of US shale liquids production from 1 million to more than 4 million barrels per day.
Like in the case of the housing bubble, the energy boom was an accident waiting to happen— testimony to another even grander experiment by the madmen running the world’s central banks. It is now exploding right on schedule. The plunging graphs subsequent to the housing bust are now being re-gifted to the energy patch and all the bloated, unstable chains of finance and real economic activity which flow from it.
The graph below which shows that every net job created in the US during the last seven years is attributable to the shale states will be one of the first to morph into a less happy shape.
But there is something else even more significant. The global oil price collapse now unfolding is not putting a single dime into the pockets of American households - the CNBC talking heads to the contrary notwithstanding. What is happening is the vast flood of mispriced debt and capital, which flowed into the energy sector owning to the Fed’s lunatic ZIRP and QE policies, is now rapidly deflating.
That will reduce bubble spending and investment, not add to economic growth. It’s the housing bust all over again.
Until now, when it comes to the fallout in the Russian economy from the crude price plunge leading to a collapse in the Russian currency, most of the interest has been on how the Russian financial system recovers and/or survives and just as importantly, what Putin's response would be. Just yesterday, we wrote that as a result of capital controls fears, many western banks led by Goldman Sachs had halted liquidity to Russian clients and other local entities.
However while the adverse impact on the Russian banking system has been mostly confined to the upper class - since there is virtually no middle class in the country to speak of - the second cold war of words, which rapidly morphed into a very hot financial war, is about to hit the very ordinary Russian on the street, because as Russia's Vedomosti reports, citing vegetable producer Belaya Dacha, juice maker Sady Pridoniya and others, Russian suppliers are suspending food shipments to stores because of unpredictable FX movements. And it is about to get worse: very soon Russians may have to live without imported alcohol because at least on supplier of offshore booze, Simple, halted shipments in "a two-day pause” to see what happens with the ruble, Vedomosti reports.
The full story from Vedomosti:
Food retailers are faced with a halt in the supply of deliveries, according to both suppliers and retailers. The main reason - the jumps in the currency jumps and the devaluation of the ruble, which makes it impossible to plan activities in the current environment.
The largest domestic producer of juices "Gardens of the Don" has suspended shipment of products at the old prices to a number of trading companies due to the sharp depreciation of the ruble, the company said. The reason is that the cost of its products is more than 70% denominated in foreign currencies.
Gardens of the Don will ship products "first of all to all network companies who understand the situation and accept the new prices." From 16 to 21 December 2014 the company has suspended shipping to merchants who did not give a definitive answer on the adoption of higher prices, explained the producer of such juices as "Gardens of the Don" "Golden Russia" "My" "Juicy world" and others.
Shipments were also stopped by a major distributor and importer of alcohol, Simple, told "Vedomosti" an employee of a major retailer. He was informed yesterday that the Simple warehouse would be closed. A company representative confirmed the suspension: the company took "a two-day pause."
"We, as a company that depends on the value of currencies, can do nothing in this situation. We are putting prices in rubles, prices in Uslovniye Yedintsy (UY) or 'conditional units' are not acceptable under the current laws - reported a representative Simple CEO Maxim Kashirin. "Buying the currency now or taking out a bank loan, is impossible: banks will not finance receivables ".
According to him, restaurants and retailers will pay with a long delay, the federal network - up to several months.
Kashirin says that Simple hopes to resume the next day delivery, but "The decision will largely depend on what will happen on the foreign exchange market." "If everything will fluctuate with the speed with which fluctuates now, we will not be able to give a long delay, great discounts. Most likely, we will be forced to sell, let's say, on a prepaid basis" he fears.
Large fish suppliers that operate on imported raw materials, have also begun to suspend deliveries. December 16 during the "Orgy" period in the foreign exchange market, the company suspended shipments to counterparties for one day, told "Vedomosti" employee of a large fishing company. According to him, the company now operates in normal mode, the issue of increasing prices is discussed. However, due to the sharp depreciation of the ruble with all counterparties company now works exclusively on a prepaid basis: "There are no delays."
Which is why tomorrow's annual address by Putin to the nation will be, as has been dubbed, his "moment of truth" because while patriotic fervor is still high and the population is willing to suffer runaway inflation for a short period of time, even the greatly suffered Russian population will meet its breaking point. The question is when, and whether that will take place before or after the US shale industry reaches its own breaking point, at which point Saudi Arabia will finally release the price of oil which it has, according to all the "supply-siders", been holding back. Alas, as we and others have demonstrated, that breaking point will most certainly not come for many more months to come. Which means that Putin better find an alternative soon, because if and when the food (and vodka) of Russians' is impaired, then things have a tendency to get very bad.
Mortgage applications for home purchases fell almost 7% last week, fading recent gains and hovering once again back at 20 year-lows (entirely unable to reflect the housing 'recovery' for the average joe). The plunge in applications comes as mortgage rates crash back to 4% - the lowest in 19 months. The reason - apart from unaffordability - is explained by Citi's Will Randow who notes the spillover effects of the "unequivocally good for everyone" drop in oil prices has a dramatic effect on both jobs (prolonged price drop means a loss of ~200k jobs) and housing (starts expected to drop 100k if oil prices remain low). Maybe talking-heads should reconsider that "unequivocally good" narrative.
Mortgage applications tumble back near 20-year lows...
And Architect activity is plunging...
Even as Mortgage rates near record lows...
* * *
As Citi explains, the drop in oil could be responsible for the apparent lack of demand...
The upstream oil & gas industry (i.e. extraction, support activities for operations, and related machinery manufacturing) has added roughly ~0.2M jobs since nonfarm payrolls bottomed in July 2010 (TTM avg), which represents 16% of goods producing jobs added and 2% of total jobs added since then. Assuming a prolonged decline in oil prices below $60 per barrel causes the ~0.2M jobs added to cease, our sensitivity analysis leads us to believe that ~0.1M cumulative US Housing Starts are potentially at risk, factoring in that ~0.2M jobs are eliminated at the current ~1.7 jobs per US household ratio.
Among US homebuilder end-markets, Houston and other parts of Texas appear to have the largest potential risk associated with lower oil prices and related job losses. The last time oil prices sustained (current dollar) price levels below $60 per barrel, annual TX housing permits bottomed at ~40K homes (TTM) versus ~160K homes in October 2014 (TTM), but did eventually recover, even at sustained lower oil price levels. So, similarly, it appears downside risk is near ~0.1M in incremental lost Housing Starts, predominantly in Texas.
Update: and moments after we wrote this, Sony itself decided to cancel the release of the movie.
Sony Pictures says it cancels release of 'The Interview' http://t.co/HTzu5s2kqE
— WSJ Breaking News (@WSJbreakingnews) December 17, 2014
Straight to "must watch" Netflix it is.
* * *
One of the biggest conspiracy theories in recent weeks has nothing to do with the stock market and the Fed, or with HFT manipulation, or with Ukraine's gold, or with who brought down the two Malaysian airliners, but whether the now beyond ridiculous drama surrounding Seth Rogen and James Franco's latest movie, The Interview, which has its very own cast of C-grade characters, including an alleged furious North Korean dictator and his hacker disciples, a mega corporation whose servers were hacked releasing the content of thousands of emails into the open, and of course, delighted marketing stuiod execs, has been staged and planned from the beginning. Because the latest development in this soap opera is almost as surreal as today's shocking detente with Cuba: as the Hill reports, America's top five movie theater chains have decided to pull the Sony Picture's comedy "after cyberattackers on Tuesday threatened Sept. 11-style attacks against any theater showing the movie."
Regal Entertainment, AMC Entertainment, Cinemark, Carmike Cinemas and Cineplex Entertainment will all withhold the film from their lineups, meaning “The Interview” will not appear in thousands of theaters nationwide, according to The Hollywood Reporter.
More for those who are, blissfully, unaware of the stupidity behind this latest contrived escalation, from The Hill:
A hacking group going by “Guardians of Peace” infiltrated Sony in late November, stealing massive amounts of data. The group has since been slowly leaking Sony’s internal documents, including unreleased films and Hollywood executives’ emails.
But on Tuesday, the group upped its rhetoric, threatening violence against any theater showing the film and even against any person in the vicinity of one of the theaters.
Many have speculated the cyber offensive is a North Korean retaliation for film, which depicts the fictional assassination of Kim Jong Un. Pyongyang has denied involvement in the hack but praised the action as “a righteous deed.”
Sony on Tuesday reached out to theater chains to reaffirm it would be releasing the film on Dec. 25, but said it would respect any decisions about pulling the now-controversial movie.
The National Association of Theatre Owners said Wednesday it was working with law enforcement to investigate possible threats.
“We are encouraged that the authorities have made progress in their investigation and we look forward to the time when the responsible criminals are apprehended,” the group said in a statement.
Thus far, federal officials have said there is “no credible intelligence” of an active plot.
“Individual cinema operators may decide to delay exhibition of the movie so that our guests may enjoy a safe holiday movie season,” the association said.
Regal Entertainment said in a statement it had decided to "delay the opening of the film" because of Sony's "wavering support of the film" and "the ambiguous nature of any real or perceived security threats."
The Hollywood elite quickly lashed out against the decision to pull “The Interview.”
“I think it is disgraceful that these theaters are not showing The Interview. Will they pull any movie that gets an anonymous threat now?” tweeted Judd Apatow, producer and writer of such films as “Knocked Up,” “Pineapple Express” and “Funny People.”
What goes unsaid is that as Judd Apatow, and Sony, and Sony's marketing execs know all too well, there is nothing to boost interest in a movie, especially a movie that is a spoof from the beginning, and one which certainly did not get glowing pre-release reviews, if regular viewers have i) already heard so much about it and ii) are at least indirectly prohibited from watching it.
So the question remains: is the entire drama surrounding The Interview legitimate, or is it the biggest publicity stunt in movie history?
New polls show that – even after the Senate torture report showed that torture is unnecessary and doesn’t work – Americans still think torture is necessary and works.
Americans wouldn’t support torture if they knew the following facts, proven beyond any doubt:
- All of the top interrogation experts say that torture does NOT produce actionable intelligence … even in a “ticking time bomb” scenario
- Torture doesn’t reduce terrorism. In fact, the opposite is true: it simply creates new terrorists and terrorist groups, including ISIS
- People have known for thousands of years that torture – stripped of the torturer’s lies – is really just a way to create fear … i.e. a form of terrorism. Indeed, America’s recently-leaked criteria for putting people on the terror watchlist says torture is terror (page 47-48):
- While the mainstream media gives overwhelming coverage to pro-torture guests, those people have a very strong incentive to lie. Specifically, virtually all of them are war criminals under international and U.S. law who are afraid of being prosecuted for their creation and approval of the torture program. Indeed, many are calling for their prosecution, and a former top Air Force interrogator notes that government officials knew they are vulnerable for war crime prosecution:
They have, from the beginning, been trying to prevent an investigation into war crimes.
- The Nazis used the same “Enhanced Interrogation” techniques the U.S. did … and even CALLED IT the same thing
- The Founding Fathers were strongly opposed to torture … and enshrined a torture ban in the Constitution
- This is not the first time America tortured. Americans tortured Filipinos over a hundred years ago as a way to terrorize the population into submission. CIA torture in Vietnam was so severe that most prisoners died during torture; and the torture was so horrific that those who didn't die during torture usually killed themselves soon after. Americans also taught the leaders of other countries how to torture
- The detainees held up as “poster boy” justifications for torture actually prove the opposite
(Note: Other polls reach very different conclusions about Americans' acceptance of torture.)
Back in the halcyon days of summer, it seemed nothing could go wrong.
Commodities were still things it was not utterly disreputable to own. Base metals had shaken off a springtime swoon to hit 18 month highs. Though still suffering from that enervating, post-bubble flatness, precious metals had just enjoyed a neat little 10% rally. Energy was threatening to print new 2 ½ year highs as WTI sold for more than $107 at the front and $86 at the back of the curve. Nor were people much interested in paying for downside protection: across the complex, options premia were as low as ever they had been in recent years.
Volatility – and risk measures in general – were drifting ever southwards, everywhere you looked. The US equity market’s VXO index was being quoted in single figures, the lowest in its 29-year history. As a percentage of the underlying equity level, it was barely still on the chart – 16 standard deviations below the mean and under one fifth of the median. Germany’s VDAX was doing its best to keep up (down, in fact) touching its lowest in 18 years at just over half the 23-year median reading. Emerging markets? Got it. Price high, vols low, the ratio between the two at an extreme, and the VIX-VXEEM spread less than 2% – around a fifth of that typical over its short 4-year track record.
In the fixed income market, swaption vol was back in the low 20s – a level not undercut since the Lehman crisis exploded and, adjusted for yield, the level was actually in the very first percentile of the past 18 years’ range. Baa bond spreads were down at 135bps over Treasuries, the smallest premium since early 2005, while junk bond equivalents were the lowest on record, their 220bps reading less than half the 27-year median of 460bps. Even Greece was trading a relatively rich 415bps over Bunds, their best since the T2 blow-up in 2010.
Nor was forex immune. JPM’s G7 volatility gauge stood at 5.2%, just more than half the 22-year median and – you guessed it – a record low. The EM equivalent? Yes. A record 14-year series low some 40% below the median.
Leverage is a little harder to measure since much of who borrows what and to buy what is not available for public scrutiny. Suffice it to say that not only was US margin debt printing new outright highs at $466 bln, it also set a new high water mark as a percentage of market cap. The real leverage, though, is that internal to the corporate sector itself. Taking just the US as an example, the period since 2010 (inclusive) has seen non-financial corporates retire almost $1.8 trillion in equity despite the fact that they have only had $480 billion in own funds to disperse after paying taxes and dividends and making capital outlays. This means that they have simultaneously borrowed $1.3 trillion simply in order to juice the EPS ratio – a move they have accomplished by issuing a like amount of bonds for a sum which equates to around 10% of aggregate book value.
No-one watching these markets will need to be told that, just six months on, we live in a very different world, indeed. Suffice it to say that bond vol is 10% higher, FX vol has more than doubled to Taper Tantrum levels, junk is trading not 220bps over, but 500 – half way back to the climax of the Euro storm of 2011 before Draghi uttered the magic words ‘whatever it takes’. Outright panic is a very real possibility, especially in today’s lightly buffered, Volcker rule markets.
Coming in the final quarter of the year, the tumult has also upset that cosy if cynical compression of positioning into window-dressed winners and universally-shunned losers. Everyone who was anyone was long the Nikkei, short the yen, didn’t you know, Dahlings? Rates in the US were obviously headed higher, so both percentage and absolute eurodollar shorts were respectively close to and at record levels and net note and bond positions were similarly bearish. The dollar index – having finally steamrollered the last reluctant sceptic of its rise – had garnered spec longs to the tune of three-quarters of all-time high O/I. The euro net spec short was half of record O/I, the yen equivalent accounted for 70%.
Everyone with the same viewpoint, far too many interlinked positions, far too much lazy consensus. And now – BANG! No wonder the reaction has been savage.
Look at the graphs. Since 2008, US break-even inflation has wiggled up and down in a broad consonance with the price of crude. Given such behaviour from a flawed, market-generated reading conferred with far too much significance by a Fed desperate to pretend it is at least partly deterministic in its actions, it should not be hard to imagine how much the deflationistas are bleating now that the black stuff is spiralling earthward out of its SuperCycle pretensions like an overeager Icarus cursed with Virgin Group sponsorship.
Junk was likewise in loose synch with the same gyrations, long before every newly-born shale doubter became an expert on the drillers’ credit ratings. Likewise, FX vol followed much the same beat, partly because anxiety tends to rise when the greenback, too, is on the up. Weaker commodity prices also go in the market’s mind with demand side weakness, especially in China, and with knock-on export earnings effects in producers like Brazil and South Africa and so link back to EM valuations that way, too.
Similarly, after a long time in the doldrums, gold has been relatively – if not yet absolutely – perky of late as that classic ‘bird of ill omen’ ratio – the price of the metal in terms of a basket of industrial commodities – is starting to rise along with that of a long bond not a million miles away from testing its 2.45/50 double bottom. And this, in the case of bullion, despite an almost overnight shift in tin-hat theorising from thinking that the very tight cash market of a week or so ago was all due to Moscow’s anti-dollar acquisition to fretting that its latest reversal is all down to that same Moscow frantically unloading the stuff once more.
So now it is all starting to unravel. Since OPEC’s demarche last month, as we know oil has plunged $50/bbl at the front, $20 at the back and could well be heading for $40 a pop, both on current technicals and on historical precedent (see chart). Gulf stock markets – especially that serial bubble-blower, Dubai – have strongly felt the chill. Across the Atlantic and even reckoned with its frankly unreal official peso rate, the Merval is off 45% when translated back into dollars, the Bovespa and the Colcap have shed 40%, while the Bolsa is down 25%, all on the same basis.
Russia is another case entirely. After several uneasy months, confidence has finally crumbled with CDS spreads soaring from 100 to fast approaching 600, while both the RTS index and the ruble have lost around three-fifths of their value, a calamitous move for the latter not a world away from the three-quarter loss it suffered during the nation’s bankruptcy in 1998. Though the causation may be working in reverse today – and though Russia was not alone in toppling into the financial abyss back then – no-one will wish to dwell on what happened to the price of oil ($10/bbl), gold ($250/oz), or copper ($1,400/tonne) in the aftermath of that particular implosion!
Eastern Europe as a whole is beginning to wobble. Budapest in USD has touched a 5 ½ year low, leading the MSCI regional index to another slide of 40% from those late June highs. Raiffeisen Bank – notable for its lending into and beyond the hinterland of the old Austro-Hungarian empire – has come under the cosh as a result, the shares suffering a black run descent of 60% since June to a suffer the ignominy of hitting a post-flotation low. More and more, the dreaded word ‘contagion’ is beginning to be whispered.
Courtesy of the discussion of it in the BIS’ latest quarterly, the focus has also been on the high volume of cross-border leverage prevailing – much of it hidden away from regulatory fiat and popular consciousness in offshore borrowing via foreign non-bank subsidiaries. The price action so far shows that to the extent this has been a feature, it has been mostly about unwinding yen carry trades, the unit having retraced as much as six big figures versus the US, much to the chagrin of those arch competitive devaluers, Kuroda and Abe, no doubt.
What has not yet begun to be priced in, however, is the possible cost of Russia succumbing to either an involuntary default or a deliberate moratorium. Even to suggest that latter might seem a step too far, but there must surely be limits to the sphinx-like patience of even a Putin or a Lavrov.
Between them, these two have so far striven hard to present, especially to the emerging nations, a front of international respectability and reasonableness and to portray their land as the victim of a concerted attempt at destabilization launched by the hardliners in the America foreign affairs hierarchy. Thus, the only pre-emptive action they have taken to date in the wholly unnecessary conflict with the Ukraine has been to secure their strategic – and, they would add, historic – foothold in the Crimea. Even here, they then arguably secured the mandate of the overwhelming majority of the people for their intervention.
But now the stakes have been raised by the acute financial disruption they are suffering, perhaps to the point where it may no longer be wise to play their long, patient game of waiting for the regime in Kiev to collapse of its own accord and for Europe to baulk at the costs of underwriting American Full Spectrum Dominance. Moreover, the US congress has just passed – in the most morally questionable, if procedurally correct, fashion – a bill which several major figures at home and abroad have stated is tantamount to a declaration of war on Russia, a bill to which it appears the Nobel Prize winner manqué in the White House will append his signature this week.
If so, how might the Kremlin respond? Well, certainly not with military force. But it could impose a grain embargo, a disruption which would serve additionally in reserving the harvest for its own people at lower cost than the crop would now bring on world markets. It could perhaps demand payment for gas deliveries in rubles, not dollars, thus forcing the Europeans to take up the defence of the currency on its behalf. But beyond all this, it might impose capital controls in such a manner as to lock Western funds in place and to suspend all payments of principal and interest thereon until a wider settlement of the dispute was achieved.
In this context, it helps to be aware that, at end June, the BIS says that member state banks with money out to the country stacked up as follows:-
France, $51 bln; Italy, $29 bln; USA, $23 bln; Germany, $22 bln; Japan, $19 bln; NL, $17 bln; UK, $15 bln; Sweden, $10.5 bln; Swiss, $6 bln – in a total of $235 bln. Then there was the matter of the $253 bln in international bond issuance by Russia, $180 bln in the name of banks and other financial institutes, $39 bln raised by non-financial corporates and $35 bln by the government.
[In passing, consider that each of these figures individually were comparable in scale to the domestic security market which stood at $286 bln while banks’ domestic claims amount to around $500 bln].
Clearly such sums are subject to downward revision in light of the withdrawals that presumably lay behind the currency moves but, nevertheless, they must remain sizeable. Were they to be frozen, then in place of some of the Western chickenhawks puffing up their chest feathers about excluding the Russians from SWIFT, the latter would have thrown a rather large spanner of their own into the international plumbing in anticipation. After all, financial warfare can be a two-edged sword, can it not?
Suffice it to say in conclusion that the uncertainties presently being generated have the potential to undermine two crucial kinds of trust – that one must have in the merits of one’s own exposure and that equally critical faith in the reliability of one’s counterparties. If it does, the third great bull run of the 20-year age of Irrational Exuberance could well reach its culmination, after a rally of almost exactly the same magnitude as and of similar duration to the one which ushered it in, all those years ago.
More crazy pills...
Another day, another face-ripping short squeeze... this was the biggest day for "most shorted" stocks in over 3 years!!!!
— Eric Scott Hunsader (@nanexllc) December 17, 2014
...that lifted stocks magnificently from last night's closing lows to the week's highs...
Small Caps rip in a massive short squeeze... up 2% on the week now!!!
6000 busted trades and counting - about 3 to 5 each second
— Eric Scott Hunsader (@nanexllc) December 17, 2014
S&P's best day since Jan 2013... ripping back above the 50DMA and 100DMA
Don't get too excited...
Energy credit did indeed raly on the day - how could it not - but we suspect stocks are getting a little ahead of themselves
Treasury yields rose on the day...post FOMC
rates decoupled from stocks
The USDollar surged...
Silver was relatively flat (but down hard on the week), goldslipped lower after FOMC, oil pumped and dumped...
"Russia is at a critical juncture and given the sanctions placed upon them and the rapid decline in oil prices, they may be forced to dip into their gold reserves, if it happens it will push gold lower." That is what, according to some people Bloomberg has quoted, is in the cards.
Russia’s surprise interest-rate increase failed to stop the plummeting ruble. Another tool available to repair economic havoc caused by sanctions and falling oil prices: selling gold.
Russia holds about 1,169.5 metric tons of the precious metal, the central bank said last month. That’s about 10 percent of its foreign reserves, according to the London-based World Gold Council. The country added 150 tons this year through Nov. 18, central bank Governor Elvira Nabiullina told lawmakers. The Bank of Russia declined to comment on its gold reserves.
Russia’s cash pile has dropped to a five-year low as its central bank spent more than $80 billion trying to slow the ruble’s retreat. The currency’s collapse combined with more than a 40 percent tumble in oil prices this year is robbing Russia of the hard currency it needs in the face of sanctions imposed after President Vladimir Putin’s annexation of Crimea. A fall in gold prices signals that traders are betting that the country will tap its reserves, according to Kevin Mahn, who oversees $150 million at Parsippany, New Jersey-based Hennion & Walsh Asset Management.
“Russia is at a critical juncture and given the sanctions placed upon them and the rapid decline in oil prices, they may be forced to dip into their gold reserves,” Mahn said. “If it happens it will push gold lower.”
But others are less convinced.
“There are a number of ways that they could use their gold,” Robin Bhar, an analyst at Societe Generale SA in London, said today by phone. “They could use it as collateral for bank loans, or for loans from multi-lateral agencies. They could sell it directly in the market if they want to raise foreign-exchange” reserves, including to get more dollars, he said.
If Russia decides to sell, the figures to confirm the move wouldn’t be available for a few months, Bhar said.
Selling gold is usually “one of the last weapons” for central banks because some use the metal to help back their currencies, George Gero, a precious-metal strategist at RBC Capital Markets in New York, said in a telephone interview. “They are probably still accumulating gold and keeping it for a bigger crisis,” he said.
While some suggest the accumulation was "tradition" it is still nonetheless an impressive aggregation of the barbarous relic:
So given the efforts to build this gold-backing for their nation's currency, do we really expect Putin to now dump his physical: or perhaps more strategically suggest a true gold-backed currency and jawbone the currency that way?
Moments ago, after Yellen earlier explained that the Fed may hike rates at any moment, and certainly not only during press-briefing days, she also explicitly, and very unexpectedly, said that the Fed will likely not hike for a "couple" of meetings. And when she was subsequently asked to explain what "a couple" means, she further explained that it means "two." As a reminder, this comes from a Fed chairwoman who had a trial by fire when, fresh after replacing Bernanke, she locked herself in the "6 month" calendar interval. In other words, she knows not to give the market a timing bogey. And still she did so. Which, quite explicitly, means that anything starting with the 3rd meeting, currently scheduled for April 28-29, 2015, and onward is very fair game and the market will be foolish to expect the Fed not to follow through with this warning, a Fed which is already dangerously close to losing all credibility it has.
And another way of stating it comes from Peter Tchir of Brean Capital. His take:
Looks like the April/May meeting could be the date. 3 reasons:
1) A couple means 2 - just stated
2) then could host a conference call on a non press conference meeting
3) she said, i keep telling the market what we are going to do, i wash my hands of the market if they won't listen
She also does not get about oil as transitory. She is remaining very consistent. Core is what matters.
This is hawkish:
Short treasuries 3 year in particular again
Short front end eurodollar futures
Hit any last hy energy bond bids while they remain
Buy IG CDX23 protection (short)
Russia’s currency market witnessed further huge volatility again today. The finance ministry said it would start selling foreign exchange which are primarily in dollars. This appeared to reduce selling pressure on the battered rouble.
The fall of the rouble this year has been severe, with a 50 percent fall against the dollar and of course gold this year. The slide has been precipitous as in the past two days alone, it fell about 20 percent against the dollar and gold.
On Monday, the ruble fell 10% against the dollar and gold followed by another crash of 11% on Tuesday, despite a massive rate hike.
The heavy selling pressure this week, made the central bank sharply increase its key interest rate by an unexpected 6.5 percent or 650 basis points. The move did little to buttress the currency in the short term as speculators and traders continued to sell the rouble.
Momentum is clearly down; computer-driven markets and increasing dominance of algorithmic or black box trading is exacerbating the rouble’s short term weakness. However, the sharp increase in interest rates and the fact that the fundamentals of the Russian economy remain reasonably sound and not much worse than many western economies, will support the rouble. It is likely to stabilise at these levels and recover in the coming months.
It is also important to note that political and economic relations between Russia and China are very good at the moment and China would likely provide financial assistance – if indeed that is needed.
The rouble rout is due in part to the collapse in oil and now very low oil prices. It may also be due to the effects of western sanctions. This is likely to rally the Russian people behind Putin and will not have the impact that western leaders hope it to have.
The effects of the crisis are already being felt in western Europe and in the global financial system.
Austria’s third largest bank, Raiffeisen Bank lost 10.3% of it’s share value on the news that the Russian central bank had raised rates a stunning 6.5% overnight on Monday.
It is worth remembering that it was the bankruptcy in 1931 of Austrian bank Creditanstalt’s, founded by the Rothchild family, that resulted in a new global financial crisis and ultimately the bank failures and deep recessions of the Great Depression.
In France, Societe General – a bank which is also exposed to the Russian economy to the tune of €25 billion – lost 6.3% of it’s share value. If the Russian crisis continues, and there is little to suggest it won’t – with the U.S. set to impose a new round of sanctions, the repercussions for the west and the global economy could be drastic.
In the modern, interconnected, globalised world of today, there is a real sense that and a risk that western leaders are “cutting off our nose to spite our face.”
The global banking system has a very limited capacity to absorb sizeable losses and the risk of contagion is as high now as in 2008. It may be the case that western banks and institutions have more to lose than Russia in the longer term.
Russia is still energy and resource abundant with close economic ties to the industrialising East, Asia and China. It also has substantial gold reserves – some 10% of their sizeable foreign exchange reserves of $370 billion.
It’s oil companies are reasonably well insulated from the crisis as the rouble value of their exports has soared.
It should also be noted that what looked like a public display of weakness, that was Monday night’s rate hike, is most uncharacteristic of Russia, especially under Putin. In the murky goings on of geopolitics, it is wise to question every action and motivation. Some have suggested that the move could lead to severe losses in the interest rate market and the multi trillion interest rate swap market and this could be part of the reason for the move.
Putin is well aware of Warren Buffett’s “financial weapons of mass destruction”.
In the event of another banking crisis due to financial instability, market crashes and or western banks exposure to Russia, larger deposits will be confiscated by banks as “bail-in is now the rule,” to quote Irish finance minister Michael Noonan.
The experience of Russian holders of gold since this crisis began is worthy of note as evinced by the chart above. Gold has acted as a very effective insurance policy against financial instability and currency instability for those ordinary Russians prudent enough to have allocated some of their savings to gold as a diversification.
Must-read guide to and research on bail-ins can be read here:
Guide: Protecting your Savings In The Coming Bail-In Era
Today’s AM fix was USD 1,199.00, EUR 962.36 and GBP 763.16 per ounce.
Yesterday’s AM fix was USD 1,199.25, EUR 960.25 and GBP 763.95 per ounce.
Gold in Singapore was flat again overnight with gold hovering just below $1,200 per ounce before slight gains in London saw gold touch the $1,200/oz level. Spot gold was up 0.3% at $1,199.66 an ounce by late morning in London. A volatile session yesterday, saw a high above $1,221 then a drop to a one-week low of $1,188.41, before finishing stronger.
The electronic gold market or futures gold market continues to have all the hallmarks of a managed market and gold seems tethered to the $1,200/oz level for now despite the very bullish geo-political backdrop and robust global demand.
There is a lot of market chatter about Russia selling gold – mostly by non gold experts and people who are not renowned for analysis of the gold market. The chatter is just that chatter as Russia is likely to keep accumulating gold rather than sell it.
Russia is unlikely to sell gold in any meaningful way as long as Putin remains at the helm. Indeed, while a wily Putin may allow an announcement regarding gold sales and official statistics may show a reduction in reserves, Putin may adopt the Chinese gold policy and not be so transparent regarding the Russian gold reserve accumulation and reserves in general.
Traders await the outcome of the U.S. Federal Open Market Committee’s last policy meeting of the year, where traders will look for a clue as to when they may raise interest rates.
The Fed’s statement is at 1900 GMT and analysts are looking for the phrase “considerable time” to be removed as a signal that the Fed may take action in 2015 to hike rates. As ever it is important to watch what the Fed does rather than what they signal they might do.
SPDR Gold Holdings, the world’s largest gold ETF, saw a second consecutive daily outflow on Tuesday, of 1.8 tonnes, after they posted their largest weekly rise last week since July.
In other precious metals, silver climbed 1% to $15.92 an ounce and platinum up 0.7% at $1,197.52 an ounce. Palladium was up 0.8% at $785.31 an ounce.
Get Breaking News and Updates On Gold Here
It was all going well for Janet - stocks were up, crude was down - and then she said...
- YELLEN SAYS ALMOST ALL PARTICIPANTS SEE RATE INCREASE IN 2015
Sending stocks back below pre-FOMC levels and sparking a tumble in Gold, a surge in The Dollar, and slip higher in yields.
and the reaction across assets
Stocks are up and crude oil is down following The Fed's confusing statement. Treasury yields whiplashed lower then higher and are holding slightly lower. Gold did the same - holding slightly above pre-FOMC levels.
Bonds up, Stocks up, Gold up, Crude down...
Crude Oil has given back all its spike gains...
Having added further confusion to the markets by keeping "considerable" and adding "patient", suffered 3 dissents (1 dove, 2 hawks), and explaining that the energy price drop is "transitory", we suspect Fed Chair Janet Yellen will have some 'splainin' to do during today's press conference. Is "patient" longer than "considerable time" and just what (Dow Jones Industrial Average) data is the Fed dependent on now?
Presenting the quarterly change of the Fed's "dot plot", showing where the Fed thinks the Fed Funds rate will be at the end of 2016. The Fed is so hawkish about the upcoming rate hikes, that since September, when the median dot was at at 2.875%, the dots, "surprisingly", have declined across the board and now have a median of 2.50%.
With expectations that the FOMC would drop "considerable time," ignore foreign market instability, and shrug off HY credit's demise (as they had previously said it was a bubble), the members did not let anyone down...
- *FOMC SAYS IT CAN BE 'PATIENT' IN APPROACH TO RAISING RATES
- *FOMC DECLINES TO MENTION RECENT GLOBAL MARKET INSTABILITY
- *FOMC SAYS PATIENT APPROACH 'CONSISTENT WITH OCT. STATEMENT'
- *FISHER, PLOSSER, KOCHERLAKOTA DISSENT IN FOMC DECISION
For the 3rd FOMC meeting in a row, equity markets have surged (and decoupled from bonds); we will soon see if history repeats a third time.
Pre-FOMC: S&P Futs: 1988.00, 10Y 2010%, Gold $1195, WTI $57.50
What happened the last 2 times...
The Fed goes on to say...
- *FOMC SAYS JOB MARKET UNDERUTILIZATION `CONTINUES TO DIMINISH'
- *FOMC SAYS LABOR MARKET `IMPROVED FURTHER'
- *FOMC SEES INFLATION RISING TO TARGET AS LOW OIL IMPACT FADES
- *FED SEES JOBLESS RATE AT FULL EMPLOYMENT BY LATE-2015
- *FED SEES 2015 GDP GROWTH OF 2.6%-3%, UNCH VS SEPT. EST
- *FED SEES INFLATION AS LOW AS 1% IN 2015 VS 1.6% IN SEPT. EST.
- *FED SEES 2015 JOBLESS RATE 5.2%-5.3% VS 5.4%-5.6% IN SEPT. EST
- *FED MEDIAN FED FUNDS RATE 2.5% END-2016 VS 2.875% SEPT. EST.
* * *
And the redline from October:
Since the beginning of this year, Wall Street economists and analysts have been consistently prognosticating that following the Federal Reserve's latest bond buying campaign, economic growth would gather steam and interest rates would begin to rise. This has consistently been the wrong call as I discussed in April of this year in "Interest Rate Predictions Meet Bob Farrell's Rule #9:"
"An interesting article hit my inbox this morning from WSJ MarketWatch which was titled '100% Of Economists Think Yields Will Rise Within 6 Months' From the article:
'Economists are unwavering in their assessment of where yields are headed in the next half year.
Jim Bianco, of Bianco Research, points out in a market comment Tuesday that a survey of 67 economists this month shows every single one of them expects the 10-year Treasury yield to rise in the next six-months.'
This is very striking from the standpoint that a separate poll of economists showed that there were none, zero, nada expecting an economic contraction either.
With literally 100% of all surveyed economists bullish on the economy, it suggests that there is nothing but clear sailing ahead for investors. Of course, it is also important to remember that it was this same group of "economists" that have been predicting the return of economic growth and higher interest rates for the last three years, as well. As we enter into the sixth year of the current economic expansion the unanimous 'bullish bias' is indeed fascinating."
Almost 18-months ago, after interest rates initially spiked from historic lows, I began writing then that the bond "bull" market was not yet over despite the litany of articles and punditry claiming otherwise. Furthermore, I stated that interest rates would be lower in the future as the three primary ingredients needed for higher rates were missing: rising inflation, increased wage growth and economic acceleration.
So, as we pass the 6-month mark for those predictions, let's take a look at where things stand now that the Federal Reserve's latest QE campaign has come to an end.
As I discussed earlier this week on Fox Business News, the call for lower interest rates has continued to confound and frustrate the majority of mainstream analysts.
Watch the latest video at video.foxbusiness.com
Will long-term interest rates eventually rise? Yes. However, as stated above, the ingredients necessary for a sustained rise in borrowing costs are not currently embedded within the economy. Furthermore, as I wrote previously, the current level of interest rates, given global economic conditions, is not unusual. To wit:
"Since then rates have continued to be in a steady decline as real economic strength has remained close to 2% annually, deflationary pressures have risen and monetary velocity has fallen. The chart below is a history of long-term interest rates going back to 1857. The dashed black line is the median interest rate during the entire period."
"Interest rates are a function of strong, organic, economic growth that leads to a rising demand for capital over time. There have been two previous periods in history that have had the necessary ingredients to support rising interest rates.
Currently, the U.S. is no longer the manufacturing powerhouse it once was and globalization has sent jobs to the cheapest sources of labor. Technological advances continue to reduce the need for human labor and suppress wages as productivity increases. As discussed recently, this is a structural problem that continues to drag on economic growth as nearly 1/4th of the American population is now dependent on some form of governmental assistance."
Importantly, since 2009, interest rates have only risen during the Federal Reserve's QE campaigns as money was forced out of "safe haven" investments like bonds into "risk" assets in the equity markets. This, of course, was what was intended by the Federal Reserve under the assumption that inflating asset prices would lead to increased consumer confidence levels and higher rates of consumption.
(Note: As shown above, interest rates peaked during the latest QE program just as the Federal Reserve announced their first step in reducing bond purchases. Equities, at least for the moment, have appeared to peak as the last of the liquidity support was extracted from the financial markets.)
IF the Federal Reserve remains flat on monetary interventions, the current trend of interest rates suggests a retest of 2012 lows as economic growth slows domestically due to global deflationary pressures.
The Dollar & Oil
Like interest rates, the dollar has also been driven by the Fed's monetary injections. Just as with interest rates, the dollar is a "safe haven" investment during times of global weakness and deflationary pressures. As shown below, the dollar has rallied strongly when the Federal Reserve has extracted support from the financial markets which has made "risk" based investments much less attractive.
Since oil is traded in US dollars globally, it is also not surprising to see the effect of the Fed's interventions applied to oil prices.
As shown, oil prices rose sharply during QE programs as the push for "risk" drove money out of "safe haven" investments of the dollar and bonds and into oil contracts. As monetary interventions were extracted, or as during Operation Twist where the Federal Reserve was not actively monetizing debt, oil prices trended lower. The latest plunge in oil prices coincided with the end of the Fed's latest QE program which, as expected, sent oil prices and interest rates lower and the dollar higher.
Another Year Of Bond Bear Disappointment
The recent decline in interest rates should really not be a surprise as there is little evidence that current rates of economic growth are set to increase markedly anytime soon. Consumers are still heavily levered; wage growth remains anemic, and business owners are still operating on an "as needed basis." This "economic reality" continues to constrain the ability of the economy to grow organically at strong enough rates to sustain higher interest rates.
This is a point that seems to be lost on most economists who forget that the Federal Reserve has been pumping in trillions of dollars of liquidity into the economy to pull forward future consumption. With the Fed now extracting that support, it is very likely that economic weakness will resurface since the "engine of growth" was never repaired.
As I stated at the start of this post, while interest rates are indeed low currently, it is not the first time that we have witnessed such levels. Furthermore, interest rates can remain low for a very long time when there is a lack of sufficient economic catalysts to sustain the drag imposed by higher borrowing costs.
For now, as a contrarian investor, literally "everyone" remains piled onto the same side of the interest rate argument even after 18-months of being wrong. That alone is enough to keep me bullish on bonds and other interest-sensitive sectors of the economy for now.
Back in March, otherwise very under-the-radar Swiss commodities trading giant Gunvor and the fifth largest oil trader in the world, made headlines in the press when one of its then-Russian owners, billionaire Gennady Timchenko (estimated net worth of $8.5 billion), sold his entire 44% stake in the company to his partner in the firm, Torbjorn Tonqvist, just a day before the US revealed its first round of sanctions against individuals affiliated with the Putin regime. Timchenko was among them. As a result of the sale, however, Gunvor avoided falling on the US sanctions list and a Treasury official said that "Gunvor Group Ltd. isn’t subject to automatic blocking from dealing with U.S. persons under Russian sanctions because co-founder Gennady Timchenko owns less than 50 percent of the company."
Since then the Geneva-based company rarely appeared in the media which is how the nondescript company lliked it. Until last week, that is, when Bloomberg reported that the company was giving up trading physical precious metals, read gold, less than a year after the commodity house started a business dedicated to buying and selling gold. Gunvor is, or rather was, one of the few large commodity firms that handles precious metals. The move into gold was part of an expansion into non-oil businesses that now include iron ore, industrial metals and natural gas. Gold trading was done by a handful of people in Singapore and Geneva.
Gunvor's move away from physical commodities trading in itself is not surprising: recall that first it was Germany banking titan Deutsche Bank which announced it would no longer trade physical precious metals last month.
According to Bloomberg at least two traders are leaving the company in Geneva and Singapore: Francois Beuzelin, hired in 2012 as head of metals in Geneva, and Cedric Chanu, who started in Singapore in January as a precious-metals trader. Chanu declined to comment by phone and Beuzelin didn’t answer calls to his office nor an e-mail sent via his LinkedIn account.
But the biggest surprise in this story was the reason why Gunvor chose to discontinues its gold trading. Per Bloomberg, "executives decided to abandon the precious metals trading business partly because of difficulties in finding steady supplies of gold where the origin could be well documented, one of the people said."
And while we would certainly love to learn more about this problem of "undocumented" physical gold, just like that we have the most definitive confirmation yet that the story surrounding China's rehypothecated commodities scandal in the port of Qingdao which as previously reported included copper and aluminum and which mysteriously disappeared just as abruptly as it first appeared, not only also involved the precious yellow metal but never really went away, and instead what appears to have happened is that "robosigned" physical gold - or gold whose ownership traders are unable to validate - has now flooded into the global trading infrastructure.
Because if the world's fifth largest trader of commodities has chosen to outright not trade gold, and thus not generate value for its shareholders over risks and fears that another, or two, or three, or a countless number of other prior "owners" may come knocking one day and demanding delivery of gold whose origin could not be documented by its trading intermediaries, and whose ownership link Gunvor is unable to trace, then just what on earth is really going on with the world's physical gold inventory (here's looking at you, Chinese gold-backed Commodity Funding Deals), and just what is the catalyst that will unleash what is essentially the infamous US mortgage robosigning scandal onto the gold arena, at which point owners of gold realize the gold they thought they owned, even if held safely in a deposit box deep in a gold vault in a safe offshore location, in reality "belongs" to someone else?