29 August 2015 — Saturday
YESTERDAY in GOLD, SILVER, PLATINUM and PALLADIUM
[NOTE: I’m travelling today and won’t be answering my e-mails until very late tonight EDT, or maybe even early Sunday morning. – Ed]
With some obvious headwinds, the gold price rallied in morning trading in the Far East—and then traded sideways starting just before lunch Hong Kong time. As I mentioned in The Wrap yesterday, the selling began at precisely 9:00 a.m. BST—and the low tick of the day came shortly after 12:30 p.m. in London. The price rallied rather smartly from there, but you can tell where “da boyz” showed up starting around 9:45 a.m. EDT, with the high tick coming at 10:30 a.m. It got sold down until shortly before noon in New York, rallied quietly for 30 minutes—and then traded sideways into the 5:15 p.m. close of electronic trading.
The low and high ticks were recorded by the CME Group as $1,140.30 and $1,123.10 in the December contract.
Gold closed in New York yesterday at $1,133.80 spot, up $8.30 from Thursday—and well off its high tick. As you can already surmise, if it had been allowed to trade freely, it would have closed ‘Materially‘ higher. Net volume was fairly decent at 135,000 contracts, with a large amount of that used to cap the price in New York.
Here’s the 5-minute tick chart for gold—and as you can see, the only volume that really mattered occurred between 7 and 11 a.m. MDT on this chart, which was between 9 and 1 p.m. EDT. The vertical gray line is midnight Thursday night—and the ‘click to enlarge‘ feature works wonders.
I should also point out that even through there was decent price action in Far East and early London trading on their Friday, it didn’t matter much, as there was virtually no volume associated with it. It’s only when “da boyz” and their HFT trading showed up in New York yesterday that it mattered. If they weren’t there, we would have had a new and astronomically higher gold price by Friday’s close.
And it’s no surprise that silver followed gold around like a shadow—and like Thursday’s trading action, their respective price charts are virtually interchangeable.
The high and low ticks in this precious metal were reported to be $14.65 and $14.34 in the September contract.
Silver was closed in New York yesterday at $14.595 spot, up 8 cents from Thursday’s close. Net volume as September went off the board was very decent at 47,500 contracts, with the vast majority of it in the new front month, which is December.
Platinum’s chart pattern was identical to gold and silver’s as well, complete with the 10:30 a.m. capping of the price and subsequent sell-off. Platinum was closed at $1,016 spot, up 17 dollars from Thursday.
Palladium rallied $18 in the first two hours of trading starting at 6 p.m. on Thursday evening in New York. The price got capped at 8 a.m. Hong Kong time—and it traded pretty flat until the Zurich open. I hit its $560 spot low tick at 11 a.m. Zurich time—and then rallied steadily until just before the COMEX close, before getting sold down a few dollars. It then traded virtually ruler flat into end of electronic trading. Palladium finished the Friday session at $586 spot, up 23 dollars from its Thursday close—and up $67 bucks from it $519 low tick on Wednesday morning.
The dollar index closed late on the Thursday afternoon in New York at 95.79—and didn’t do much until it began to sell off shortly before London opened. The 95.38 low tick came about two minutes after London opened—and the subsequent rally made it up to 96.32 around 11:45 a.m. in New York. By the COMEX close it was back to around 85.86 before rallying back a bit into the close. The dollar index finished the Friday session at 96.08—up 29 basis point from Thursday.
And here’s the 6-month U.S. dollar index chart so you can keep watch over the medium-term trend.
The gold stocks gapped up a bit—and then ran up to their high tick, which came at 10:15 a.m. EDT—and about 15 minutes before “da boyz” stepped on the gold price. By around 12:15 a.m. they were back to where they started the day, but then a rally developed that carried them almost back to their high tick by the close, ruined only by a day trader dumping their positions just minutes before the close of trading. The HUI closed up 4.30 percent.
The silver equities followed a somewhat similar trajectory, expect their highs came at 10:30 a.m. in New York when the silver price got capped—and the sell-off after that wasn’t nearly as brutal. By shortly after 11 a.m. EDT, they were back in rally mode—and Nick Laird’s Intraday Silver Sentiment Index finished the Friday session up 5.52 percent.
For the week the HUI closed down 8.36 percent—and the ISSI finished lower by 4.40 percent. However, both are still up on the month—the former by 3.93 percent—and the latter by 3.35 percent.
The CME Daily Delivery Report turned up the 58 missing gold contracts, as they were issued by HSBC USA out of its in-house [proprietary] trading account. Goldman Sachs stopped 49 of them in its in-house trading account. Delivery is Monday—and August is now done.
The standout feature of the August delivery month was that Goldman Sachs stopped 2,500 gold contracts for its in-house [proprietary] trading account. That was almost 50 percent of the 5,113 gold contracts that were issued in that month—and I know that Ted will have more to say about this in his column this afternoon, as he was talking about it on the phone yesterday.
First Day Notice for delivery into the September contract showed that 4 gold and 167 silver contracts were posted for delivery within the COMEX-approved depositories on Tuesday. In silver, JPMorgan was the short/issuer on 133 contracts out of their client account—and the only other short/issuer of note was ABN Amro with 32 contracts out of its client account. The only standout on the long/stopper side was Canada’s Scotiabank with 50 contracts, as there were a dozen stopping firms in the report. The link to yesterday’s Issuers and Stoppers Report is here—and it’s worth a look.
The CME Preliminary Report for the Friday trading session showed that with the August deliveries done—and September off the board—there are currently 272 gold contracts open for delivery in September, minus the four posted above. Silver’s open interest in the September delivery month is currently 2,218 contracts, minus the 167 mentioned in the previous paragraph. I fully expect September o.i. in both gold and silver to drop a bit more in Monday’s Preliminary Report—and I’m somewhat surprised that, at the moment, the number of silver contracts left open in silver is very much on the smaller side. It will be interesting to see who the issuers and stoppers are as the September delivery month unfolds—and whether or not more contracts get added to the delivery list as the days move along. This happened a fair amount in July—and there’s no reason why it can’t, or won’t, happen in the September delivery month.
There were no reported changes in GLD yesterday—and as of 7:31 p.m. EDT yesterday evening, there were no reported changes in SLV, either. I checked back several times as Friday evening went along, with no updates—and lo and behold when I checked again at 1:51 a.m. EDT this morning, it showed that an authorized participant had added 954,434 troy ounces.
There was another sales report from the U.S. Mint yesterday. They reported selling 9,500 troy ounces of gold eagles—and 1,000 one-ounce 24K gold buffaloes. They didn’t sell any silver eagles.
Month-to-date the mint has sold 87,000 troy ounces of gold eagles—17,500 one-ounce 24K gold buffaloes—and 4,180,000 silver eagles. Because the mints is unofficially back on rationing because they can’t meet demand, especially in silver eagles, a silver/gold ratio for sales should be looked at with deep suspicion. But working with these numbers here, it works out to precisely 40 to 1, which certainly isn’t close to a true indication at all.
There was very little movement in gold over at the COMEX-approved depositories on Thursday. Nothing was reported received—and 12 kilobars were shipped out of the Manfra, Tordella & Brookes, Inc. depository.
There was very little activity in silver, as only 919 troy ounces were reported received—and 33,259 troy ounces were shipped out. None of this activity involved JPMorgan.
Over at the COMEX-approved gold kilobar depositories in Hong Kong on their Thursday, they reported receiving 709 kilobars—and shipped out 8,431 of them. All of the in/out activity was at the Brink’s, Inc. depository—and the link to that action, in troy ounces, is here.
The Commitment of Traders Report, for positions held at the close of COMEX trading on Tuesday, August 25 was actually better than I was expecting.
There was virtually no change in silver at all, which I found surprising considering the fact that the 50-day moving average was taken out with real authority to the down side on Monday. Anyway, the numbers are what they are—and one has to assume that they were reported in a timely manner.
In silver, the Commercial net short position increased by a smallish 577 contracts. The new Commercial net short position now sits at 119.9 million troy ounces of paper silver.
Under the hood in the Disaggregated COT Report, the technical funds in the Managed Money category sold 2,310 long positions, but they also covered 2,553 short contracts—and that was something Ted wasn’t happy to see, nor was I. This is rocket fuel being tossed away. The trading in the “Other Reportable” and “Nonreportable” categories during the reporting week pretty much cancelled each other out as well. This was a ‘nothing’ report for silver.
But don’t forget the big down day we had on Wednesday, the day after the cut-off for yesterday’s COT Report. “Da Boyz” took silver down to a new low tick for this move down—and to a price that hasn’t been seen since mid 2009. That move by itself would have ensured that the current COT structure for silver is much more bullish than the numbers in the current report indicate. In some ways, and because of Wednesday’s price action, this COT Report is already “yesterday’s news”.
Scrolling through copper on the way to gold, I see that the Commercial long position in copper is now getting whittled away, as they reduced their net long position by another 4,099 contracts during the reporting week—leaving them with 31,850 contracts, down from the 40,000 net long contracts [1 billion pounds] they had two weeks ago.
The deterioration in gold wasn’t quite as bad as Ted had hinted it might be—and I, for one, was happy to see that. Nonetheless, the Commercial net short position increased by 32,688 contracts, or 3.27 million troy ounces of paper gold—and the new Commercial net short position now stands at 6.26 million troy ounces.
That’s certainly a deterioration off its lows of a couple of weeks back, but historically it’s still a very small number.
Under the hood, the unblinking non-technical fund longs in the Managed Money category added 7,381 contacts to their already impressive long position, while the technical funds in the same category reduced their net short position by 25,316 contracts. And like happened in silver, the trading done in the “Other Reportable” and “Nonreportable” categories cancelled each other out. This COT Report’s changes in gold was the usual tango between the Commercial traders on one side—and the Managed Money traders on the other—and not a producer or consumer of the metal in sight.
Here’s Nick’s updated “Days of World Production to Cover Short Positions” of the 4 and 8 largest traders in each physically traded commodity in the COMEX futures market. The four precious metals still hold down their usual spot, as does silver, which has been in the #1 position almost without a break for the last fifteen plus years. It’s very similar in appearance to the chart from the August 18 COT Report.
Here are a couple of charts that Nick passed around yesterday evening. The first is the chart showing the weekly withdrawals from the Shanghai Gold Exchange. For the week ending August 21, they reported a very chunky withdrawal of 73.013 tonnes. This is a staggeringly large number, as have all SGE withdrawals been so far this summer. Nick says that this is the 4th largest weekly withdrawal ever. Don’t forget the ‘click to enlarge‘ feature for this, or any other chart in this column.
This next chart is also courtesy of Nick—and here was his covering note about it—“And for the 33rd week of the year we’re running about 200 tonnes ahead of 2013 which was the largest year of withdrawals at 2,186 tonnes.” This has all the hallmarks of a ‘Made in China’ short squeeze in the making. We’ll see.
I don’t have all that many stories for you today, but there are quite a few that I’ve been saving for Saturday’s column—and I hope you can find enough time over the weekend to read the ones that interest you.
CRITICAL READS
UMich Consumer Sentiment Tumbles as “Hope” Drops to Lowest Since 2014
After July’s disappointing drop in UMich Consumer Confidence, August did not help. Printing 91.9, below expectations of 93.0, UMich is hovering at the 2015 lows. Both current and future sub-indices dropped with hope falling to its lowest since 2014 (biggest 7month decline in 2 years).
Income growth expectations dropped and business expectations dropped to lowest since Sept 2014. This follows the highest conference board confidence in 2015 and lowest Gallup confidence in a year. Bill Dudley will be disappointed after proclaiming this a key driver of The Fed’s rate hike call (more important than jobs).
This brief 1-chart Zero Hedge article put in an appearance on their Internet site at 10:05 a.m. Friday morning EDT—and it thank reader M.A. for today’s first story. The chart is worth a quick look.
The Investor Revolt Arrives: This Hasn’t Happened Since Q4 2008
There’s little question that the collapse of the financial universe in 2008 dealt a dramatic blow to retail’s confidence in US capital markets. Taxpayers were forced to foot the bill for a Wall Street bailout just as 45% of their 401ks was being vaporized and to make matters immeasurably worse, CNBC ensured that mom and pop could watch their retirements disappear in real time on the same channel that had, for the better part of a year, been telling them that everything was fine.
To the extent that the Fed-driven, six-year rally restored some semblance of trust between retail investors and Wall Street, it was wiped away for good on Monday when, in a harrowing day of flash-crashing mayhem, the perils of broken, manipulated markets were laid bare for all to see and to add insult to injury, the ETF pricing model blew up causing some funds to trade far below NAV.
Given that, and given how predisposed household investors are to mistrust Wall Street in the post-crisis, post-Flash Boys world, retail outflows during uncertain times (like those that began last month when China’s stock market collapse began to make national news) shouldn’t come as a surprise, but as Credit Suisse notes, something happened in July and August that hasn’t happened since Q4 of 2008: retail investors pulled money from both stocks and bond funds. In other words, mom and pop were selling everything.
This is the second Zero Hedge article in a row—and the second contribution from reader M.A. It’s worth reading—and if you don’t wish to do that, you should at least check out the chart. There was a Bloomberg story about this as well. It was posted on their website at 10:00 p.m. Denver time on Thursday evening. It’s headlined “Fed Up Investors Yank Cash From Almost Everything Just Like 2008“—and I thank Patricia Caulfield for sharing it with us.
Top JPMorgan Quant Warns Second Market Crash May Be Imminent
Last Friday, when the market was down only 2%, we presented readers with a note which promptly became the most read piece across Wall Street trading desks, which was written by JPM’s head quant Marko Kolanovic, who correctly calculated the option gamma hedging imbalance into the close, and just as correctly predicted the closing dump on Friday which according to many catalyzed Monday’s “limit down” open.
Recall:
Given that the market is already down ~2%, we expect the market sell-off to accelerate after 3:30PM into the close with peak hedging pressure ~3:45PM. The magnitude of the negative price impact could be ~30-60bps in the absence of any other fundamental buying or selling pressure into the close.
We bring it up because Kolanovic is out with another note, one which may be even more unpleasant for bulls who, looking at nothing but price action, were convinced that after the biggest two day market jump in history, the worst is behind us.
This short novel appeared on David Stockman’s website on Thursday—and I found it in yesterday’s edition of the King Report.
The Central Bankers’ Malodorous War on Savers — David Stockman
Well, that didn’t take long!
After just three days of market turmoil the monetary politburo swung into action. This time they sent out B-Dud to promise still another monetary sweetener. Said the head of the New York Fed,
“From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago.”.
Needless to say, “B-Dud” is a moniker implying extreme disrespect, and Bill Dudley deserves every bit of it. He is a crony capitalist fool and one of the Fed ring-leaders prosecuting a relentless, savage war on savers. Its only purpose is to keep carry trade speculators gorged with free funding in the money markets and to bloat the profits of Wall Street strip-mining operations, like that of his former employer, Goldman Sachs.
This longish commentary by David appeared on his website yesterday sometime—and it’s the first offering of the day from Roy Stephens.
1929 And Its Aftermath – A Contra-Keynesian View of What Really Happened
A half-century ago, America — and then the world — was rocked by a mighty stock-market crash that soon turned into the steepest and longest-lasting depression of all time.
It was not only the sharpness and depth of the depression that stunned the world and changed the face of modern history: it was the length, the chronic economic morass persisting throughout the 1930s, that caused intellectuals and the general public to despair of the market economy and the capitalist system.
Previous depressions, no matter how sharp, generally lasted no more than a year or two. But now, for over a decade, poverty, unemployment, and hopelessness led millions to seek some new economic system that would cure the depression and avoid a repetition of it.
Political solutions and panaceas differed. For some it was Marxian socialism — for others, one or another form of fascism. In the United States the accepted solution was a Keynesian mixed-economy or welfare-warfare state. Harvard was the focus of Keynesian economics in the United States, and Seymour Harris, a prominent Keynesian teaching there, titled one of his many books Saving American Capitalism. That title encapsulated the spirit of the New Deal reformers of the ’30s and ’40s. By the massive use of state power and government spending, capitalism was going to be saved from the challenges of communism and fascism.
This essay by Murray N. Rothbard was first published back on November 12, 1979—but in light of the current conditions, it’s been revived over at the Zero Hedge website. It as posted there early on Tuesday evening—and it’s the third offering of the day from reader M.A. For length reasons it had to wait for today’s column.
Where is Neo When We Need Him? — Paul Craig Roberts
In The Matrix in which Americans live, nothing is ever their fault. For example, the current decline in the U.S. stock market is not because years of excessive liquidity supplied by the Federal Reserve have created a bubble so overblown that a mere six stocks, some of which have no earnings commensurate with their price, accounted for more than all of the gain in market capitalization in the S&P 500 prior to the current disruption.
In our Matrix existence, the stock market decline is not due to corporations using their profits, and even taking out loans, to repurchase their shares, thus creating an artificial demand for their equity shares.
The decline is not due to the latest monthly reporting of durable goods orders falling on a year-to-year basis for the sixth consecutive month.
No, none of these facts can be blamed. The decline in the U.S. stock market is the fault of China.
What did China do? China is accused of devaluing by a small amount its currency.
This must read commentary by Paul showed up on this Internet site on Wednesday—and had to wait for today’s column as well. I thank Roy Stephens for this one.
Citigroup braces for world recession, calls for Corbynomics QE in China
China has bungled its attempt to slow the economy gently and is sliding into “imminent recession”, threatening to take the world with it over coming months, Citigroup has warned.
Willem Buiter, the bank’s chief economist, said the country needs a major blast of fiscal spending financed by outright “helicopter” money from the bank to avert a deepening crisis.
Speaking on a panel at the Council of Foreign Relations in New York, Mr Buiter said the dollar will “go through the roof” if the U.S. Federal Reserve lifts interest rates this year, compounding the crisis for emerging markets.
Professor Zhiwu Chen from Yale University told the same event that China will be doing well if it can contain its slow-motion crisis to mere stagnation for the next 10 years, given the dangerous levels of debt in the system.
This Ambrose Evans-Pritchard commentary showed up on the telegraph.co.uk Internet site at 6:45 p.m. BST on their Friday evening, which was 1:45 p.m. in New York—EDT plus 5 hours. I thank Patricia Caulfield for sending it.
Marc Faber: The Global Economy is Entering an Epic Slump
I do not believe that the global economy is healing. I believe that the global economy is heading into a slump once again.
We have a slowdown practically everywhere and if you take out the fudging of statistics, the economy for the median household everywhere in the world is not doing particularly well. If the global economy were doing so fantastically well, how would it be that commodities collapsed to the extent that they have declined? Or how would it be that the currencies of American markets and some of them have actually declined by more than 50 percent against the U.S. dollar in the last three years. How would this happen? So I do not believe that we have a healing of the global economy. On the contrary, I believe that the global economy is slowing down and that essentially equity markets are not particularly attractive.
Preceding every bubble, you have a huge expansion of credit. That was the case in the period ’97 to 2000, and in the period 2003 to 2007, and on previous occasions in economic history. In the case of China, credit as a percent of the economy has grown by more than 50% over the last five years, which is essentially a world record. And in my view, its economy is slowing down rapidly. I had a drink with a friend of mine the other day who has car dealerships, luxury car dealerships, in China. He said sales have hit a brick wall. Not ‘slowed down'; a brick wall. And indeed, exports were down and car sales were down in July. I think that this will then spill over again into other emerging economies because China is a large buyer of commodities and a large trading partner to other countries.
This 37:21 minute audio interview with Dr. Marc and Chris Martenson appeared on the peakprosperity.com website last Sunday—and for length reasons had to wait for this Saturday’s column. I thank Ken Hurt for sharing it with us.
Uh-oh, Canada. China Pales as a Risk to U.S. Growth
Canada probably experienced a technical recession in the first half of 2015, and the fact that the No. 1 U.S. export market is in a slump could spell bad news for growth in the world’s biggest economy.
Canada’s gross domestic product contracted for a second quarter in the three months through June, a Sept. 1 report will show, according to almost all economists in a Bloomberg survey. The economy probably shrank by 1 percent, even worse than the 0.6 percent first-quarter drop.
“When Canada hurts, U.S. exporters do, too,” Bricklin Dwyer, an economist at BNP Paribas in New York, wrote in an Aug. 27 note to clients titled “Canada (not China) matters more.”
Economy-watchers and investors have been spooked by fears of a worse-than-expected Chinese slowdown after the nation devalued its currency Aug. 11 in a surprise move. Yet the direct effects on U.S. trade from slowing Chinese growth and the yuan move are probably fairly contained — far more so than the potential fallout from faltering Canadian demand.
Yes, Canada is in a recession—and I’m just waiting for the real estate bubbles in both Vancouver and Calgary to pop. This news item put in an appearance on the Bloomberg website at 2:40 p.m. Denver time on their Friday afternoon—and it’s another offering from Patricia Caulfield.
Deliberate Deception: Washington Gave Germany an Answer Long Ago in NSA Case
For months, the German government sought to create the impression it was still waiting for an answer from the U.S. on whether it could share NSA target lists for spying with a parliamentary investigation. The response came months ago.
The order from Washington was unambiguous. The United States Embassy in Berlin didn’t want to waste any time and moved to deliver the diplomatic cable without delay. It was May 10, 2015, a Sunday — and even diplomats aren’t crazy about working weekends. On this day, though, they had no other choice. James Melville, the embassy’s second-in-command, hand delivered the mail from the White House to Angela Merkel’s Chancellery at 9 p.m.
The letter that Melville handed over to Merkel’s staff contained the long-awaited answer to how the German federal government could proceed with highly classified lists of NSA spying targets. The so-called “selector” lists had become notorious in Germany and the subject of considerable grief for Merkel because her foreign intelligence agency, the BND, may have helped the NSA to spy on German firms as a result of them. The selector lists, which were fed into the BND’s monitoring systems on behalf of the NSA, are reported to have included both German and European targets that were spied on by the Americans.
The letter put the German government in a very delicate position. The expectation had been that the U.S. government would flat out refuse to allow officials in Berlin to present the lists to members of the federal parliament, which is currently investigating NSA spying in Germany, including the eavesdropping of Merkel’s own mobile phone. But that wasn’t the case. Instead, the Americans delivered a more differentiated letter, making it all the more interesting.
This very interesting story was posted on the German website spiegel.de on Friday, August 21. Roy Stephens sent it to me on Monday—and it obviously had to wait for today’s column.
Switzerland has completed construction on the world’s longest tunnel
I’ve been following the progress of this tunnel for years now—and here it is all done!
This incredible photo/essay showed up on the businessinsider.com Internet site on Tuesday—and is another one of those stories that had to wait for my Saturday column. It’s definitely worth your time. It’s another contribution from Roy Stephens.
How the IMF’s misadventure in Greece is changing the fund
Many of the top brass of the International Monetary Fund always had concerns about the plans to bail out Greece. That much was clear as far back as May 9, 2010, when the IMF’s 24 directors gathered in Washington to sign off on the fund’s participation in the first, 110-billion-euro ($125 billion) rescue alongside European institutions.
A Reuters examination of previously unreported IMF board minutes shows that a near majority of directors round the board table that day thought the Greek program would not work.
“We have serious doubts about the approach,” said Brazil’s then director Paulo Nogueira Batista. He slammed IMF forecasts for Greece as overly optimistic – “Panglossian.” Arvind Virmani, the director from India at the time, said the program imposed “a mammoth burden” that Greece’s economy “could hardly bear.”
But they and others who feared the IMF was walking into a quagmire had little room for maneuver. The fund’s powerful Managing Director, Dominique Strauss-Kahn, and a handful of his advisers, feared Greece posed a threat to the wider euro zone financial system. They had already decided to plunge into the crisis. The doubters were given a blunt retort, according to the minutes.
This eye-opening Reuters essay, co-filed from Washington and Athens, appeared on their Internet site at 9 a.m. BST yesterday, which makes it 4 a.m. EDT. I thank Patricia Caulfield for this story as well.
It’s the West, Not Russia, That’s Blocking Truth on MH17
The propaganda machine in the west is once again ramping up and spewing out one false claim after another about the shoot down of MH17 last year over eastern Ukraine and each story is more absurd than the one before it.
On the 13 of August the British newspaper, mistakenly called The Independent, made the bizarre claim that Russia has “stoked tensions with the West by burning Dutch flowers in what is regarded as a political statement over the investigation into the Malaysian Airlines flight disaster headed by The Netherlands.”
The Independent states that its source for this garbage rests on unnamed “critics” and then goes on to repeat the NATO party line that Russia is trying to block the facts from coming out.
Just two days before this the BBC claimed a leak from the Dutch investigation indicated Russian missile parts were found at the site. However they failed to mention later that Dutch investigators refuted this mysterious leak and stated their investigation did not conclude that at all.
This article showed up on the russia-insider.com Internet site on Wednesday—and it had to wait for my Saturday column. It’s worth reading if you have the interest—and I thank reader M.A. for sending it along.
China and the world economy: Taking a tumble
The ability to make stock markets boomerang is usually reserved for central bankers. But on August 24th, hours into a global market rout that had started in Asia and was sweeping its way through Europe and then America, Tim Cook, the boss of Apple, turned his hand to it. “I can tell you that we have continued to experience strong growth for our business in China through July and August,” he wrote in an e-mail to CNBC, a financial-news channel. “I continue to believe that China represents an unprecedented opportunity over the long term.”
By the time Mr Cook felt it necessary to opine on the state of the world’s second-biggest economy, plenty had started to question its prospects. Following weeks of wobbling, the Shanghai stock exchange had just cratered. A government once credited with near-magical powers to browbeat its economy into growth looked to have misplaced its wand. Suspicions abounded that a decades-long era of superlative—if recently softening—economic expansion might be coming to an end. So the news that Chinese consumers were still in the mood for new iPhones and whizzy watches did more to assuage nerves than reams of official pronouncements from Beijing ever could.
Apple shares reclaimed the $66 billion they had lost; the Dow Jones blue-chip index, having opened down a calamitous 1,000 points, rebounded. But that was a precursor for days of volatility. Many markets around the world crossed the line into “correction” territory, having fallen more than 10% from recent peaks, though some were rallying as The Economist went to press. Shanghai remained down by some 40%, a drubbing to rival the 2001 dotcom crash, if not (yet) the 2008 miasma.
This long essay, filed from Shanghai, was posted on the economist.com Internet site—and I thank Patricia C. for sending it our way.
China banks warn of rising bad loans and falling margins as economy slows
China’s largest banks warned of a tough year after posting their weakest half-yearly profit growth in at least six years as a slowing economy forces the lenders to make even more provisions for soured loans and squeezes interest income.
State-owned Industrial and Commercial Bank of China (ICBC), China’s largest bank by assets, and peers Bank of China (BOC), Agricultural Bank of China and Bank of Communications this week reported another spike in bad loans in the first half and net profits that grew at most by 1.5 percent, a far cry from the double- digit growth banks enjoyed after the 2008 financial crisis.
With China’s economy set to grow at its weakest pace in a quarter of a century this year, the lenders said they were bracing themselves for even more bad loans as industries ranging from steel to petrochemicals and property struggle.
“We will continue to face pressure from non-performing loans for a period of time,” ICBC President Yi Huiman said.
This Reuters piece, co-filed from Shanghai and Beijing, appeared on their website at 8:57 a.m. EDT yesterday morning—and I thank Richard Saler for bringing it to our attention.
Consumer Anxiety in China Undermines Government’s Economic Plans
In recent days, an advice column has circulated widely on China’s most popular social media phone app. Titled “Guide on Safe Passage Through the Economic Crisis,” it is aimed at young Chinese urban professionals. Its nuggets of wisdom include: “Work hard at your job so you are the last to be laid off” and “In an economic crisis, liquidity is the number one priority.”
Zhang Yuanyuan, 31, a bank teller in Shandong Province, is among the thousands of people who have shared it online.
“Last year we didn’t have any year-end galas or a bonus,” she said in an interview. “I think this year will be the same.”
“I try to spend less,” she said, adding that she now buys cheaper clothes online instead of shopping in high-end malls. “And I started car-pooling with co-workers to save on gas.”
This New York Times article was posted on their Internet site on Friday sometime—and I thank Patricia Caulfield for her final offering in today’s column.
China: And Why QE4 is Inevitable
http://www.zerohedge.com/news/2015-08-28/reason-chinas-crash-will-unleash-global-bond-shockwave
One narrative we’ve pushed quite hard this week is the idea that China’s persistent FX interventions in support of the yuan are costing the PBoC dearly in terms of reserves. Of course this week’s posts hardly represent the first time we’ve touched on the issue of FX reserve liquidation and its implications for global finance.
In short, stabilizing the currency in the wake of the August 11 devaluation has precipitated the liquidation of more than $100 billion in USTs in the space of just two weeks, doubling the total sold during the first half of the year.
In the end, the estimated size of the RMB carry trade could mean that before it’s all over, China will liquidate as much as $1 trillion in US paper, which, as we noted on Thursday evening, would effectively negate 60% of QE3 and put somewhere in the neighborhood of 200bps worth of upward pressure on 10Y yields.
And don’t forget, this is just China. Should EMs continue to face pressure on their currencies (and there’s every reason to believe that they will), you could see substantial draw downs there too. Meanwhile, all of this mirrors the petrodollar unwind. That is, it all comes back to the notion of recycling USDs into USD assets by the trillions and for decades. Now, between crude’s slump, the commodities bust, and China’s devaluation, it’s all coming apart at the seams.
This longish but worthwhile read, was posted on the Zero Hedge website at 1:51 p.m. yesterday afternoon—and I thank reader M.A. for his final offering in today’s column.
Doug Noland: “Carry Trades” and Trend-Following Strategies
I’m convinced that perhaps Trillions worth of speculative leverage have accumulated throughout global currency and securities markets at least partially based on the perception that policymakers condone this leverage as integral (as mortgage finance was previously) in the fight against mounting global deflationary forces.
Yet massive securities market leverage is viable only so long as perceptions hold that government policymakers have things under control. And therein lies latent fragility. This explains why Central banks around the world vow liquid markets. The Fed must remain ultra-loose near zero rates, while upholding the perception that Yellen, Dudley & Co. will adhere to Bernanke’s doctrine of “pushing back against a tightening of financial conditions” (aka market risk aversion). The BOJ must continue with its massive QE program, ready to “push back” hard against a strengthening yen. Similarly, the ECB must convey that it is willing to boost and broaden its securities purchase program as necessary, also pushing back to suppress euro rallies. Chinese officials must be willing to adopt “whatever it takes” fiscal and monetary stimulus to sustain their faltering expansion – economic activity essential to the overall global economy. And importantly, China must be resolute in defending its currency peg to the dollar. All the above are required to ensure stable market, financial and economic backdrops imperative to highly leveraged global “carry trades.”
I have posited that the global Bubble has burst. Fundamental to my analysis is that the above necessary conditions required to sustain global “carry trades” no longer exist. Faith has been broken that EM central banks retain the resources required to stabilize their currencies and ensure liquid securities markets. Importantly, confidence that Chinese officials have their markets, Credit system and economy under control has evaporated. Moreover, China’s recent devaluation badly undermined the perception of a strong and well-managed Chinese currency tied securely to the US dollar.
This week’s Credit Bubble Bulletin commentary by Doug finally showed up on his Internet site in the wee hours of this morning—and I’d been checking for it many times on Friday evening. It’s always a must read for me.
Editorial: Another ‘Barbarous Relic’ — The New York Sun
That’s the headline over a Financial Times editorial calling on authorities to consider phasing out the use of cash — by everyone, not just governments. This is what it has come down to. The government has run down the value of the dollar to less than 2% of what it was worth when our parents were born. Now it is itching to ban the use of banknotes and gets an endorsement from, of all broadsheets, the “world business newspaper.” The FT refers to the banknotes as “another ‘barbarous relic,’” which, it says, is the “moniker Keynes gave to gold.”
Actually, it was to the gold standard that Keynes gave that moniker. He did so in his 1924 “Tract on Monetary Reform,” in which he wrote: “In truth, the gold standard is already a barbarous relic.” Added he: “All of us, from the Governor of the Bank of England downwards, are now primarily interested in preserving the stability of business, prices and employment, and are not likely, when the choice is forced on us, deliberately to sacrifice these to outworn dogma, which had its value once, of 3 pounds, 17 shillings, 10 1/2 pence per ounce.”
In any event, the FT is promoting the idea that cash is another barbarous relic at a time when our own government is moving to attack the use of even moderate amounts of cash in the most startling ways. This story is being covered by, among others, the Daily Signal, which is published by the Heritage Foundation. It has released a book on how civil asset forfeiture makes a mockery of property rights and, as Heritage puts it, “turns the police into profiteers.” The stories it has uncovered are heartbreaking.
This editorial, which is certainly worth reading, put in an appearance on The New York Sun website on Thursday—and I found it in a GATA release yesterday.
Jim Rickards: Stay in Gold and Cash
Investors should play it safe and stay away from publicly-traded stocks that have more room to fall further, warns Jim Rickards, chief global strategist at West Shore Funds.
This 4:17 minute video interview was posted on the CNBC website on Thursday evening—and I thank Harold Jacobsen for bringing it to our attention.
Gold Surges on NIRP Hint
The Fed’s ultimate dove has been unleashed and this time he means business. Faced with the inevitable rate hike, Kocherlakota has come out swinging to explain how cataclysmic inflation is and why The Fed should use its asset-purchase tools and lower interest rates further… i.e. to negative… Gold reacted instantly…
*KOCHERLAKOTA SAYS FED HAS ASSET-PURCHASE TOOLS
*KOCHERLAKOTA: THERE ARE WAYS TO LOWER INTEREST RATES FURTHER
And sure enough gold surges…
Of course it, silver and platinum all got hammered flat shortly after. This 1-paragraph/1-chart commentary appeared on the Zero Hedge website at 9:45 a.m. EDT on Friday morning—and it’s courtesy of James O’Kelly.
Lawrie Williams: Gold’s 2015 performance far better than generally believed
The past week has been an interesting one to say the least for both stock markets and gold. While in general markets have recovered at least part way from the long succession of sharp falls which appear to have been initially triggered by the Chinese yuan devaluations, gold perhaps also performed rather less well than the pro-gold investment community would have liked, much to the glee of the anti-gold naysayers. But then perhaps it didn’t perform quite as badly as many would have you believe – very much the story of gold over the year to date.
In U.S. dollars, for example, at the time of writing gold is currently only down 4.6% from its opening LBMA morning gold price on January 2nd, while the Dow is down 7.4% over the same period even after its recent sharp recovery. In the UK the FTSE 100 is off 5.4% year to date. Thus gold has actually outperformed major U.S. and UK stock indexes over the period. Reading most media headlines on gold one would have been hard pressed to believe this to be the case!
And in other key markets like Australia and Canada, the gold price has actually risen quite decently over the year to date, while local stock market indexes have tended to fall alongside many of the other global indexes. In Canada, the TSX Composite Index for example is down 6.7% on the year, while gold is up 7% in Canadian dollars. Australia’s ASX 200 is off 3.7% while the AUD gold price has also risen by 7%. So has gold’s performance been as dire as its detractors would have us believe?
This short commentary by Lawrie was posted on the sharpspixley.com Internet site yesterday sometime.
The PHOTOS and the FUNNIES
This magnificent creature is a Harpy Eagle—and I thought these spectacular photos were worth sharing.
THE WRAP
The silver metal holdings in SLV first crossed north of the 300 million oz level in September of 2009, on the way to over 360 million oz in April 2011, so today’s level of around 325 million oz is about midway. I think the stability in SLV holdings, has caused many, including me, to overlook a key takeaway. While it’s interesting to speculate why holdings in GLD declined so dramatically and not the holdings in SLV, that’s not the central issue.
The key takeaway is staring us right in the face – the incredibly large and fully documented fact that much, if not all of the world’s total inventory of 1,000 oz bars of silver resides in publicly-owned ETF-type investment vehicles and exchange inventories (COMEX). All the visible and documented silver bars in the world, some 850 million oz, are known to exist only because they are in the ETFs and exchange warehouses. It is only when you add another, quite unverifiable, 450 million oz (mostly owned by JPMorgan I believe) does the percentage of all industry grade residing in ETFs drop from 100% to “only” 65% of total world silver inventories. Remember, in gold the percentage is under 3%, which helps put just how large is the percentage of silver in the ETF-type vehicles of total world inventories.
But the comparison to gold is not the important point. What is important is the stunning change the silver ETF’s have had in transforming the profile of who owns the world’s silver inventories today versus who owned the silver previously, say ten years ago longer. Previously, the world’s inventory of silver was owned by governments, dealers and those in the industry, including producers and users. Today, none of the old silver owners, effectively, hold silver (only JPM on the sly) and private investors, effectively, own it all. — Silver analyst Ted Butler: 26 August 2015
Today’s pop ‘blast from the past’ takes us back to 1965. I was in Grade 11 at the time—and the British Invasion was at its peak. It was mostly wall-to-wall Beatlemania back then—but this tune by Gerry & The Pacemakers would not be denied—and rightfully so, as it’s a classic. The link is here.
Today’s classical ‘blast from the past’ is a violin work by German composer Max Bruch. I’ve posted it before, but it’s been a couple of years. It’s his 4-movement Scottish Fantasy based on Scottish folk melodies which he wrote in 1880 and dedicated to virtuoso violinist Pablo de Sarasate. The soloist here is Korean virtuoso violinst Kyung-Wha Chung, along with the Seoul Philharmonic Orchestra. Myung-Whun Chung conducts. The link is here.
In light of this week’s COT Report, along with the big engineered price decline in all four precious metals on Wednesday, I’m somewhat more optimistic about the short and medium term prospects for the prices of both metals. Of course JPMorgan et al can still have their way with them, as they are still fully in charge, but I’ve certainly been happy with the sentiment, not only in the price, but in the equities as well.
But as Ted Butler has been saying for at least a decade now, the day will come when what’s happening in the COT Report—and what “da boyz” may or may not do, won’t matter. Which day that is, is unknown, but it’s drawing ever closer.
Here are the 6-month charts for all of the Big 6 commodities as of the close of trading on Friday—and it will be interesting to see how next week’s trading action unfolds in the light of the last couple of days trading.
If you’re getting the feeling from the past week’s antics that the end is nigh, or fast approaching, you would be right about that. There’s nothing that can be done, as the great unwind has started. Attempts will certainly be made to mitigate the unfolding disaster, but in the end they will be for naught.
For once confidence is lost like it is now, liquidity will vanish—and no amount of money printing will save the system this time. Any attempt, including QE4 which was mentioned in a Zero Hedge article further up, will be the final sign that the world’s central banks—and their respective governments—are all out of aces.
As to what may follow, heaven only knows. But it’s a given that the rush for gold and the other precious metals will be on in earnest. As to what the U.S. and other governments may do when that happens is anyone’s guess, as everyone out there are now making things up as they go along. It will be every individual for themselves—and that includes the banks and governments.
I can’t speak for you, dear reader, but I’ve done all I can—and from this moment on, all I or anyone else can do is watch with morbid fascination as the Frankenstein-like economic, financial and monetary system that was nurtured with reckless abandon after the gold standard was jettisoned in 1971, comes unglued.
I’m done for the day—and the week—and I’ll see you here on Tuesday.
Ed
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