The Five-Year Fantasy Is Ending

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Since these monetary/fiscal fixes (i.e. distortions) didn't address the real issues, all they can possibly do is increase the magnitude of the next collapse.

For five long years, we have pursued the fantasy that we could return to "growth" without having to fix or change anything. The core policy of the fantasy is the consensus of "serious economists," i.e. those accepted into the priesthood of PhD economists protected by academic tenure or state positions: what we suffered in 2009 was not the collapse of leveraged crony-state financialization but a temporary decline of "aggregate demand" and productive capacity.

The solution, the economic witch doctors asserted, was simple: replace temporarily slack private demand with government-funded demand (deficit spending) and flood the impaired financial system with liquidity (i.e. free money) and increase the incentives to borrow money.

In other words, the "serious economists" solution was to transfer all the interest earned by savers to the banks and push households to buy more low-quality junk from Asia on credit. This expansion of demand (for more of anything– "serious economists" don't differentiate between a 13th pair of shoes and a single replacement pair of shoes–and they absolutely love building McMansions in the middle of nowhere) would push businesses to borrow money from banks (that's good because banks will profit, and "serious economists" want banks to skim enormous profits to keep the financial sector healthy) and expand their production and payroll.

None of this made any sense, of course, because the "serious economists" completely misread the problem. The key characteristic of science is predictable, repeatable results. Yet "serious economists" failed to predict both the 2008 global financial meltdown and the failure of their Keynesian Cargo Cult policies: zero interest rates, limitless liquidity and pushing households and enterprises to borrow more money.

There is simply no way this track record justifies economics as a science. It is at best a pseudo-science. The number of astrologers who predicted the 2008 crash far exceeds the number of "serious economists" who did so, yet the priesthood still claims the mantle of science.

Add the fallacies of "serious economists" to the resistance of the Status Quo to any reduction in their skimming operations and you get the fantasy that the only solution needed was to print trillions of dollars and give the dough to government and financiers. Five years on, "growth" has been extremely anemic, and no honest observer can deny the reality that the "recovery" is so fragile and dependent on free money that any normalization–raising interest rates, ceasing Federal Reserve quantitative easing and reducing the Federal deficit to $200 billion from $600 billion–would instantly toss the economy into a deep recession and trigger a collapse in stocks and bonds.

Absolutely nothing was done to address the structural causes of the meltdown and the erosion of the middle class and upward mobility. Was anything done to reverse the soaring costs of higher education? No–the crisis was papered over by the Federal government taking over much of the student loan debt-serf industry. You call this a solution?

How about financial reform? What exactly did the 2,319-page monstrosity of corrupted Federal power, the “Dodd-Frank Wall Street Reform and Consumer Protection Act" actually accomplish? Did it abolish the 'too big to fail banks" or did it simply enable them to prosper at the expense of the consumer?

What If We're Beyond Mere Policy Tweaks? (February 6, 2012)

How about the 2,074-page Affordable Care Act (ACA), a.k.a. ObamaCare? Did that fix the underlying problems with sickcare? No–it simply created more regulatory distortions and a subsidy for the uninsured to join the bloated monstrosity of sickcare, speeding the bankruptcy of the entire system.

America's Hidden 8% VAT: Sickcare (May 10, 2012)

The jewel in the Keynesian Cargo Cult's crown is the "wealth effect" created by the spectacular rise in the stock market. Nothing like a doubling of stocks to make everyone feel wealthier and more likely to spend, spend, spend–oops, except only the top 5% of households own enough financial assets to even notice.

This spectacular rise is supposedly based on corporate profits, which have soared to new heights. Roughly 11% of the nation's GDP (gross domestic product) is now corporate profits.

Financial sector profits have been equally wonderful:

Compare those spikes to GDP, which has registered a much more modest increase since 2008.

How could corporate profits have soared on such anemic growth? There are several rarely addressed causes.

1. The weak U.S. dollar greatly increased profits earned overseas when stated in dollars. In 2002, 1 euro of profit earned by a U.S. global corporation equaled $1 in profit when converted to U.S. dollars. That same 1 euro profit swelled to $1.60 a few years ago and still garners $1.37 in profit today. That's a 37% premium based not on profits being higher but on currency arbitrage.
Given that most U.S. global corporations earn 50% or more of their sales and profits overseas, this is an enormous factor in rising profits.

2. The Federal Reserve's flood of free money washed over the entire global economy, sparking an orgy of investment and consumption in emerging markets. Some percentage of this flowed to U.S. corporations, which have compensated for weak domestic sales with strong growth in emerging markets.

Both of these conditions are at risk of reversal. The Fed's modest "tapering" of its liquidity flood triggered a near-collapse in the emerging markets, and the U.S. dollar's weakness is based on a rising yen and euro. Given the systemic problems in Japan and Europe, this five-year trend could reverse.

Two other factors deserve mention. Some of these corporate profits result from dodgy accounting, not actual net profit. Much of the rise in stocks can be attributed to corporate buy-backs where the companies borrow billions of dollars for next to nothing and then buy back their own shares, driving share prices higher.

In summary, the five-year fantasy that free money would fix all the distortions and systemic problems is drawing to a close. Why can't the fantasy run forever? The two-word answer: diminishing returns. Handing out subprime auto loans works at first because it pulls demand forward: anyone who wants or needs a new car buys one now, rather than put the purchase off a year or two. Eventually the marginal buyers default and demand falls off, and the distortions cause an even greater collapse in demand and auto loan quality.

This pattern of diminishing return from all the fake fixes can be found in every nook and cranny of the global economy. Papering over structural problems with free money works for a while, but since these monetary/fiscal fixes (distortions) didn't address the real issues, all they can possibly do is increase the magnitude of the next collapse.


via Zero Hedge Tyler Durden

Ukraine Prime Minister Says Crimea Conflict Has “Moved From Political To Military Stage”

More headlines, more buying fuel for the algos, and apparently another step closer to all out war:


What, still reading? Run, run, run to your nearest Virtu colocated terminal and BTFWWWIIID already!


via Zero Hedge Tyler Durden

Squaring the Circle: A QE for the ECB

European Central Bank is in a pickle.  The pillars of monetary policy, money supply growth and inflation, are crumbling.  The main interest rate it influences, the repo rate is already at a lowly 25 bp.  Excess liquidity is trending lower as European banks returned funds borrowed under the Long Term Repo facility.

This is contributing to  upward pressure on the EONIA, the overnight rate, and making it more volatile.   EONIA is double what it was a year ago and the amplitude of the swings, more violent.  Lending to households and businesses has been contracting for nearly two years.

The risk is that the situation gets worse.  Commodity prices have fallen.  ECB President Draghi indicated last week that the rise in the euro is slowing the economic recovery and increasing the risk of deflation.  

ECB officials play up the options at their disposal, but a closer examination suggests this simply is not so.  There are no easy and effective courses of  action.    Those that are easy, like shaving the repo rate, are not very effective.    Those that could be effective, like quantitative easing, are not very easy given the ECB’s charter.

The ECB has said for several months that it is technically prepared for a negative deposit rate.  While do doubt this is true, such a move is unprecedented among large countries.  It could reignite the financial crisis by squeezing banks and money market funds, which provide wholesale funding.

The Outright Market Transaction scheme offered by Draghi in the middle of 2012 has not been operationalized and with Spain and Italian rates at multi-year, if not record, lows there is little incentive for the most likely candidates.  Moreover, the Bundesbank’s doubts about the legality of OMT, expressed before referring the case to the European Court of Justice, shrouds the program, even if the ECB formally denies it.  Trying to invoke the OMT now could trigger an institutional crisis if the BBK refused to participate.

The ECB has indicated it is interested in reviving the asset-backed securities market as a vehicle to boost lending to households and small and medium businesses.    The ECB could buy those bank bonds backed by such lending.  However, there is much preparation and regulatory changes that need to be enacted to turn this into a reality.  This means will not be available anytime soon.

Perhaps the ECB can learn something from the Swiss National Bank.  Recall that when confronting deflation a few years ago, the SNB’s ability to implement quantitative easing was limited by the fact that its domestic bond market is too small.  Forced by circumstances, the SNB opted for buying foreign bonds.

In the early days of the Abe government in Japan, some advisers were suggesting purchasing foreign bonds.   It subsequently moved away from this and stuck to buying domestic bonds and risk assets, including ETFs and REITS.

The IMF and others have advocated that the ECB adopts QE policies.  However, this would contravene its legal framework.  However, the Swiss experience and the Japanese consideration suggests it should consider buying foreign bonds.

There was some objection over Japan’s notion of foreign bond purchases as part of QE because it would appear to be too similar to intervention.    The ECB has repeatedly said that it does not target the exchange rate so a foreign bond buying program would seem to confuse that message.

This underscores the importance of the ECB explaining its effort as an attempt to fix the transmission mechanism that is preventing the highly accommodative monetary policy from translating into lending and offsetting deflationary forces.  That is the goal.  The buying of foreign bonds would indeed entail the sales of euros.  While it may produce a welcome side effect, it is not a direct goal.

There may be some institutional challenges.  For example, there appears to have been two episodes in which the ECB has intervened in the foreign exchange market.  The first was shortly after the euro’s advent as it trended lower, reaching $0.8230 in October 2000.  The intervention was a coordinated operation and the US also participated.

The ECB also reportedly participated in the intervention against the yen after the earthquake, tsunami and nuclear disaster.  A couple issues are not immediately clear.  What is the intervention conducted at the ECB’s initiative, or was it a political decision the ECB carried out?  Did the ECB use its own resources to when it sold the or was it provided the funds?

The right of the ECB to intervene in the foreign exchange market in order to more effectively implement monetary policy, given the arguably broken transmission mechanism, does not appear to contravene its legal structure.   Such intervention, especially if not sterilized (offset via money market operations) would boost the ECB’s balance sheet.  It would likely increase the money supply and boost liquidity.  To the extent that it would weaken the euro, it could help reduce the risks of deflation.  It may also help periphery boost competitiveness and growth.

The media would cry “currency war”, but if the main trading partners of EMU, like the UK, US and Japan said it wasn’t, and there was no retaliation, the fears would fade.   

The ECB does not have any good choices.  It is restricted by its mandate and the legal challenges to OMT.  The measures that the ECB can do like the cut repo rate, reduce the lending rate, and stop sterilizing bonds purchased under the SMP program are insufficient to address the ECB challenges.  The strength of the euro compounds its difficulties.

A quantitative easing that has been advocated by a number of observers, including a German think tank and the IMF is difficult to implement the way the Bank of England, the Bank of  Japan and the Federal Reserve did.  While not constrained by size of the local bond market, the way the Swiss National Bank was, the ECB is constrained in a different way.  Buying foreign bonds appears to be a way to square the circle.

The importance of this to investors with euro exposure is that few have yet to discuss this possible course publicly, though our impression is that European officials are more concerned about the financial and real economy trajectory that perhaps the recent ECB meeting suggested.   Subsequently, the preliminary February inflation estimate was revised lower, and the euro has appreciated by more than 1% on a trade-weighted basis since the March meeting.  Draghi’s speech in Vienna last week, already gave investors notice that the saliency of the euro in the policy making equation had increased. 


via Zero Hedge Marc To Market

Another Escalation: US Freezes Diplomatic Relations With Syria, Orders Non-US Personnel To Leave Country

Putin 2 – Obama 0, which means it is time to go back to the one place where it all started last year, and where Putin had his most resounding victory over the US foreign policy apparatus (at least until the Ukraine, where we trampled not only over Obama’s red line… again… but where nobody quite explained the “costs” to the ex-KGB leader): Syria.  Sure enough, with the US unable to respond in Crimea, has decided to take its fight back to where Europe’s natgas reliance on Gazprom product was first truly exposed.

The US can order non-US personnel around? Regardless, if the bloodless Russian annexation of Crimea wasn’t enough to push the S&P to new all time highs, this surely will.


via Zero Hedge Tyler Durden

More Warren Buffett Hypocrisy; Restructures Deal To Avoid $400 Million In Taxes

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

Warren Buffett epitomizes everything that is wrong with the global economy, and the U.S. economy specifically. He is the consummate crony capitalist, a brilliant yet conniving oligarch who intentionally plays on the gullibility of the masses to portray himself as one thing, when in reality he is something else entirely.

He publicly talks about how rich people need to pay more in taxes, then turns around and pioneers new ways for his company Berkshire Hathaway to avoid hundreds of millions in taxes. He thinks that by going on television stuffing ice cream cones and hamburgers in his mouth and acting all grandfatherly that no one will notice who he is really is and the incredible hypocrisy of his actions.

I’ve pointed out “Uncle” Warren’s hypocrisy previously on these pages, most recently in my post from last March titled: Crony Capitalist “Uncle” Warren Buffett Drives Company Profits Using Derivatives.

While that was pretty blatant hypocrisy, Buffett’s latest elaborate scheme to avoid $400 million in capital gains taxes from the disposition of a large chunk of Berkshire Hathaway’s Washington Post stake (which was acquired in the 1970s for $11 million) absolutely takes the cake.

The Street published an excellent article on the topic. Their conclusion at the end of the piece says it all:

Bottom Line: Warren Buffett is pioneering new ways to avoid capital gains tax, even as he is President Obama’s richest spokesperson for progressive income tax policy. 

More from The Street:

NEW YORK (TheStreet) – Berkshire Hathaway may have avoided about $400 million in taxes by exiting its long-time stake in Graham Holdings – formerly known as The Washington Post Company – through an asset swap with the company that will add Miami-based TV station WPLG and hundreds of millions in cash to Berkshire’s coffers. Wednesday’s transaction also may also break new ground in how large investors structure deals to avoid taxes on their investment gains.


Berkshire’s deal with Graham Holdings is structured in a way that may allow the Warren Buffett-run conglomerate to exit a multi-decade investment in Graham Holdings without paying any capital gains tax, Robert Willens, an independent tax expert, said in a Friday telephone interview.


The cost-basis for Berkshire’s 1,727,765 million shares was $11 million, Warren Buffett said in Berkshire’s 2000 annual letter to shareholders. Now, Berkshire is seeking to exit Graham Holdings at a value in excess of $1.1 billion.


Applying a 38 percent tax rate (federal plus state and local taxes) would bring Berkshire to about $400 million in tax liability, Willens said. The swap orchestrated between Berkshire and Graham Holdings, however, is likely to reduce Berkshire’s tax liability to $0.


The mechanics of Berkshire’s maneuvering are arcane, especially since both Berkshire and Graham Holdings hold large investment gains on each other company’s shares. Berkshire holds 1,727,765 Graham Holdings shares, while Graham Holdings owns 2,214 shares in Berkshire’s Class A stock.


To unwind each other’s investment, Berkshire and Graham Holdings devised what amounts to a stock swap, although not a direct swap that would have locked in capital gains on both companies’ respective investments.


Normally, both corporations and investors must recognize taxable gains on appreciated assets, even if they transfer shares for assets such as cash or business lines.

But Berkshire isn’t directly taking the TV station from Graham, and Graham isn’t taking Berkshire’s stock. NewSub is doing all of the stock, TV station and cash swapping. As such, the swap may meet Sec. 355 of the federal tax code that exempts capital gains.


“This particular cash-rich split-off breaks new ground since, to our knowledge, it is the only one in which the investment assets of the distributed subsidiary consist, at least in part, of the stock of the very shareholder to whom the subsidiary’s stock is being distributed,” Willens wrote on Thursday.


Berkshire’s swap deal with Graham Holdings and similar moves the investment conglomerate has made in exiting large investments in Phillips 66  and White Mountain Insurance indicate that Warren Buffett isn’t interested in paying taxes on Berkshire’s investment gains when cutting deals on behalf of the company’s shareholders.


That comes as Buffett has placed himself front-and-center in a debate over taxation that has simmered in Washington for decades.

If you haven’t thrown up yet, I suggest you read my most popular post ever on our favorite crony oligarch from back in August 2011: A Wolf in Sheep’s Clothing.

Full article from The Street here.


via Zero Hedge Tyler Durden

Russian Forces Attack Simferopol Military Unit; 1 Injured, According To Reports

It seems, despite all the market’s belief that Putin would go quietly into the night once more, that the situation is escalating:


Of course, the big question now is how will Ukraine respond? Because attacking (and injuring) citizens sure seems like a red-line someone should not be crossing (although, as per the referendum, that region is now Russian).


Of course there is no confirmation that these are “Russian” troops per se but it is on the heels of news (via Slashdot) that:

this excerpt from The Examiner: “The Security Service of Ukraine (SBU) confirmed March 16 the arrest of a group of Russians in the Zaporizhzhia (Zaporozhye) region of Ukraine. The men were armed with firearms, explosives and unspecified ‘special technical means’. This follows the March 14 arrest … of several Russians dressed black uniforms with no insignia, armed with AKS-74 assault rifles and in possession of numerous ID cards under various names. One of which was an ID card of Military Intelligence Directorate of the Russian armed forces; commonly known as ‘Spetsnaz’.

And the response by Ukraine has to be weighed based on this statement from the PM:



via Zero Hedge Tyler Durden

28-Year Old Former JPMorgan Banker Jumps To His Death, Latest In Series Of Recent Suicides

Not a week seems to pass without some banker or trader committing suicide. Today we get news of the latest such tragic event with news that 28-year old Kenneth Bellando, a former JPMorgan banker, current employee of Levy Capital, and brother of a top chief investment officer of JPM, jumped to his death from his 6th floor East Side apartment on March 12.

From the NY Post:

Bellando, a former investment bank analyst at JPMorgan, is the son of John Bellando, chief operating officer and chief financial officer at Condé Nast. His brother, John, a top chief investment officer with JPMorgan, works on risk exposure valuations.


Several John Bellando emails were cited during testimony at the Senate Finance Committee’s inquiry into the bank’s losses during the infamous London Whale trade fiasco.


Kenneth Bellando — who grew up in Rockville Center, LI, and was a Georgetown graduate — worked as a summer analyst at JPMorgan while in school. Upon graduation in 2007, he was hired as an investment bank analyst and worked there for one year before moving on, according to his LinkedIn page.


The investment banker then went to Paragon Capital Partners, according to his LinkedIn page, until leaving at the end of 2013.

And so another young life is tragically taken before his time, the 11th financial professional to commit suicide in 2014, and the third in as many weeks. How many more to come?

In summary, here are all the recent untimely financial professional deaths we have witnessed in recent months:

1 – William Broeksmit, 58-year-old former senior executive at Deutsche Bank AG, was found dead in his home after an apparent suicide in South Kensington in central London, on January 26th.

2 – Karl Slym, 51 year old Tata Motors managing director Karl Slym, was found dead on the fourth floor of the Shangri-La hotel in Bangkok on January 27th.

3 – Gabriel Magee, a 39-year-old JP Morgan employee, died after falling from the roof of the JP Morgan European headquarters in London on January 27th.

4 – Mike Dueker, 50-year-old chief economist of a US investment bank was found dead close to the Tacoma Narrows Bridge in Washington State.

5 – Richard Talley, the 57 year old founder of American Title Services in Centennial, Colorado, was found dead earlier this month after apparently shooting himself with a nail gun.

6 – Tim Dickenson, a U.K.-based communications director at Swiss Re AG, also died last month, however the circumstances surrounding his death are still unknown.

7 – Ryan Henry Crane, a 37 year old executive at JP Morgan died in an alleged suicide just a few weeks ago.  No details have been released about his death aside from this small obituary announcement at the Stamford Daily Voice.

8 – Li Junjie, 33-year-old banker in Hong Kong jumped from the JP Morgan HQ in Hong Kong this week.

9 – James Stuart Jr, Former National Bank of Commerce CEO, found dead in Scottsdale, Ariz., the morning of Feb. 19. A family spokesman did not say whatcaused the death

10 – Edmund (Eddie) Reilly, 47, a trader at Midtown’s Vertical Group, commited suicide by jumping in front of LIRR train

11 – Kenneth Bellando, 28, a trader at Levy Capital, formerly investment banking analyst at JPMorgan, jumped to his death from his 6th floor East Side apartment.


via Zero Hedge Tyler Durden

The Next One: Moldova’s Transnistria Region Said To Seek Russian Accession

Many had feared (or expected), fallout from Crimea’s referendum and subsequent accession to Russia may embolden ethnic minorities in many bordering nations to seek self-determination. It appears that is taking place in Moldova where Vedomosti reports that Mikhail Burla, head of the Transnistria region’s legislature, has asked Russia’s Duma for draft laws on accession to Russia to be altered to allow the region to join. The timing of this move is surreal as headlines appeared this morning that Europe is looking to speed up its “association” with Moldova. In a 2006 referendum, over 97% of Transnistrians voted to join Russia


Who is next?


And it appears #1 Transnistria is indeed next

Moscow-based newspaper cites letter from Mikhail Burla, head of Transnistria’s legislature, to the head of Russia’s State Duma.


Letter asks for Russian draft law on accession to Russia to be altered to allow for Transnistria to join, says current draft bill would only allow for Crimea to join Russia


2006 referendum in Transnistria saw 97.2% vote to join Russia, Burla cited as saying in letter

The Moldovan Director of the Russian Institute for Strategic Studies had a few things to say…

What is the problem in the U.S.? They talk about the weakness of Russia, but still afraid of competition on our part. They do not want a competitor. China – a rival, but not a competitor. And the U.S. is not interested in what system in Russia – monarchical, feudal, communist. Only interested in how to relax, but better – to split. Yeltsin they liked – when it broke up the country. Putin does not like it – he wants to save Russia.



“It’s been 60 years – not even changed a generation, if Crimea voted for reunification with Russia, the situation arises where any normal person would say, but what distinguishes the situation in Transnistria? – Says Leonid Reshetnikov. – The question becomes relevant than ever. Have to wait for the Americans attempt to deal with Transnistria. They have no other way to make a muck of Russia. They are afraid that gathered to fight with someone. Who will fight?



Russia, in my opinion, after the Crimea should recognize Transnistria Tiraspol and propose to hold another referendum on reunification with Russia. Differently protect Transnistria we can not.



We must not make concessions when we openly say that Russian world should be destroyed. I urge the show will. We must not become the new Bulgaria, the new Serbia. These and other countries have become dependent on the United States. Travel to Bulgaria, look – no minister in Sofia not be appointed without the consent of the U.S. ambassador.



Now we prepare for the dissemination of Russian legislation in Transnistria. It would be difficult without a strong methodological support. For this great help RISS – special thanks. Two years ago, our president assured the Russian expert community that we will conduct a Eurasian course. It took not much time to see all that we have taken the first steps in this direction. “

And then this…


Signing accord may be expedited because of situation in Transnistria, Crimea, Andrian Candu, Moldova parliament’s vice president, says in Bucharest.

  • Accord was expected to be signed by end-Aug.: Candu
  • Romanian Foreign Minister Titus Corlatean asked EU’s foreign affairs council yday to speed up signing of Moldova’s association agreement
  • Transnistria is Moldova’s secessionist region that borders Ukraine and has Russian military presence

And the Moldovan President believes it would be an “erroneous step”:

Transdniestria’s accession to Russia would be “an erroneous step,” Moldovan President Nicolae Timofti said at a press conference in Chisinau on Tuesday.


I’ve been informed that the speaker of the Tiraspol parliament has addressed Moscow on the matter. Such actions are counterproductive, and they would not favor either the Republic of Moldova or the Russian Federation. If Russia resorted to such a step, this would be an erroneous decision and would not improve Russia’s authority on the international arena,” Timofti said.


Timofti admitted that “there is a lot in common” between the situation in Ukraine and the events in Crimea and Transdniestria.

So to summarise – The EU is seeking a “close” association with Moldova and is attempting to speed up this process and a region of mostly-Russian-ethnicity (with 97% wishing to accede) is demanding that Russia draft a law allowing them to join Russia…


Ring any bells?


via Zero Hedge Tyler Durden

PBOC Denies It Will Bail Out Collapsed Real Estate Developer While Chinese Property Developer Market Crashes

In yesterday’s most underreported story, which we noted first thing yesterday morning, China is on the verge of a second bond default just weeks after Solar cell maker, Chaori Solar, defaulted earlier this month, this time Zhejiang Xingrun (appropriately abbreviated ZX): a real-estate developer which just collapsed after its largest shareholder was arrested and which has some CNY3.5 billion in debt and furthermore the company was revealed to have been taking deposits from individuals offering interest rate between 18% and 36%.

But while Chaori was left to crash and burn, ZX may need a bailout for the same reason that we have always said China is desperate to keep kicking the can for as long as possible: any glimpse under the hood will reveal the true Chinese credit bubble nightmares, best summarized in the following: CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.” Which is why overnight the FT reported that none other than the PBOC was scrambling to bail out the lender in order to avoid the inevitable liquidation avalanche that will begin as soon as the realization hits just how far China’s non-existent collateral is stretched out.

From the FT:

Officials from the government of Fenghua, a town in eastern China with a population of about 500,000, the People’s Bank of China and China Construction Bank, which was the main lender to the developer, were on Tuesday thrashing out ways to repay the company’s Rmb3.5bn ($566m) of debt.

Not surprisingly, local government officials were keen to downplay Xingrun’s fate, which quickly added fuel to jittery markets after Chaori defaulted previously. The “situation is not that serious yet”, said a Fenghua local government official to the FT who only gave her surname Wu. Failure of a small property developer is not unusual in China or even in Zhejiang Province, where Xingrun is based. Well, it is if people start asking questions.

One can see why the local governments and administrators are eager to downplay the potential impact. As Bloomberg reported overnight, “some 66 percent of new Chinese developer dollar-denominated bonds sold this year are trading below their issue price amid the collapse of a private real estate company and news the housing market is cooling.” In other words, the Chinese housing market is suddenly the perfect receptacle for a lit default match to lead to an all out panic.

About $6.3 billion of notes in the U.S. currency sold by property companies including Guangzhou R&F Properties Co., KWG Property Holding Ltd. and Shimao Property Holdings Ltd. (813) have fallen in secondary market trade, according to data compiled by Bloomberg. Prices on Kaisa Group Holdings Ltd. (1638)’s 2018 8.875 percent debentures dropped to a seven-month low yesterday while Shimao Property’s $600 million of 8.125 percent notes due 2021 and sold to investors at par in January were trading at 97.646 cents on the dollar.


Demand for developer debt is waning after government officials familiar with the matter said yesterday Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay 3.5 billion yuan ($566 million) of debt. The value of home sales in the world’s second-biggest economy fell 5 percent in the first two months of the year after local governments stepped up measures to curb rising prices. The 7.5 percent economic expansion targeted by China this year would be the slowest since 1990.


We’re cautious on property bonds short term, with the developers expected to report weaker year-on-year monthly sales data for March,” said Owen Gallimore, a Singapore-based credit analyst at Australia & New Zealand Banking Group Ltd. “For the majority of high yield property developers, January and February sales fell as tier three and four cities suffered from over supply and the smaller developers faced a credit squeeze.”

In other words, not only is the primary market frozen, but the secondary market is crashing further adding to the reflexive fuel that could be precisely the catalyst that unwinds the entire Chinese credit bubble:

China Resources Land Ltd. was the last company from China and Hong Kong to sell dollar debentures in Asia, adding $50 million to its existing 4.375 percent bonds due February 2019 on March 13.


The collapse in secondary prices comes less than two weeks after Shanghai Chaori Solar Energy Science & Technology Co. became the first company in China to default on its onshore corporate bonds.

All of this is happening as China is doing all it can (and has been for the past two years, without success) to cool its red hot housing market bubble, which unlike the US where the bubble is in the stock market, in China it is all about housing:

At least 10 Chinese cities stepped up measures to cool local property markets at the end of last year with Shenzhen, Shanghai and Guangzhou raising the minimum down payments for second homes to 70 percent from 60 percent.


New-home price growth slowed last month led by Beijing, Shenzhen, Shanghai and Guangzhou, the four cities the government defines as first tier, the National Bureau of Statistics said today. Prices in Beijing and Shenzhen each rose 0.2 percent in February from a month earlier while they added 0.4 percent in Shanghai, the smallest increase since November 2012, and gained 0.5 percent in Guangzhou. Prices advanced in 57 of the 70 cities the government tracks, versus 62 in January.


So all of the above would suggest the FT’s account of an imminent, if quiet, bailout of ZX is true. Turns out isn’t, and in fact the PBOC was so pissed it took to its Weibo microblog site to explain what really happened. As Bloomberg summarized, the Chinese central bank says it didn’t participate in an “emergency meeting held Tuesday” to discuss Zhejiang Xingrun Real Estate as reported by some unidentified media  according to a statement posted on PBOC’s official microblog account. PBOC is not involved in dealing with risks from the developer, according to the statement.

For the purists, here is the official statement via Weibo:

[Condemned individual foreign media untrue] March 18, individual foreign media reports, “China’s central bank to discuss emergency aid small real estate company,” inconsistent with the facts: First, the People’s Bank did not participate in the text referred to “convene an emergency meeting on Tuesday.” . Second, the People’s Bank of Zhejiang Xingrun not involved in the disposition of property-related risks. False reports to the media release behavior in unverified cases, the People’s Bank strongly condemned.

Well, it was google-translated, but the gist is clear.

So which is it: will China really let ZX fail and allow the second bond default in under a month to further slam the secondary bond (and much less relevant equity) market, while grinding the all important primary issuance market to a halt at precisely the time when credit creation in China is absolutely critical, or will the PBOC have been exposed as a liar once again.

Since the PBOC is merely a central bank, and thus lying is its bread and butter, our money is on the former, but one can only hope that in a world in which the Bernanke global put is now ubiquitous and perpetual, and the only investment calculus depends on the return/return analysis, that it will be “communist” China that finally allows risk back into the global investment equation.

And finally, putting it all into perspective, is our favorite chart showing bank asset creation in China and the US over the past five years. It needs no commentary.


via Zero Hedge Tyler Durden

NY Attorney General Probing HFT “Fairness & Predatory Behavior”: Did He Just Kill The Virtu IPO?

It seems the blatant unveiling of the HFT market’s Holy Grail trading – Virtu (1 loss in 1238 days) – has raised some attention as Bloomberg reports, NY AG Eric Schneiderman has opened a broad investigation into whether U.S. stock exchanges and alternative venues provide high-frequency traders with improper advantages. As one European lawmaker noted, “the area of high-frequency trading is lacking suitable regulation,” and Schneiderman warned “this new breed of predatory behavior gives a small segment of the industry an enormous advantage over all other competitors.”  We wonder how this will affect Virtu’s IPO given regulation is risk factor #1!


Via Bloomberg,

New York’s top law enforcer has opened a broad investigation into whether U.S. stock exchanges and alternative venues provide high-frequency traders with improper advantages, a person with direct knowledge of the matter said.


Attorney General Eric Schneiderman is examining the sale of products and services that offer faster access to data and richer information on trades than what’s typically available to the public, according to the person. Wall Street banks and rapid-fire trading firms pay thousands of dollars a month for these services from firms including Nasdaq OMX Group Inc. and IntercontinentalExchange Group Inc.’s New York Stock Exchange.


The attorney general’s staff has discussed his concerns with executives of Nasdaq and NYSE and requested more information, said the person, who asked not to be named because the inquiry hasn’t been announced. Schneiderman’s office is also looking into private trading venues, known as dark pools, and the strategies deployed by the high-speed traders themselves.


This new breed of predatory behavior gives a small segment of the industry an enormous advantage over all other competitors and allows them to use new technologies to reap huge profits based on unfair advantages,” according to a draft of Schneiderman’s speech delivered today at New York Law School.



The investigation threatens to disrupt a model that market regulators have openly permitted for years as high-speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centers as the exchanges, a practice known as co-location that lets them directly plug in their companies’ servers and shave millionths of a second off transactions. They also purchase proprietary data feeds, which are faster and more detailed than the stock-trading information available on the public ticker.



Schneiderman has previously voiced disapproval of services that cater to high-speed traders and give them a potential edge. When Business Wire, the distributor of press releases owned by Warren Buffett’s Berkshire Hathaway Inc., said last month it would stop sending the statements directly to high-frequency firms, Schneiderman called it “a tremendous victory.”


Taking his concerns public may help Schneiderman push the exchanges to alter practices, as Business Wire did, even without enforcement action. Among the powerful tools at his disposal is the Martin Act, an almost century-old law that gives him broad powers to target financial fraud in the state.



Targeting the exchanges could be the most straightforward way to deal with any ill effects of speedy trading, said James D. Cox, a securities law professor at Duke University in Durham, North Carolina…“They have a broad statute to maintain orderly markets and to do so in an ethical manner.”


“The SEC wants to protect investors, but also strengthen and promote U.S. capital markets,” Cox said. “These twin functions conflict with each other, which is why they have so far turned a blind eye on this issue.”

Of course, the big headline will be the effect this has on Virtu’s “Holy Grail” IPO – their #1 Risk Factor is…

In addition, certain market participants have requested that the U.S. Congress and the SEC propose and adopt additional laws and rules, including rules relating to restrictions on co-location, order-to-execution ratios, minimum quote life for orders, incremental messaging fees to be imposed by exchanges for “excessive” order placements and/or cancellations, further transaction taxes, tick sizes and other market structure proposals. The SEC recently proposed Regulation SCI, which could impose significant compliance and other costs on market centers that may have to pass such costs on to their users, including us, and could impact our future business plans of establishing a market center to avoid or reduce market center costs for certain of our transactions. Similarly, the consolidated audit trail, which the SEC is requiring SROs to propose a plan for and implement, is expected to entail significant costs both on market centers, which may pass these costs along to their users, and broker-dealers directly.


Any or all of these proposals or additional proposals may be adopted by the SEC, CFTC or other U.S. or foreign legislative or regulatory bodies. These potential market structure and regulatory changes could cause a change in the manner in which we make markets, impose additional costs and expenses on our business or otherwise have a material adverse effect on our business, financial condition and results of operations.

Seems “lobbying costs” might be about to become a much bigger line item…

It appears Virtu really does have a problem!


via Zero Hedge Tyler Durden