Category: zerohedge

Well, as we warned, the Evergrande contagion has finally arrived and with China closed for holiday traders are getting out while they can and where they can, and on Monday morning in Asia that means Hong Kong, where Evergrande – which is about to default – has crashed by another 13% this morning and is on track to close at its lowest market cap ever (to be expected ahead of a bankruptcy that will wipe out the equity)…

… and with Evergrande property development peers such as New World Development & Sun Kung Kai Properties both down over 8%, and Sunac China and CK Asset plunging over 7%, the Hang Seng property index has crashed more than 6%, its biggest drop since 2020 to the lowest level since 2016…

… and the broader Hang Seng index is down 3.5% in early trading, to the lowest level since November 2020.

And with traders on edge about the rapidly spreading contagion (as we described earlier) even sectors supposedly immune to China’s property woes, such as the Hang Seng Tech Index are plunging, sliding as much as 2.7%.

And speaking of Evergrande’s imminent default, we noted earlier that while the company is scheduled to pay $83.5 million of interest on Sept. 23 for its offshore March 2022 bond, and then has another $47.5 million interest payment due on Sept. 29 for March 2024, the day of reckoning may come as soon as Tuesday: that’s because Evergrande is scheduled to pay interest on bank loans Monday, with a one-day grace period. In other words, should it fail to arrange an extension, it could be in technical default as soon as Tuesday (for a much more detailed analysis of next steps please see “This Is How Contagion From Evergrande’s Default Will Spread To The Rest Of The World“.) Spoiler alert: a default is coming because Chinese authorities have already told major lenders not to expect repayment.

Incidentally, as Bloomberg’s Mark Cranfield notes, Hong Kong stocks can’t blame low liquidity for the meltdown as “trading volumes on the Hang Seng and H shares indexes are running well above the 10-day average on Monday as both drop by ~4%.”

There’s more: junk-rated Chinese dollar bonds slid by as much as 2 cents, according to credit traders, pushing their yield to just shy of 15%, the highest since 2011.

Other sectors are also getting hammered, such as Ping An Insurance, China’s largest insurer by market value, which plunged 7.3% in Hong Kong.

“Investors may be concerned about highly-geared names and don’t care about valuation nowadays,” said Philip Tse, head of Hong Kong & China Property Research at Bocom International Holdings Co Ltd. “There will be further downside” unless the government gives a clear signal on Evergrande or eases up on its clampdown on the real estate sector, Tse said.

Meanwhile, pouring gasoline on the fire, Goldman’s China anlyst Hui Shan published a note (available for professional subs in the usual place) on Sunday in which it discussed the rising risks from the property market, writing that even without the Evergrande debacle “housing activity fell sharply in July and weakened further in August” largely in response to China’s structural reforms in the property sector (such as the “3 Red Lines”). At the same time, “concerns over Evergrande are rising and signs of financing difficulties spreading to other developers are emerging.”

In the note, Goldman also estimates the potential impact of the coming property market crash on Chinese growth under different scenarios, which can be described as bad, worse, and terrible, with the bank expecting a GDP hit anywhere from just over 1% to as much as 4.0%. Needless to say, such an outcome would be devastating not only for China but for the world.

Looking ahead, Goldman notes that while for now, its baseline remains that any potential default or restructuring of Evergrande would be carefully managed by the government with limited contagion effect in both financial and property markets “this would require a clear message from the government soon to shore up confidence and to stop the spillover effect, the absence of which we think poses notable downside risk to growth in Q4 and next year.”

In short, as we explained previously, it all depends on Beijing whether the current selloff accelerates, or if we see a furious surge as Beijing directly or indirectly injects another cool trillion or 10.

Meanwhile, as Bloomberg’s bloggers write echoing what we said yesterday while traders may have been hoping there would be some clarity on the road ahead for the company, given it has bond payments due this week, “the complexity of the case may be the reason for a lack of communication from the authorities. That compounds the uncertainty for investors, and with China on holiday, the momentum for lower Hong Kong stocks are picking up pace.”

So while contagion is clearly hammering Hong Kong in lieu of the shuttered China, it is also spreading to Australia where the Aussie dollar is  mining stocks have slumped as iron ore prices continue to collapse, with the industry group falling 4%. Among the biggest movers, Champion Iron fell as much as 12.5% in early trade Monday, continuing a four-day losing streak while Fortescue Metals dipped as much as 7%, falling to the lowest price since July last year.

Contagion has also moved beyond merely stocks, with US equity futures trading as low as 4380..

… and is starting to impact FX, with the dismal mood lifting USD/HKD to the highest for September, and while USD/CNH is firmer, but for now, that is in line with broad dollar strength. Should EUR/CNH start trending higher, Bloomberg notes, “that would be a signal traders have become anxious about the health of the yuan amid the equities slump.”

Should the silence out of Beijing persist, it’s only a matter of time before the anxiety hits levels not seen since Sept 2008 as an outcome most traders thought impossible becomes all too probably.

Authored by Paul Sullivan via OilPrice.com,

Is the Middle East still important?

This is a seemingly absurd question, yet some are asking this in Washington. The Middle East is the source of massive reserves in oil and gas. Much of the fuel to produce goods and trade from Asia and the EU comes from the Middle East. Much of the world economy relies on Middle East energy. The region has strategic chokepoints like the Strait of Hormuz, The Suez Canal, and The Bab al Mandab. It is a source of some of the more significant threats in the world, such as from ISIS, Al Qaeda, and other groups. It contains some of the most important security connections in the world. Consider the neighbors of the Middle East and not just the Middle East. The Middle East is a crossroads for energy and security. It also could be one of the generators of change and improvement, if it is allowed and supported to do so.  

However, as the U.S. becomes more focused on “The Great Powers Conflict” in Asia, especially with China, it is becoming clearer that the U.S. is losing the plot in the Middle East.

Consider the slow to no reaction to the shipping of Iranian fuel with the help of Hezbollah and Syria to Lebanon.

The U.S. could have done many different things to help the Lebanese with this without handing a massive public relations and political victory to its adversaries. But, in some ways, Washington’s sanctions have painted it into a corner on such issues. Consider how the U.S. took the anti-missile batteries from Saudi Arabia as the Houthis are still attacking Saudi Arabia with missiles. The Saudis made a deal with the Russians in response to this and other moves by the U.S. The U.S. handed leverage to the Russians. These are just two of many examples of how the plot is being lost. 

Indeed, China is a threat in the Pacific to Taiwan and others. It is a threat to the freedom of navigation in the Western Pacific. It is an economic and technological threat to the US and has been for a very long time. It is a cyber threat to the US. It is developing leverage in many countries with its Belt and Road Initiative. It is now the largest trading partner with almost all Middle East countries. It is building significant diplomatic, economic, and even military leverage in the Middle East. China is moving into the region as the U.S. moves in other directions. By the way, it is getting more likely that China could have a piece of the nuclear power pie in Saudi Arabia. 

Russia has also been creating greater leverage in the region. Its recent big defense deals with Saudi Arabia are just one example. The U.S. basically opened the door to them. Similar things happened when the U.S. cut back on defense aid to Egypt a few years back. The Egyptians were in Moscow in quick order to make defense and other deals. Russian advisors are back in Egypt. The Russians are building a huge nuclear power complex on the north coast of Egypt. There is no doubt that the Russians have far more clout and leverage in the region than before. Much of this is due to missteps by the U.S. or simply U.S. neglect of this vital region. 

The U.S. should be in the running on nuclear power plant exports and other crucial leverage-giving exports in the region. We could export small modular rectors to the region. These have much lower proliferation and safety risks than older, larger plants. We could further develop the safety of this trade by applying 123 agreements as we did in the UAE. The UAE has the gold standard nuclear power agreement with the US even though the plants were built by a Korean company. 

Why am I mentioning nuclear power plants? Because whoever exports a nuclear power plant to another country can develop 80 to 100 years of leverage and clout in that country. Nuclear power plant exports are dominated by Russia with China second. The U.S. is not even in the running. 

We have seen above some examples of how the Russians and Chinese are building leverage and clout in the region. If the U.S. wants to turn more to the “Great Powers Conflict”? Then it should realize that the “Great Powers Conflict” is not just in Asia, but also in the Middle East (and Asia begins in the Sinai). The Middle East is a contested space. 

One cannot win a backgammon and chess game by letting the other sides, one’s adversaries, make clever moves while we do not have good counter moves and we do not think many moves ahead. 

The U.S. seems to be losing the plot of the 4D chess game in the Middle East. It is not too late to rethink strategies. The U.S. needs to be in the game for the long run and think in the long run. The U.S. needs to regain the plot in the region and how it connects with the big pictures in geopolitics, geo-economics, energy, security, and much more. It is not too late. 

While General Motors is in the midst of EV hell, dealing with a massive recall for its Chevy Bolt and shuttering production as a result of the ongoing semi shortage, Ford looks to be “full speed ahead” with plans for its electric F-150 Lightning.

The company’s CEO, Jim Farley, said on Thursday that it had reached 150,000 reservations for the forthcoming electric pickup. As a result, the company has ramped up hiring and increasing capacity as it starts building prototypes.

Joe White, global automotive industry editor for ThomsonReuters in Detroit, confirmed on Thursday that Ford would be expanding its F-150 Lightning capacity to 80,000 vehicles.

Confirmed: Ford doubles F150 Lightning capacity to 80,000 vehicles. pic.twitter.com/aWqbnWSlAo

— Joe White (@JBWEyesonroad) September 16, 2021

Ford plans on adding 450 jobs across 3 factories and also announced it would invest $250 million to bump up its production capacity, which was formerly 40,000 vehicles. 

Ford Chair Bill Ford said on Thursday: “We knew the F-150 Lightning was special, but the interest from the public has surpassed our highest expectations and changed the conversation around electric vehicles. So we are doubling down, adding jobs and investment to increase production.”

“The reservation number has been growing quite rapidly since we launched it. That’s why we’re increasing capacity and building them as fast as we can,” Farley added.

And make no doubt about it, while other manufacturers falter, Ford’s factory appears to be up and humming.

Just got a tour of @Ford’s new Rouge Electric Vehicle Center, where workers are building the 1st preproduction models of the F-150 Lightning pic.twitter.com/OZSpOKdBcB

— Michael Martinez (@MikeMartinez_AN) September 16, 2021

Ford is planning on building about 15,000 of the model next year after its launch, and about 55,000 of the model in 2023, in a ramp up to its 2024 target. 

Ford had already upped its production targets by 50% last November. This increase comes on top of that one.

Authored by Beth Brelje via The Epoch Times,

A shortage of certain alcohol brands is leaving some drinkers in low spirits; the Pennsylvania Liquor Control Board (PLCB) announced this week it would begin rationing a list of popular liquor labels.

Due to sustained supply chain disruptions and product shortages, purchase limits of two bottles, per customer, per day were applied to certain items beginning Friday, Sept. 17, and will remain in effect for the foreseeable future.

The two-bottle limit applies to all consumers and liquor license holders such as bars and restaurants, and includes 43 well-known labels including Hennessy Cognac, Don Julio 1942 Tequila, Jack Daniel’s Whiskey, Moët & Chandon Impérial Champagne, and Buffalo Trace Kentucky Straight Bourbon.

The rationing was not a surprise to Shawn McCall, general manager at Room 33 Speakeasy in Erie, Pa. The speakeasy has had trouble getting some brands for the last three or four months.

“I haven’t been able to get Bulleit Bourbon for a month. Jack Daniel’s was out for a while but it’s back in now,” McCall told The Epoch Times in a phone interview. “People know there is a shortage, so bar owners are overstocking. That is why they put a limit on it.”

In Pennsylvania, wine and spirits are sold at state-operated stores where both consumers and liquor license holders shop. The state stores buy directly from producers so they have a first look at supply.

“We are aware of product shortages in other states,” PLCB Press Secretary Shawn Kelly told The Epoch Times in an email.

“While the current supply challenges are not unique to Pennsylvania and are impacting markets across the U.S., the PLCB has experienced product shortfalls before, and we regularly impose bottle limits on products for which we know demand will exceed supply in order to distribute the product as fairly as possible. These bottle limits are preventative measures to fairly distribute product and minimize out-of-stock situations, which will vary by location.”

Chuck Moran, executive director of the Pennsylvania Licensed Beverage & Tavern Association, says the rationing adds to a growing list of challenges for small businesses.

“Before the pandemic I believe there were problems making kegs, having to do with steel tariffs,” Moran told The Epoch Times in a phone interview.

“We’ve dealt with shortages before. But now it seems to be one thing after another. We went through this with chicken wings, ketchup packets, plastic cups, and there is still a recovery effort going on from COVID. Businesses were having a hard time finding employees. The combination is really hampering recovery for small business.”

Moran hopes that when Pennsylvania’s legislators return to session Monday, they have a plan to help small businesses.

Glass Shortage and More

There are several reasons for the shortage. All producers who spoke with The Epoch Times pointed to increased consumer demand as one reason.

“Many of our brands, including Buffalo Trace Bourbon, have been on allocation for a few years due to demand outstripping supply of aged whiskey,” Amy Preske, spokeswoman for the Kentucky-based Sazerac Company told The Epoch Times in an email. “On average, the whiskeys we sell today were made seven to eight years ago (2013/14) and we underestimated today’s consumer demand.”

Buffalo Trace Distillery is in the midst of a $1.2 billion expansion, including more barrel warehouses, construction of an additional still, additional fermenters, and expanding its dry house operation. But it will still be a few years before bourbon supply catches up with demand. This shortage is related to any glass shortage or worker shortage in the supply chain, Preske said.

Barrels of bourbon are seen inside of a closed storage building as they age at the Bardstown Bourbon Company in Bardstown, Kentucky on April 11, 2019. (Andrew Caballero-Reynolds / AFP via Getty Images)

But Svend Jansen at Jack Daniel’s Distillers headquartered in Louisville, Kentucky, says those issues did impact its operation.

“We are managing through the impact of global supply chain disruptions, including glass supply and challenging cost headwinds. With the rebound and recovery of our markets and channels, coupled with strong consumer demand for our brands, we are currently managing through glass supply constraints,” Svend told The Epoch Times in an email. “We have deployed a number of risk mitigation strategies and are working actively with our suppliers and distributor partners to optimize our supply chain to meet the consumer demand. While we expect these disruptions to persist throughout the fiscal year, we believe that the impact will become less significant in the second half of the year.”

A global glass shortage is affecting large and small companies. Adam Flatt, co-owner of Franklin Hill Vineyards in Bangor Pa., and Social Still, makers of Sasquatch Vanilla Maple Bourbon in Bethlehem Pa., says the cost of bottles has gone up and it’s tough to buy them at any price.

“Two years ago, I paid $1.47 for a glass bottle, now I pay $2.50 a bottle,” Flatt told The Epoch Times in a phone interview.

“The supply chain is broken for sure for us small guys, and now suppliers are not warehousing as much as they used to.”

In January, he ordered 6,000 bottles for October. The supplier has changed the delivery to no sooner than January, but his orders have been pushed back so many times he is not confident about getting bottles by then. Flatt has changed bottle designs, suppliers and still struggles to get bottles. And there is more.

“There are labor shortages. For a while, nothing could be shipped to you. The bottle company was on quarantine and people were not allowed to work. Now demand is back, even better than before,” Flatt said.

“But everything seems more challenging. Like pricing, a dollar more a bottle. Sometimes you think, ‘I’ll pay a little more to fix a problem,’ but money can’t fix some of these problems.”

Every part of the supply chain has problems, says Pat Shorb, president at  Holla Spirits, a York, Pa. vodka producer.

“If we were to order today, we would have issues getting bottles, caps, labels—many are experiencing problems with their glues, we can get them but they are delayed—it’s all down the board. It’s parts for equipment. It’s drivers, general freight at the ports, delays getting products out of warehouses and into stores,” Shorb told The Epoch Times in a phone interview.

“There’s not a person in the industry who is not feeling the constraints of the supply chain.”

Shorb says he has a supplier who needs 50 workers in his warehouse and can’t find the workers, even with a $3,000 sign-on bonus. It means products sit in the warehouse longer and the company makes adjustments.

“We’re forecasting better, working more in advance and in higher quantities, and hoping that the supply chain issue shakes itself out,” Shorb said, adding that Pennsylvania’s ration of major brands is an opportunity for consumers to embrace new brands.

“A majority of major spirit brands are foreign-owned. It’s a great opportunity for consumers to support your local or regional producers, to experiment. There are phenomenal local products of superior quality and consumers should try them.”

Products Rationed in Pennsylvania

Bars and consumers may buy no more than two bottles of any items on this list.

• 1792 Chocolate Bourbon Ball Cream Liqueur 34 Proof 750 ML

• Baker’s Straight Bourbon Small Batch 107 Proof 750 ML

• Blanton’s Single Barrel Straight Bourbon 750 ML

• Blood Oath Bourbon Trilogy 3 Pack Second Edition 99 Proof  2.25 L

• Bond and Lillard Straight Bourbon 100 Proof 375 ML

• Buffalo Trace Kentucky Straight Bourbon Whiskey 90 Proof 1 L

• Buffalo Trace Straight Bourbon 90 Proof  750 ML

• Buffalo Trace Straight Bourbon 90 Proof 1.75 L

• Colonel E H Taylor Jr Straight Bourbon Small Batch Bottle in Bond 100 Proof 750 ML

• Dom Pérignon Champagne Brut 750 ML

• Don Julio 1942 Tequila Añejo 80 Proof  750 ML

• Don Julio Tequila Blanco 80 Proof 750 ML

• Eagle Rare Single Barrel Straight Bourbon 10 Year Old  750 ML

• Elijah Craig Single Barrel Straight Bourbon 18 Year Old 90 Proof 750 ML

• Hennessy Cognac VS 80 Proof 750 ML

• Hennessy Cognac VS 80 Proof  1 L

• Hennessy Cognac VS 80 Proof 200 ML

• Hennessy Cognac VS 80 Proof 375 ML

• Hennessy Cognac VS 80 Proof 50 ML

• Hennessy Cognac VS 80 Proof 1.75 L

• Jack Daniel’s Old No. 7 Black Label Tennessee Whiskey 80 Proof 1.75 L

• Moët & Chandon Ice Impérial Champagne 750 ML

• Moët & Chandon Ice Impérial Champagne Rose 750 ML

• Moët & Chandon Impérial Champagne Brut 375 ML

• Moët & Chandon Impérial Champagne Brut 750 ML

• Moët & Chandon Impérial Champagne Brut 1.5 L

• Moët & Chandon Impérial Champagne Brut 187 ML

• Moët & Chandon Impérial Champagne Rosé 750 ML

• Moët & Chandon Impérial Champagne Rosé 187 ML

• Moët & Chandon Nectar Impérial Champagne  750 ML

• Moët & Chandon Nectar Imperial Champagne Rosé  750 ML

• Moët & Chandon Nectar Impérial Champagne Rosé 375 ML

• Moët & Chandon Nectar Impérial Champagne Rosé 187 ML

• Patrón Tequila Silver 80 Proof 750 ML

• Russell’s Reserve 13 Year Old Straight Bourbon Barrel Proof 114 Proof 750 ML

• Sazerac Straight Rye Whiskey 90 Proof 750 ML

• Veuve Clicquot Champagne Rose 750 ML

• Veuve Clicquot Yellow Label Champagne Brut 1.5 L

• Veuve Clicquot Yellow Label Champagne Brut 750 ML

• Veuve Clicquot Yellow Label Champagne Brut 750 ML

• Veuve Clicquot Yellow Label Champagne Brut 375 ML

• WB Saffell Straight Bourbon 107 Proof 375 ML

• Weller Special Reserve Straight Bourbon 90 Proof 750 ML

Representatives of the Taliban have continued to publicized funds which they say were unlawfully appropriated by corrupt former national government officials, among them ex-President Ashraf Ghani and officials close to him.

The Central Bank of Afghanistan this week announced the Taliban seized more over $12 million in cash and gold from the homes of ex-government officials, which comes on the heels of last weekend a raid by Taliban militants on the home of the man who servied as Ghani’s vice president, Amrullah Saleh. A video from the search of the residence purported to show that the former longtime Afghan politician had about $6 million in cash and at least 15 gold bars stashed in his home.

There’s long been reports and confirmation out of the Pentagon and US officials who’ve admitted to flying entire crates and bricks of cash into the country over the past couple decades of war. It’s believed that the abundance of foreign and military-supplied aid that poured into the war-torn country to the tune of trillions often went to line the pockets of corrupt officials, amid complaints that nothing ever really got done in terms of intended infrastructure projects for the public.

This past week’s Central Bank of Afghanistan statement revealed the following:

“A certain amount of cash found at the residence of Mr. Amrullah Saleh, the first Vice-President of the previous government and a number of previous high ranking government officials was submitted to Da Afghanistan Bank by the authorities of the Islamic Emirate of Afghanistan.”

The bank said further in the accusatory announcement: “The total of the aforementioned cash amounts to USD twelve million three hundred sixty-eight thousand two hundred forty-six (12368246) and a number of gold bricks most of which were found at Amrullah Saleh’s residence”.

Likely the Taliban will continue to release evidence of uncovering piles of cash, jewelry, and gold at former Afghan officials’ residence, in order to underscore the self-serving nature of the prior corrupt US propped-up government. This all appears intended to humiliate the country’s past government which had been propped up by the US and NATO.

Cash and gold amounting to over $12 million have been taken in raids by the Taliban on former members of the Afghan government, as #Afghanistan experiences a severe cash shortfall | via Deutsche Wellehttps://t.co/77jJXr8flf

— WikiLeaks (@wikileaks) September 16, 2021

The Taliban has meanwhile vowed that it will serve the people in a transparent manner, and according to the principles of Islam, which has lately included the establishment of a ‘morality police’.

Authored by Chris MacIntosh via InternationalMan.com,

There are some things that bring joy to my soul. My pleasures are simple ones. Peanut butter on toast (the food of gods), witnessing Macron getting a slap, and this…

The awesome thing here is that what is taking place is that our competition on bidding for coal assets has disappeared in a cloud of woke smoke.

This will quickly become geopolitical, and the question is this: can BlackRock, Citi, Prudential, HSBC, and their other woke mates decide the fate of nations?

They are already affecting the fate of nations. Witness Canada and all of Western Europe.

I found a live shot of their respective energy policies:

But will they do the same to China? Will they do the same to Russia?

The answer to that will only be fully revealed in the due course of time, but we don’t really need any crystal balls here as we just watch actions, not words.

“China put 38.4 gigawatts (GW) of new coal-fired power capacity into operation in 2020, according to new international research, more than three times the amount built elsewhere around the world and potentially undermining its short-term climate goals.”

Nearly all of the 60 new coal plants planned across Eurasia, South America and Africa — 70 gigawatts of coal power in all — are financed almost exclusively by Chinese banks”

We see all of this on the ground, and while it is taking place, formerly reputable media outlets such as the FT, Reuters, and Bloomberg tell us that: “China’s belt and road initiative creates a problem for China with respect to their climate goals.”

Really?

There is no conflict or problem. Let me explain. Here is what is transpiring. They will keep paying lip service to the woke ideology while capturing the bulk of the energy market, and by the time we all wake up, they’ll control the world’s energy and logistics chains. And once they’ve done that, they’ll be able to control the reserve currency and once they’ve done that… well, they will be the dominant power. Game over. At this rate they’ll get there in a frighteningly rapid period of time. No more than a couple of decades.

Every week I find myself saying to myself “I just can’t believe this sheit I am reading.” It is the same old story. The West see themselves as above the East and that the West (North America and Europe) can dictate to the rest of the world what they must do.

From the BlackRock article:

“BlackRock Inc. and other major financial institutions are working on plans to accelerate the closure of coal-fired power plants in Asia in a bid to phase out the use of the worst man-made contributors to climate change.

“The world cannot possibly hit the Paris climate targets unless we accelerate the retirement and replacement of existing coal-fired electricity,” Don Kanak, chairman of Prudential’s insurance growth markets division, said in a statement. “This is especially in Asia where existing coal fleets are big and young and will otherwise operate for decades.””

So shut down coal fired power stations, and pray tell, what are you going to replace them with? How will this affect their standards of living?

Let’s put some numbers behind this to understand probabilities. China has a massive industrial sector. So massive it currently consumes 4x more primary energy than its transport sector and more primary energy than all of the US and European industrial sectors COMBINED. So, it’s big.

Will the CCP willingly negatively impact this sector whereby it threatens China’s growing lead in the global economy and, hence increasing global political influence? I’ll let you be the decider.

In contrast to the US, China uses 10x more coal than natural gas. In 2020, China built over 3x as much new coal capacity as all other countries combined, equal to one large coal plant PER WEEK. In fact, in 2020 alone China’s fleet of coal fired power plants was expanded by a net 29.8 GW.

Think that’s a lot? In 2020 they commissioned 73.5 GW of new coal plant proposals, which is over 5x that of the rest of the entire world combined.

*  *  *

The 2020s will likely to be an increasingly volatile decade. More governments are putting their money printing on overdrive. Negative interests are becoming the rule instead of the exception to it. One thing is for sure, there will be a great deal of change taking place in the years ahead. That’s precisely why legendary speculator Doug Casey and his team released an urgent new report titled Doug Casey’s Top 7 Predictions.

Another day, another Chinese crackdown targeting permissible online screen time for young Chinese users. This time, ByteDance, the maker of short-video mobile juggernaut TikTok, said that it would restrict access to Douyin, the Chinese version of the app, to 40 minutes a day for users under 14 years old.

According to the WSJ, Douyin’s “youth mode,” which follows the imposition of new limits on younger Chinese users’ access to online videogames, will restrict under-14s to using the app between 6 a.m. and 10 p.m. The app will be inaccessible to all users in that age group outside of those hours.

While Douyin had introduced some of the features beginning in 2018 on an optional basis, the latest rollout will apply to all users registered with their real names and as being under 14 years old, Douyin said Saturday.  It said that the mandatory measures were designed to protect younger users from harmful content, which however prompts a question: if the online content served by the platform is “harmful”, which would it exist in the first place. In that vein, the up-to 40 minutes a day of Douyin for younger users will henceforth serve up “edifying content such as science experiments, museum exhibitions and history lessons, the company said.”

In other words, its popularity is about to crater.

To aid enforcement, Douyin urged parents to register their children with their real names and ages.

The new restrictions have come as the Chinese government seeks to rein in the country’s biggest internet companies, accusing them of violating antitrust, data-security and labor rules. The ruling Communist Party has also increasingly cast itself as the “guardian of morality” for the younger generation, cracking down on after-school tutoring (thus creating a black market for tutors which makes it even less accessible to anyone but the wealthiest) and emphasizing the need to clamp down on what it calls an obsession with unhealthy celebrity culture (thus further escalating the unhealthy obsession with celebrities).

In June, Beijing revised its Minor Protection Law, requiring digital-content providers to implement time-management tools, restrict certain features and limit purchases for users under the age of 18. Last month, China issued strict new measures aimed at curbing what authorities described as youth videogame addiction by limiting play time to three hours a week for most of the year.

According to the WSJ, Douyin’s primary domestic rival, Kuaishou Technology’s namesake app – backed by Chinese tech giant Tencent Holdings – began offering a similar, if optional, “youth mode” feature in 2019, supplying preselected age-appropriate content and limiting daily app use to a maximum of 40 minutes between 6 a.m. and 10 p.m.

Tencent’s WeChat, China’s ubiquitous do-everything messaging chat service, also offers an optional “youth mode,” which prevents users from accessing some games as well as the app’s payment function.

TikTok, Douyin’s international counterpart, published last month a number of measures aimed at addressing privacy and security concerns around young users—for instance setting accounts of users under 16 years of age to private by default and allowing parents to guide their children’s usage with a pairing function.

Via SovereignMan.com,

What happened:

In the proposed infrastructure bill, as well as the proposed tax increases to fund it, Congress is messing with retirement accounts.

Here are some of the worst proposals currently on the table.

IRA accounts will not be allowed to invest in anything based on account holder’s status.

That applies to investments that require “accredited investor” status, certain financial credentials, or a minimum net worth, such as many private investments (i.e not publicly listed companies). You have two years to get out of current investments that violate this rule.

The IRA will also be prevented from investing in anything in which the owner has 10% or larger ownership, or is an officer.

This is terrible for Self-Directed IRAs — more on these below. Fortunately, it does not currently apply to 401(k)s.

Restrictions on Roth funding and conversions

The Roth structure allows after-tax contributions to retirement plans which then grow tax free. Since you paid taxes up front, you do not owe taxes on distributions, even if the value has grown substantially from good investments.

Congress is proposing to prohibit any after-tax contributions to Roth structures in workplace plans, and ban converting after-tax money paid into a regular plan into a Roth plan (this tactic can currently help avoid Roth contribution limits).

It would also ban ALL Roth conversions for workplace plans for singles who make over $400,000 per year, and couples who make more than $450,000 — but this would not go into effect until after December 31, 2031.

Converting to Roth triggers a taxable event, meaning you pay the taxes on the account now and not on distributions. This can be preferable if you think your investments will grow enough that you would owe more taxes later on distributions than you would owe currently if the account value was taxed today.

Contribution Limits and Minimum Required Disbursements

According to the House Ways and Means summary, “the legislation prohibits further contributions to a Roth or traditional IRA for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year.”

This applies “to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation).”

Under those circumstances, the owner of the account would be forced to take a 50% distribution of the combined value of all applicable plans over $10 million (i.e. if the accounts have $11 million total, the minimum required distribution is $500,000).

It becomes even more restrictive if the accounts exceed $20 million in value.

What this means:

This all translates into less choice and flexibility for individuals planning their retirements.

But it does not eliminate the benefits of the two main self-directed retirement structures that can benefit the self-employed, and people with side income.

What you can do about it:

For a long time we have presented self-directed retirement accounts as a good way to plan for retirement.

A Self-Directed IRA owns one, and exactly one, asset: a limited liability company (LLC) that you manage. That’s why they are called “Self-Directed”. And through that LLC, you can invest your retirement savings in a wide array of assets — precious metals, real estate, cryptocurrency, private businesses*, and much more, in the US, or overseas.

It’s a fairly straightforward setup: you establish an account with the custodian, then establish an LLC in a zero-tax state (like Wyoming or Florida) where the IRA is the owner (member) of the LLC, but YOU are the manager.

You’ll also want to open a bank account for the LLC. Afterward, the custodian transfers your retirement funds to the LLC, putting you in the driver’s seat for determining how the funds are invested.

The contribution limits for the Self-Directed IRAs themselves are not that high, however — only $6,000 (under age 50) or $7,000 (50 and older), so the earlier you start contributing to it, the better.

*If this legislation passes in its current form, the main change to the Self-Directed IRA is that you will no longer be allowed to invest in private companies which require an investor to be accredited, hold certain credentials, or have a minimum net worth.

That is really unfortunate, but it does not entirely negate the benefits of this retirement structure.

Plus, this restriction does NOT currency apply to Solo 401(k)s.

Solo 401(k) is an option to consider if you’re self-employed, or if you generate “side hustle” income.

With a Solo 401(k), you wear BOTH the employer and the employee hats, so you contribute in both roles. A Solo 401(k) allows for contribution levels ranging from $58,000 to $64,500 per year in 2021, depending on your age — offering incredible flexibility, and the ability to significantly lower your personal income tax burden.

Just like a Self-Directed IRA, a Solo 401(k) gives you a much wider array of investment options — real estate, precious metals, private businesses, etc. — that can help maximize your return.

Of course, none of this is definite yet. This is how the legislation currently looks, but there is no guarantee that it will pass in its current form. This is a heads-up about what changes could soon be coming for your retirement accounts.

Keep in mind that we are not tax or investment professionals, and this is not tax or investment advice. You should always consult with a trusted professional, familiar with your particular situation.

Last March capital markets as we once knew them ceased to exist: that’s when the Powell Fed crossed a Rubicon even Ben Bernanke dared not breach and announced that it would start buying single-name corporate bonds and ETFs under its Secondary Market Corporate Credit Facility (SMCCF) with both IG and HY names eligible for purchases in the process effectively nationalizing the corporate bond market.

Purchases under this facility, which were meant to reassure and stabilize the corporate bond market continued until December, at which point – with stocks at new all time highs – the Fed announced the cessation of its corporate bond purchases and entered the beginning stages of fully winding down the Secondary Market Corporate Credit Facility (SMCCF).

At the time, some market participants worried this might translate into a reduction in liquidity, but with purchases amounting to less than $500 million per week since July 2020 …

… and an overall portfolio holding of just $14 billion, it was unlikely that any material deterioration in market microstructure would take place.

And after all, the Fed’s purchases were merely symbolic: the Fed never wanted to become as BOJ-like whale in the corporate bond market, but merely to signal to the world that it would not allow bonds to drop further and would, if required, buy more. Of course, it was not required as the mere guaranteed backstop by the Fed was sufficient to the get dip buyers out in force.

And sure enough, fast forward to the first week of September, when the Federal Reserve has now been able to sell-off the entirety of its corporate bond portfolio with no effect on the market’s microstructure; curiously this also comes at a time when the latest TIC report showed that in Julye foreign investors were net sellers of corporate bonds for the first time this year.

Yet while the SMCCF has now been closed, we continue to think its legacy will live on as a part of the Fed’s policy toolkit with investors forever expecting its reactivation when another macro shock occurs and sends large gyrations throughout corporate credit markets. Or rather “markets” because a world where corporate bonds have no downside is just as centrally-planned as anything China could come up with, and while stonks continue to ramp up for now, there will come a time when everything will crash again and the Fed will once again remind us just how fake price discovery is in a world where the only thing that matters is the Fed’s balance sheet as Citi’s Matt King put it so elquqently in his latest report:

Some of the most interesting research of recent months concerns the “price inelasticity” of markets. Interesting, that is, to academic economists and monetary policymakers. For anyone who’s actually tried trading in markets over the past decade, the idea that prices might be determined more by flows and liquidity and certain large, price-insensitive buyers than by a rational discounting of fundamentals sounds less like a revolutionary insight and more like a statement of the blindingly obvious

As one investor put it to us recently, central bankers seem to be the only market participants left who fail to appreciate the stranglehold their policies have over asset prices: everyone else gave up looking at fundamental value in favour of obsessing over the minutiae of central bank balance sheet line items a long time ago.

While we are currently on autopilot, we expect to be reminded quite soon just how critical the Fed’s liquidity injections are for a binary world where the alternatives are simple: either the Fed prints hundreds of billions every quarter bringing the fiat system ever closer to its death, or we crash.

By Larry McDonald, former trader at Lehman Brothers, author of “A Colossal Failure of Common Sense” and publisher of the Bear Traps Report

My name is Larry McDonald, that is the UK cover above. In the years before the failure of Lehman Brothers, I ran a successful distressed credit business at what was the 4th largest investment bank in the U.S. – becoming one of the most consistently profitable traders in the fixed income division. In late 2008, early 2009 – with Patrick Robinson, we penned “A Colossal Failure of Common Sense” – the Lehman Brothers inside story. At least once a month, I tell my wife while wearing a hopeful smile —“if we sell a million books — we´ll break even on our Lehman stock.” On September 15, 2008 – it all came crashing down in the largest bankruptcy in U.S. history. Known as, “the week that changed the world,” a very painful experience indeed. I was down on the mat looking up at the referee as he delivered the count. It was one of those fateful moments most of us face. Staring into the abyss, drenched in blood-curdling uncertainty, there are times in life when we must get up. Even when it looks like all is lost in a valley of no hope.  Ultimately, the lucky ones learn there are valuable lessons in re-invention. The last 13 years have been a breath of fresh air. 

Life’s Lessons

One of the important lessons in our book comes down to how to use leading credit risk indicators? In the 2007-2010 period, the global credit risk epicenter was obviously inside the US. In the 2011-2013 period, Europe´s banks were the focus during the Grexit panic. In recent years, Asia has become far more interesting, a new epicenter has been formed.

As far back as the spring of 2007, U.S. banks began to underperform financial institutions in Asia. By now, everyone knows most of the subprime mortgage credit risk was inside the USA with domestic banks more exposed than other banks around the world. Notice above, Goldman Sachs (purple above) 5 year CDS (the cost of default protection on the bank), began to meaningfully divergence from Standard Chartered. Standard Chartered PLC is an international banking group operating principally in Asia, Africa, and the Middle East. The company has far more credit risk exposure to China – Asia than U.S. banks. It is clear above, more than 12 months prior to Lehman´s failure, banks in the USA were dramatically underperforming from a credit risk perspective. In other words, in 2007 – the cost of purchasing credit default protection on Goldman Sachs was far more expensive than the bank’s Asian peers. Indeed, elephants leave footprints – when large hedge funds see credit risk – they start placing bets months if NOT years before a credit event. The credit market sniffed out Lehman´s demise months BEFORE equity investors got the joke.

Now, let us think of Asia in the summer of 2015. The Fed was attempting “liftoff” – their first rate hike since 2004. Finally, in December of 2015, the Fed hiked rates 25bps for the first time in eleven years. In the process, as the central bank prepared the world for the now-infamous rate hike. In just six months the dollar ripped from 80 (July 2014) to 100 (March 2015). Emerging markets were in flames, the Fed had triggered a global dollar crisis. More than $1T left China (the country´s fx reserves were on the run). The world was in a real currency devaluation panic, with Asia wearing the epicenter title this time around.

Credit Risk, the Asia Epicenter 2015-2021

During 2015, the China currency devaluation crisis picked up steam in September and came to risk climax in Q3. But months before, the cost of default protection on Asia´s Standard Chartered began to sharply diverge from Goldman Sachs in the U.S. Once again, credit risk was screaming “there is a problem” in May 2015, by September the S&P 500 lost 16%. In 2007, Goldman’s credit risk was so telling. Then, eight years later – banks in Asia would wear the credit risk epicenter title. Fast forward to 2021, Evergrande headlines are all the media rage, especially with the Lehman, the lucky 13th anniversary this week.

But, what are credit markets telling us this time? As you can see above – far right. Credit risk is calm on Asia banks with exposure to China, no difference to speak of. Central bank liquidity is so abundant, there is NO way Lehman would have failed today. Free markets no more. Adam Smith has one (invisible) hand tied behind his back. We have unintended consequences as far as the eye can see with Uncle Sam’s fingerprints on every street corner.

The Trillion Dollar a Day Gravy Train

The flood of cash in U.S. interest-rate markets pushed the amount of money that investors are parking at a major central bank facility to yet another all-time high – every day a new high indeed. In recent weeks, every day more than Eighty participants have been lining up for nearly $1.2 trillion at the Federal Reserve’s overnight reverse repurchase agreement facility. Large counterparties like money-market funds can place cash with the central bank. This easy money gravy train is hiding the next Lehman Brothers, all embraced in deception. In terms of bond yields, let’s look around the planet. In the U.S., close to 90% of the junk bond market is trading below CPI inflation of 5.3% (highest since the early 90s).

Over the last 50 years, the highest this number ever reached was 7%. China’s high yield credit market is just 8-10% away from its March 2020 lows in bond prices – highs in yields. All of which begs the question – How can the U.S.-centric JNK Junk Bond ETF yield 4.4% while China´s junk bonds are offering 10-12% cash flows?! Always with an important lens – our friend, Jens Nordvig reminds us – “foreign involvement is small in China. It is true that the high-yield bond market has a sizable USD component (mostly foreign). But relative to the US, where subprime exposure was sold around the world, it is a much more local (controllable) system.” It has been clear for months, there is Evergrande credit contagion – it’s just inside China at the moment (as for how Evergrande contagion could spread to the rest of the world, read “This Is How Contagion From Evergrande’s Default Will Spread To The Rest Of The World“).

An Unsustainable Reach for Yield Comes with a Price – It is NOT FREE

Each year that goes by while central banks force investors to reach for yield – any paltry plus return on capital will do these days – complacency builds over time to an extreme – dangerous level.  Mark my words – there were dozens of Bernie Madoffs, Al Dunlaps, and Jeff Skillings sipping mint juleps in the Hamptons and the beaches of the south of France this summer. Central bankers are these guys’ best friends, that is the reality no one wants to admit. As long as central banks do NOT allow the cleansing process of the business cycle to function over longer and longer periods of time – credit risk will continue to build under the surface. Each month, week, and year we allow this charade to move forth – the corners capital flows into are deeper and deeper soaked with moral hazard toxicity. Today´s players on the field make “Dick Fuld” – former Lehman CEO –  look like a choir boy walking out of Sunday mass. The coming event will dwarf what was – “A Colossal Failure of Common Sense.”