Tag: finance

2013 is ready for the history books as an exceptional year on the financial markets in many regards. For the first time in five years there were no signs of a big financial crisis anywhere in the world. At a certain point it felt like Japan was going to be next in line to be hit by an implosion, but the swift actions from the Bank of Japan squashed the possibility. A party ensued on the Japanese stock market, which took away the prize for ‘best market in 2013’ with a rounded return of 50%!

The stock markets fared well this year. But the global economy stabilized all over too, with a modest growth of 1 to 2 percent for Western economies and 4 to 7 percent for the emerging markets. Of course, we have the extremely accommodative monetary policy from the central bankers to thank for this. They were again quite busy in 2013. The Federal Reserve for example, coupled its stimulus package to economic targets for the first time. More specifically an unemployment rate of less than 6.5 percent and an inflation rate of more than 2 percent. In the aftermath of these decisions, the Fed adjusted their monthly debt buyback program upward, to 85 billion dollars.

It is not about fighting of crises anymore, but about supporting balance sheets of banks, financing government spending and keeping the bond markets in check. Meanwhile, the core of the problem from a few years back – a huge pile of debt – is far from solved. You do not have to be a rocket scientist to understand that sooner or later this will have its effect, which is when the financial markets will be challenged once more. The only sustainable solution for the debt problem is economic growth, but at this stage it is practically impossible for Western societies like the US or Europe to grow its way out of debt. The gap between income and spending has become too large and it is increasing exponentially.

One day we will have another Big Bang. The question of ‘when’ is extremely hard to answer, however. Because until that time, the current trends will remain intact. That is why we are keeping an ‘open mind’ over at Sprout Money. Do not get caught up with one asset class or another. Make sure you have a decent mix of different assets in your portfolio. Be alert, but nimble. Ensure you respect your cash position as you never know what tomorrow might bring. New opportunities might present themselves fairly quickly. And although we do not have a crystal ball, we do want to share a few scenarios with you based on our decades of experience in the markets. As always, we are focusing on our specialties: stocks and commodities.

Stocks

This past year presented new highs for stocks. The Western markets are trading 20 to 30 percent higher, and the most important indices put historical records on the board. That is an important sign if we look at the big picture. Stocks practically broke free from the crisis period as you can see on the Bank of America chart below, which depicts the S&P 500 since 1927.

Not only did we just experience a similar crisis period as we did in the ‘30s and ‘70s of the last century, but the recent breakthrough also fits the mould well. However, we do expect that this breakthrough will be tested. Technical analysis would say that the last resistance level should become the new support level. For the S&P 500 that line lies somewhere around 1,550 to 1,600 points. That is why we do see the markets continuing the race in the first months of 2014, but the rally will meet resistance at some point, probably around symbolic barriers. If we have to make an estimation: the S&P 500 can go to 2,000 points, the Dow Jones could jump to 18,000 and the Nasdaq will have to meet its historical resistance at 5,000 points. Indeed, the technology sector is not in record territory yet!

Investing however, is looking ahead. Stock markets are trading 6 months ahead of the real economy. Those who want to predict the evolution of the markets in 2014, has to predict in one way or another the developments in 2015. As the expectations of corporate profits keeping growing at a decent pace, we foresee some ‘fear of heights’ among investors by that time. That will translate into a more turbulent year for the markets next year, possibly even before the summer. Although we are far from negative, we do predict that the stock market will not repeat its amazing 2013 performance. We expect a modest but higher close at the end of 2014 (around 7 percent) for the traditional markets. Investors will have to search for profit growth (technology stocks) and laggards – the emerging markets – to realize an above average return next year.

Commodities

2013 was as exciting for the stock market, but it was quiet for most commodity markets. Important (economically relevant) commodities barely made the news. While oil is closing off the year modestly higher, the copper price is now a little bit lower. Also in the agricultural sector there were mixed results between the grains and the softs. For real fireworks however, precious metals where the place to be, but in a negative way. We had predicted last year that the stock market could become a party pooper for gold and silver. And that scenario is exactly what happened.

As you can see on the above chart, the gold market blew off a lot of steam in 2013. The market sentiment however, felt like gold is done for. Nothing is further from the truth! Although the gold price almost had a 30 percent correction this year, it is still 3X higher than ten years ago. The secular bull market is more than intact. We are not giving up on the precious metal just like that.

We have seen movements like this before in the ‘70s. Things actually were a lot worse then, as the market had a correction of almost 50 percent, with all the doom and gloom at the time. Afterwards, the gold price made a full 180 and shot up at a ratio of 8X in the four years after. We are not saying that the next four years are going to be the same, but the gold rally is far from over. For 2014, we do expect a stabilization and a first ‘recovery’ for gold. If you look at the fundamentals, you cannot ignore the enormous demand for the precious metal. China bought most of the gold production of 2013, while the supply could possibly decrease because of the lower gold price. If we have to make an estimation for next year, we do see gold coming close to its historical record price. For gold’s ‘little brother’, silver, we expect a similar recovery, although a new record price might be a bridge too far.

We also foresee upward pressure for other commodities. The structurally higher prices of years past will continue their trend. Not only as a consequence of the increasing global demand, but also because of monetary measures taken by central bankers. The inflationary pressure will sooner or later have its effect within the commodity complex.

In summary we are keeping an open mind for 2014, with the current trend leading the charge. Increased turbulence, however, will most likely cause changes along the way. That is why flexibility, in the form of a decent cash position, is a must for every investor in the new year. New opportunities and challenges may present themselves at any given time. Our sights are mostly set on technology stocks, Chinese s
tocks, and gold and silver mining stocks.

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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/QgXcSK0-6rI/story01.htm Sprout Money

Two years ago, the CME announced USD/CNH futures trading enabling speculation (and hedging or risk transfer) of offshore Chinese Renminbi. On the other side of the world this week, a couple of gentlemen that few people have ever heard of signed an agreement that has massive consequences for the global financial system. It was a Memorandum of Understanding signed by representatives of the Singapore Exchange and Hong Kong Exchange. Their aim – to combine their forces in rolling out more financial products denominated in Chinese renminbi. This is huge…

 

Submitted by Simon Black via Sovereign Man blog,

Hong Kong and Singapore are THE two dominant financial centers in Asia. For years they’ve been locked in competition with one another, much like New York and London. So their public partnership is a very big deal… indicative of the clear objective they have in front of them.

Bottom line – finance executives in Asia see the writing on the wall. They can see that the dollar is in a period of terminal decline, and it’s clear that the Chinese renminbi is going to take tremendous market share away from the dollar. They want a big piece of the action.

The renminbi has already surpassed the euro to become the #2 most-used currency in the world when it comes to trade settlement, according to a report released yesterday by the Society of Worldwide Interbank Financial Telecommunication (SWIFT).

Right now the renminbi has about an 8.6% share of the global market for trade settlement. Granted, the dollar has the lion’s share of trade settlement at more than 80%.

But just look at how quickly the renminbi has grown; in January 2012, its share of the global market was just 1.9%. So it’s grown by nearly a factor of 5x in less than two years.

With today’s agreement between Hong Kong’s and Singapore’s financial exchanges, that growth will likely accelerate.

As we’ve discussed before, the dollar is in a unique position simply because it is the world’s dominant reserve currency.

This means that when a rice distributor in Vietnam does business with a Brazilian merchant, they’ll close the deal by trading US dollars with each other… even though neither nation actually uses the dollar.

It’s been this way since World War II, simply because there has been such a long tradition of trust in the United States, and a steady supply of dollars throughout the world.

But this confidence is fading rapidly as merchants and banks around the world have been seeking alternatives, primarily the Chinese renminbi.

As the dollar’s market share in international trade decreases, it will mean the end of US financial privilege. No longer will the US be able to print money without repercussions.

And as so many other nations have learned the hard way, when you print money with wanton abandon and indebt your nation to the hilt, there are severe consequences to pay.

Last week’s move between Hong Kong and Singapore gives us a glimpse into this future.

We’ll soon see more financial products– oil, gold, Fortune 500 corporate bonds, etc. denominated in renminbi and traded in Asia.

And as trade in these renminbi products grows, the dollar will be closer and closer to its reckoning day.

Years from now when this has played out, it’s going to seem so obvious.

Just like the post-Lehman crash in 2008, people will scratch their heads and wonder– ‘why didn’t I see that coming? Why didn’t I recognize that it was a bad idea to loan millions of dollars to unemployed / dead people?’

Duh. Same thing. People will look back in the future and wonder why they didn’t see the dollar collapse coming… why they didn’t recognize that it was a bad idea for the greatest debtor nation in the history of the world to simultaneously control the global reserve currency…

The warning signs are all in front of us. And last week’s agreement between Hong Kong and Singapore is one of the strongest signs yet.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/HxQnR5RYAyw/story01.htm Tyler Durden

Two years ago, the CME announced USD/CNH futures trading enabling speculation (and hedging or risk transfer) of offshore Chinese Renminbi. On the other side of the world this week, a couple of gentlemen that few people have ever heard of signed an agreement that has massive consequences for the global financial system. It was a Memorandum of Understanding signed by representatives of the Singapore Exchange and Hong Kong Exchange. Their aim – to combine their forces in rolling out more financial products denominated in Chinese renminbi. This is huge…

 

Submitted by Simon Black via Sovereign Man blog,

Hong Kong and Singapore are THE two dominant financial centers in Asia. For years they’ve been locked in competition with one another, much like New York and London. So their public partnership is a very big deal… indicative of the clear objective they have in front of them.

Bottom line – finance executives in Asia see the writing on the wall. They can see that the dollar is in a period of terminal decline, and it’s clear that the Chinese renminbi is going to take tremendous market share away from the dollar. They want a big piece of the action.

The renminbi has already surpassed the euro to become the #2 most-used currency in the world when it comes to trade settlement, according to a report released yesterday by the Society of Worldwide Interbank Financial Telecommunication (SWIFT).

Right now the renminbi has about an 8.6% share of the global market for trade settlement. Granted, the dollar has the lion’s share of trade settlement at more than 80%.

But just look at how quickly the renminbi has grown; in January 2012, its share of the global market was just 1.9%. So it’s grown by nearly a factor of 5x in less than two years.

With today’s agreement between Hong Kong’s and Singapore’s financial exchanges, that growth will likely accelerate.

As we’ve discussed before, the dollar is in a unique position simply because it is the world’s dominant reserve currency.

This means that when a rice distributor in Vietnam does business with a Brazilian merchant, they’ll close the deal by trading US dollars with each other… even though neither nation actually uses the dollar.

It’s been this way since World War II, simply because there has been such a long tradition of trust in the United States, and a steady supply of dollars throughout the world.

But this confidence is fading rapidly as merchants and banks around the world have been seeking alternatives, primarily the Chinese renminbi.

As the dollar’s market share in international trade decreases, it will mean the end of US financial privilege. No longer will the US be able to print money without repercussions.

And as so many other nations have learned the hard way, when you print money with wanton abandon and indebt your nation to the hilt, there are severe consequences to pay.

Last week’s move between Hong Kong and Singapore gives us a glimpse into this future.

We’ll soon see more financial products– oil, gold, Fortune 500 corporate bonds, etc. denominated in renminbi and traded in Asia.

And as trade in these renminbi products grows, the dollar will be closer and closer to its reckoning day.

Years from now when this has played out, it’s going to seem so obvious.

Just like the post-Lehman crash in 2008, people will scratch their heads and wonder– ‘why didn’t I see that coming? Why didn’t I recognize that it was a bad idea to loan millions of dollars to unemployed / dead people?’

Duh. Same thing. People will look back in the future and wonder why they didn’t see the dollar collapse coming… why they didn’t recognize that it was a bad idea for the greatest debtor nation in the history of the world to simultaneously control the global reserve currency…

The warning signs are all in front of us. And last week’s agreement between Hong Kong and Singapore is one of the strongest signs yet.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/HxQnR5RYAyw/story01.htm Tyler Durden

In 2008, the aftermath of the Subprime Mortgage Crisis created the perfect storm for the emergence of Bitcoin. Here is the definitive history of the famous crypto-currency. From the pseudonymous “Satoshi Nakamoto”‘s founding to the innovation of block chains to the “genesis block”, buying pizzas, Sandiches, Teslas, and now houses… Bitcoin has come a long way (and where it goes is anyone’s guess)…

 

(click image for massive legible version)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/kYVnzdMudWI/story01.htm Tyler Durden

It’s not Spago, nor Per Se. It isn’t located on Rodeo Drive or in Columbus Circle. The restaurant with the longest waiting list, five-years to be precise, is a small, nondescript, 12-table basement located in Earlton, N.Y., named simply enough Damon Baehrel after its owner and chef. Its guests come from 48 countries and include such celebrities as Jerry Seinfeld, Martha Stewart and Barack Obama himself. However what makes Baehrel’s restaurant the most exclusive restaurant in the world is not the decor, nor the patrons, some who fly overnight from Manhattan to pay $255 for dinner (before wine and tip), nor the hype (although all the advertising is through word-of-mouth), but the food, which is all cultivated, grown, prepared, cooked and served from and on the property, and where Baehrel is literally the only employee. “I’m the chef, the waiter, the grower, the forager, the gardener, the cheesemaker, the cured-meat maker, and, as I will explain, everything comes from this 12-acre property.”

The reality is that farm-to-table dining is not exactly a revolutionary concept, although it certainly makes for a far more enjoyable eating experience. As Bloomberg reports, “even McDonald’s touts its farmers and ranchers in feel-good ads. Increasingly, though, entrepreneurial chefs are doubling down on the eat-local trend and bringing customers into their own homes (or cozy approximations thereof). At these culinary salons or underground restaurants, as they’re often called, professionally trained cooks host for-profit dinner parties in unexpected spaces. There’s Wolvesmouth in Los Angeles, where chef Craig Thornton invites patrons to come to his house and pay what they want; City Grit in Manhattan, which rotates Top Chef winners through a downtown furniture store (yes, the communal dining table is for sale); the Underground Restaurant in London; Supper Underground in Austin, Tex.; and Hush Supper Club in Washington and Chicago. The food world revolves around hype—the harder it is to get into a restaurant, the more people want to go—and so culinary tourists obsess and war over the limited space at these secret spots.”

In this world of self-contained gastronomical universes, Baehrel is the most secret:

He has no staff, unless you count his wife and a tech-savvy friend, who help him manage the reservation e-mail address posted on his website. He spends no money on marketing and doesn’t have a business manager cultivating endorsement deals. There have been no profiles of him in major food magazines nor write-ups of his restaurant in any newspapers. In spite of this, or possibly because of it, the wait time just keeps getting longer.

The chef, waiter, gorager, grower (etc), never started off as one: “He learned how to cook from his mother, an avid gardener, and also from years doing odd jobs in mountain-resort kitchens in the Northeast. “I learned bits and pieces along the way, but I never did the research, never looked in a cookbook. In my family, we just learned to do it ourselves, and the inspiration came from nature,” he says. After an injury in 1985 derailed his nascent career as a professional motocross racer, Baehrel and his wife bought their land and opened a catering business specializing in foraged food. It eventually morphed into the bistro concept in 2006 and since then has relied almost entirely on word-of-mouth buzz.”

And a lot of buzz there is: as Michael Chernow of New York’s chain of Meatball Shops says, “With [Baehrel’s] skills, it’s like he’s the Michael Jordan of culinary art.”

So just what does the Michael Jordan of cooks serve?

Baehrel has a thing for molecular gastronomy; his small bites are dehydrated, infused, and tinctured on their way from lawn to mouth. All of that work happens in a red and white-trimmed kitchen-as-barn the chef built himself. It could pass for a rustic guesthouse. He keeps the space meticulously clean, laying down plastic sheets every few days to protect the linoleum floors. On steel prep tables sits the usual restaurant gear of blenders and food processors; neatly organized shelves store hundreds of containers of carefully labeled ingredients such as powdered bracken ferns or pickled maple leaves. “It occurred to me one day—and this was really an epiphany, 25 years ago—that everything I needed was here,” Baehrel says. “And I was going to spend the rest of my life developing and exploring what was possible.”

Not surprisingly, with an unmatched work ethic, Baehrel’s concept is very lucrative.

This hyperlocal, hyperunderground strategy is paying off. Baehrel won’t provide exact numbers but says he serves a few thousand guests each year and generates annual revenue of at least $750,000. By contrast, a successful restaurant in Manhattan’s crowded West Village might break the $1 million mark, though the business model is much different. Baehrel’s expenses are less predictable each season; they can include one-off big-ticket items such as a $5,000 trailer or a $10,000 hauling cart. But with no payroll or mortgage, and no food vendors except for his wine, seafood, and meat, which is from a local farm stand, he can stay both small and successful. “The biggest risk,” he says, “is that it’s just me there.”

However, what is most unique, and why Baehrel’s kudos and fame, are well-deserved, is his passion for working, cooking, that he takes no shortcuts, and that he has learned how to survive and thrive in an isolated ecosystem with zero supply-chain constraints and considerations, and with zero outside influence by the all-powerful megacorporations (although we have a nagging feeling it is only a matter of time before a major publicly-owned restaurant chain dangles a multi-million dollar check before Baehrel, acquires his 12-table basement and promptly pollutes yet another independent, clean eating concept).

“Native Harvest is more than the cuisine; it’s my way of life. It’s living off the land, and it’s fun to watch nature reveal itself,” Baehrel says. The three-bite dish has an appealingly musty mushroom taste. Sixteen dishes follow over the next five hours, some bite-size and others hearty courses of scallops, steak, and chicken. “He doesn’t use any dairy or butter in his cooking, and yet his sauces are creamy and delicious,” Chernow says. Each course is somehow improved by Baehrel’s monologue about the effort it takes to produce.

 

Perhaps that’s why the mainstream food world has finally started to take notice. Earlier this year, Damon Baehrel earned one of the country’s highest Zagat ratings: 29 for food and 28 for service, out of a possible 30. Baehrel also won his first James Beard nomination, as best chef in the Northeast in 2013. As it stands, the wait list for dinner stretches well into the back half of this decade. As the once-secret restaurant becomes less so, a new puzzle emerges: How does one score a table before Baehrel reti
res? He acknowledges that eventually he’ll have to stop taking reservations. “It’s a good problem to have.”

It’s also a good problem to have for all the minimum-wage restaurant workers of America who toil day and night at various McDonalds and Burger Kings around the country, demanding a higher wage and engaging in nearly daily strikes. Here’s a thought: take your passion for your job (if of course there is one) and do what Baehrel did – start a venture, open up a business, provide something new, original, fresh, and you too can attain the American dream. Or alternatively, keep on striking, and demanding more, more, more from the government, and from an uncaring corporatocracy, while lamenting your plight. Because if there is a lesson in Baehrel’s experience (and this most certainly is not a promotional post), is that while the US system is doing everything in its power to crush the enterpreneurial drive and to make upward mobility impossible, for those who have a real passion about their lot in life true success is still possible.

Finally, and perhaps most important assuming the future of the world is one in which critical supply chains tear apart: Baehrel’s example shows that one can lead a self-contained life of near gastronomical perfection with zero needs for 99 cent meals, and merely a few acres in which to grow and raise one’s food. All it takes, of course, is a lot of work…

For the reading challenged, here is an abbreviated 3-minute video summary of the above.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/0oSwjtsasns/story01.htm Tyler Durden

By Russ Winter of Winter Actionables

Many post-facto articles appear at the end of severe bear markets and bull markets. A recent Wall Street Journal article, for example, noted:

“One of the world’s biggest gold bugs is getting crushed by the metal’s steep fall.

 

“The flagship fund of prominent Canadian hedge-fund manager Eric Sprott SII.T -1.56% has dropped more than 50% this year in what will likely be the third consecutive year of double-digit percentage losses, according to documents sent to investors.

 “Redemptions and weak performance have pushed down hedge-fund assets managed by Mr. Sprott to about $350 million from nearly $3 billion in 2008.” (Article here.)

The latter probably is a 3Q number that has been driven even lower by endless taper-talk and Comex paper shorting rout in the 4Q. The historic liquidation has run its course and supply is drying up.

How much more selling is left in Sprott’s and similar funds, or for that matter in the GLD ETF? The latter has liquidated its gold, plus some that was added going back to Lehman Brothers. How much additional naked-paper shorting to producers and bullion bankers can slingers muster? Nominal would be my estimation [see “One for the Ages“].

Rick Rule of Sprott conducted an interview about this flow of funds situation and offers some color on what’s transpiring. I put his last comment first because it points to the timing of what’s potentially a real turn in sector money flows. I think he is hinting that the money flow worm has turned from a selling climax to a gearing for an up phase.

“[The] events that have transpired over the last month have made me much more bullish in terms of timing than I would have been six weeks ago,” Rule said. “First, has been with regard to our Sprott mutual funds. We are seeing net inflows, as opposed to redemptions, for the first time in a long time.

 

“We recently signed and funded a joint venture with the incredibly large Chinese state-owned mining company,” he said. “This will show that outbound investment by the Chinese government into the junior mining sector, which is what we’ve specifically been charged with, is alive and well.”

Note: The following is in regard to the Zijin deal that I wrote about several weeks ago [see “China’s Precious Metal Mines Running Out Of Reserves“].

“We expect to be able to announce a similar joint venture with another name-brand Asian investor by the end of 2013. Once again, this is testimony to the fact that Asian strategic investors are back in the junior mining sector in earnest,” Rule said.

 

“Our Sprott institutional lending fund, where we aim to raise $350 million for our lending business, is very close to securing an extremely strong cornerstone lead-order from a name-brand North American institution.

 

“I did a couple of days of marketing around the city of London with our CEO.  We were seeing some of the bigger accounts in the city of London.  The bottom line is we received an awful lot of interest in what we were doing.”

One would think that value investors from outside the industry would be all over this vacuum. Adrian Day’s fund was able to buy 5% of Vista Gold for less than a million and half dollars.

Teranga’s very bullish $135 streaming royalty deal with Franco Nevada is also a bell ringer. It has all the hallmarks of a smart, private company builder transaction that is shareholder positive. Further, it refutes the notion that there is no activity in the space. Incidentally, FNV has $1.3 billion in capital for acquisitions.

Before the deal, this went completely undetected by the market. TGZ was trading in a dull, vacuum-like manner, much like the rest of the sector. The good news is that the stock actually responded with a 32% rally on the news. TGZ will soon become a large producer and has the full backing of the government of Senegal, which has a stake in the deal.  In fact, I have it from good sources that Senegal helped pushed this deal through. Hats off to TGZ management for consolidating this high potential district without any shareholder dilution.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/n7P-g0ZMhVo/story01.htm ilene

Submitted by Matthew Lowenstein va The Diplomat,

China’s economy is straining to keep up a semblance of its former growth rate. The surest sign is the way a shadow market in bank paper has evolved to substitute the commodity that China is increasingly running short of: cash.

Bankers are passing around their own ersatz currency, stimulating trade with what, in effect, are off-the-books loans. As in the wildcat currency era of the United States, the antebellum period before America had a national currency, this paper trades at a discount from province to province. It is increasingly used for speculative purposes, is potentially inflationary, and is hard to regulate. The People’s Bank of China (PBOC) has been unable or unwilling to crack down, lest it provoke a serious slowdown. But when the world’s second largest economy must resort to passing around IOUs, the financial community should take note.

Bankers acceptance notes (BANs) are nothing more than a post-dated check with a bank guarantee. For example, a buyer in Chongqing might have a hard time passing checks to vendors in Shanghai. But if the purchaser gets his paper signed by, say, Bank of China, his check now has the guarantee of a major financial institution: it is money good. BANs facilitate trade by obviating the need for vendors to assess the creditworthiness of purchasers. But in China, this prosaic instrument of commerce has become a kind of shadow currency that allows under-reserved banks to purchase deposits, fuels speculation, and undermines the central bank’s control over the money supply.

“From the bank’s point of view, Banker’s Acceptance Notes are all about getting deposits,” explains a banker in Zhengzhou. In a typical transaction, a customer with cash in his pocket can put down 100 RMB as a security deposit and walk away with double that amount in BANs. The bank is pleased because it receives hard currency in return for its own funny money. The customer is delighted: he has turned 100 RMB in cash into 200 RMB in something almost as good. In effect, the bank has given the customer a 200 RMB loan without using a cent of cash.

The transaction harkens back to U.S. banking in the era before fiat currency, when banks used their own banknotes to purchase reserves of everything from gold bullion to national bank notes, British pounds, and bushels of wheat. Chinese banks print their own scrip to purchase “reserves” of cash, i.e., deposits. If the bank paper is accepted, it functions as currency and banks get to hold onto their reserves. But if people worry about the bank’s credit, or need cash (perhaps during a crisis) the bank will be forced to redeem its paper, possibly in a hurry.

In theory, all BANs are issued to support trade. When a customer is issued BANs, he must show proof of an underlying transaction. And to the extent the notes truly are backed by trade – by televisions shipments to Chongqing, say, or refrigerator exports to Seattle – there is very little risk. The notes get paid down as transactions are settled, and the bank need not worry about them. But to the extent BANs are not used for trade – to the extent they are merely rolled over and circulate as a secondary currency – they represent a constant, outstanding bank liability to high-risk industries.

“The truth is, most BANs are not used to support real transactions,” says a grinning shadow banker in Shenzhen. His company is one of many Chinese conglomerates whose business tentacles seem to span every industry from mining to tourism. But nearly half of its transactions are unprofitable: they are formalities, conducted solely for the purpose of acquiring BANs. “BANs are supposed to be issued only to support trade. But the rules are very flexible, and there are ways around them,” he continues. For example, trading partners can coordinate so that transactions net out. Party A sells Party B 100 RMB of widgets and Party B sells Party A 100 RMB of widgets. They both walk away with the same widgets they started with, and an extra 100 RMB of BANs each. As if by magic, the transaction has generated 200 RMB of highly liquid, bank-guaranteed financial assets.

BANs without underlying trade are used to finance speculation. Shadow bankers sell the BANs at a discount of about 5 percent – a process known as “discounting” – in return for cash. The seller of the note needs walking-around cash and is willing to dump his paper at a loss. After all, the seller is likely a speculator. He only loses 5 percent on the sale of the BAN, but his cash is invested in trust products or lent into the grey market at yields well in excess of 10 percent. The buyer of the note is likely to be a grey market BAN broker. As far as he’s concerned, he’s earning a risk free 5 percent by purchasing bank-guaranteed paper at a discount. In other words, a piece of paper – an IOU – is being passed around on which first a speculator and then a bank gives a guarantee. In this way, credit flows from the banks through shadow bankers and into property and other high-yield, high-risk industries such as mining or infrastructure. What looks to a banker like a purchase of televisions or washing machines in Shanghai could easily end up financing condominiums in Jiangsu or rolling over coal debt in Inner Mongolia. Most worrisome is that banks account for BANs as guarantees; guarantees are obligations that, a la Fannie-Mae, do not appear on a balance sheet.

The banks find the off-balance sheet accounting treatment of BANs particularly useful. Onerous statutory requirements force Chinese banks to keep a loan to deposit ratio (LDR) of 75 percent or less. BAN issuance simultaneously decreases loan balances while increasing deposits; it relieves LDR pressure on both sides of the vinculum. Of course, the change in LDR is a purely cosmetic change: the risk – and leverage – in the bank is just as high as if it had extended a plain vanilla loan, but the leverage is moved off balance sheet. Hence, to the extent BANs are used for speculation, they represent bank exposure to high-risk activities that is invisible to regulators, investors and even bankers themselves.

Not surprisingly, China’s local governments, themselves heavily involved in project and commercial finance, have become a huge market for BANs. Since 2008, local governments across China have been diligently at work on grand infrastructure and “urbanization” projects, of which ensuring an adequate supply of ghost cities seems to rank highest in priority. In the process, local government financing vehicles (LGFVs), the corporate subsidiaries that local governments use to fund infrastructure projects, have racked up an estimated 19 trillion RMB in debt according to the National Audit Office. Because LGFV investment has been so unremunerative – ghost inhabitants don’t pay taxes – the fiscal burden on local governments is crushing. For cities and counties that are short of cash, there is scarcely a more appealing solution to printing their own.

“There is a risk of banks and LGFVs colluding to fake security deposits and print BANs with no underlying trade,” warns a Ministry of Finance discussion document. Local governments up to their eyeballs in debt have the advantage of control – often of ownership – of banks within their territories, and can order up BANS at will. LGF
Vs turn to sister banks as a makeshift printing press, printing pseudo-currency virtually on demand. LGFVs use BANs to pay suppliers and obscure the truth about their overburdened balance sheets. A jaded banker in Tianjin complains, “When a borrower uses a BAN, they are supposed to record it on their balance sheet as a liability. But it’s kind of an unspoken rule that they don’t. To be honest, a lot of people see this is a major advantage of using BANs; they can pretend they have lower debt than they really do.” And the LGFVs never have to worry about principal repayments because banks are happy to roll over BANs as they come due. In short, LGFVs have nearly unrestricted access to notes that allow them to make payments, do not get recorded as debt, and never have to be paid down – i.e., their very own money.

Local governments printing their own money has led to a partial fracturing of the monetary system. A BAN issued by a local bank is likely to be accepted within its province, but its credit might not be honored – or honored only at a punitive discount – across provincial borders. An employee at an LGFV in Jiangsu engaged in contract work for infrastructure projects said his company routinely accepts BANs from Jiangsu banks. However, it refuses scrip from neighboring Anhui; out-of-province banks must pay in cash.

“A lot of smaller, local banks print more BANs than their balance sheet can support; in fact the reason they print BANs in the first place is because they don’t have the cash to make loans,” explains a banker at the Zhuhai branch of a major commercial bank, “Their BANs won’t be accepted outside of that province. It’s kind of like in international currency markets. The U.S. dollar is accepted in every country as the reserve currency.  Similarly, RMB are accepted anywhere in China. But provincial BANs can only be used within their native province.” It’s almost as if the non-consumer part of the Chinese economy had reverted to the 1930s, when each province issued its own legal tender.

It is impossible to estimate how much of China’s outstanding BANs were issued to LGFVs, but it is meaningful enough for the Guangdong Audit Bureau to list BANs as a new financing channel available to local governments. If China is to maintain a coherent fiscal and monetary regime, sooner or later its LGFV debt will have to be digested, either by paying it or writing it down. When regulators attempt to do so, they will find the National Audit Office’s estimate of 19 trillion RMB in LGFV debt understated, in part owing to BANs issued to LGFVs.

According to the People’s Bank of China, almost nine trillion RMB of BANs are circulating in an economy with a monetary base of 107 trillion RMB.  This huge economic underground is a measure of the extent to which highly speculative investment is outpacing the ability of Chinese banks to finance through deposits. If LGFVs and property developers had sufficient cash flows they would not need to resort to BAN funding. If returns on invested capital were sufficient, banks would see their deposits grow organically and not be reduced to purchasing RMB with this strange breed of banknote. These notes may behave like money, but their use is constricted; they cannot be used to purchase groceries or pay wages and will never be acceptable internationally. The BAN economy is thus separate, unable to be integrated with the rest of China’s economy. How long can it be sustained?

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4cNPzThFgkw/story01.htm Tyler Durden

Submitted by Matthew Lowenstein va The Diplomat,

China’s economy is straining to keep up a semblance of its former growth rate. The surest sign is the way a shadow market in bank paper has evolved to substitute the commodity that China is increasingly running short of: cash.

Bankers are passing around their own ersatz currency, stimulating trade with what, in effect, are off-the-books loans. As in the wildcat currency era of the United States, the antebellum period before America had a national currency, this paper trades at a discount from province to province. It is increasingly used for speculative purposes, is potentially inflationary, and is hard to regulate. The People’s Bank of China (PBOC) has been unable or unwilling to crack down, lest it provoke a serious slowdown. But when the world’s second largest economy must resort to passing around IOUs, the financial community should take note.

Bankers acceptance notes (BANs) are nothing more than a post-dated check with a bank guarantee. For example, a buyer in Chongqing might have a hard time passing checks to vendors in Shanghai. But if the purchaser gets his paper signed by, say, Bank of China, his check now has the guarantee of a major financial institution: it is money good. BANs facilitate trade by obviating the need for vendors to assess the creditworthiness of purchasers. But in China, this prosaic instrument of commerce has become a kind of shadow currency that allows under-reserved banks to purchase deposits, fuels speculation, and undermines the central bank’s control over the money supply.

“From the bank’s point of view, Banker’s Acceptance Notes are all about getting deposits,” explains a banker in Zhengzhou. In a typical transaction, a customer with cash in his pocket can put down 100 RMB as a security deposit and walk away with double that amount in BANs. The bank is pleased because it receives hard currency in return for its own funny money. The customer is delighted: he has turned 100 RMB in cash into 200 RMB in something almost as good. In effect, the bank has given the customer a 200 RMB loan without using a cent of cash.

The transaction harkens back to U.S. banking in the era before fiat currency, when banks used their own banknotes to purchase reserves of everything from gold bullion to national bank notes, British pounds, and bushels of wheat. Chinese banks print their own scrip to purchase “reserves” of cash, i.e., deposits. If the bank paper is accepted, it functions as currency and banks get to hold onto their reserves. But if people worry about the bank’s credit, or need cash (perhaps during a crisis) the bank will be forced to redeem its paper, possibly in a hurry.

In theory, all BANs are issued to support trade. When a customer is issued BANs, he must show proof of an underlying transaction. And to the extent the notes truly are backed by trade – by televisions shipments to Chongqing, say, or refrigerator exports to Seattle – there is very little risk. The notes get paid down as transactions are settled, and the bank need not worry about them. But to the extent BANs are not used for trade – to the extent they are merely rolled over and circulate as a secondary currency – they represent a constant, outstanding bank liability to high-risk industries.

“The truth is, most BANs are not used to support real transactions,” says a grinning shadow banker in Shenzhen. His company is one of many Chinese conglomerates whose business tentacles seem to span every industry from mining to tourism. But nearly half of its transactions are unprofitable: they are formalities, conducted solely for the purpose of acquiring BANs. “BANs are supposed to be issued only to support trade. But the rules are very flexible, and there are ways around them,” he continues. For example, trading partners can coordinate so that transactions net out. Party A sells Party B 100 RMB of widgets and Party B sells Party A 100 RMB of widgets. They both walk away with the same widgets they started with, and an extra 100 RMB of BANs each. As if by magic, the transaction has generated 200 RMB of highly liquid, bank-guaranteed financial assets.

BANs without underlying trade are used to finance speculation. Shadow bankers sell the BANs at a discount of about 5 percent – a process known as “discounting” – in return for cash. The seller of the note needs walking-around cash and is willing to dump his paper at a loss. After all, the seller is likely a speculator. He only loses 5 percent on the sale of the BAN, but his cash is invested in trust products or lent into the grey market at yields well in excess of 10 percent. The buyer of the note is likely to be a grey market BAN broker. As far as he’s concerned, he’s earning a risk free 5 percent by purchasing bank-guaranteed paper at a discount. In other words, a piece of paper – an IOU – is being passed around on which first a speculator and then a bank gives a guarantee. In this way, credit flows from the banks through shadow bankers and into property and other high-yield, high-risk industries such as mining or infrastructure. What looks to a banker like a purchase of televisions or washing machines in Shanghai could easily end up financing condominiums in Jiangsu or rolling over coal debt in Inner Mongolia. Most worrisome is that banks account for BANs as guarantees; guarantees are obligations that, a la Fannie-Mae, do not appear on a balance sheet.

The banks find the off-balance sheet accounting treatment of BANs particularly useful. Onerous statutory requirements force Chinese banks to keep a loan to deposit ratio (LDR) of 75 percent or less. BAN issuance simultaneously decreases loan balances while increasing deposits; it relieves LDR pressure on both sides of the vinculum. Of course, the change in LDR is a purely cosmetic change: the risk – and leverage – in the bank is just as high as if it had extended a plain vanilla loan, but the leverage is moved off balance sheet. Hence, to the extent BANs are used for speculation, they represent bank exposure to high-risk activities that is invisible to regulators, investors and even bankers themselves.

Not surprisingly, China’s local governments, themselves heavily involved in project and commercial finance, have become a huge market for BANs. Since 2008, local governments across China have been diligently at work on grand infrastructure and “urbanization” projects, of which ensuring an adequate supply of ghost cities seems to rank highest in priority. In the process, local government financing vehicles (LGFVs), the corporate subsidiaries that local governments use to fund infrastructure projects, have racked up an estimated 19 trillion RMB in debt according to the National Audit Office. Because LGFV investment has been so unremunerative – ghost inhabitants don’t pay taxes – the fiscal burden on local governments is crushing. For cities and counties that are short of cash, there is scarcely a more appealing solution to printing their own.

“There is a risk of banks and LGFVs colluding to fake security deposits and print BANs with no underlying trade,” warns a Ministry of Finance discussion document. Local governments up to their eyeballs in debt have the advantage of control – often of ownership – of banks within their territories, and can order up BANS at will. LGFVs turn to sister banks as a makeshift printing press, printing pseudo-currency virtually on demand. LGFVs use BANs to pay suppliers and obscure the truth about their overburdened balance sheets. A jaded banker in Tianjin complains, “When a borrower uses a BAN, they are supposed to record it on their balance sheet as a liability. But it’s kind of an unspoken rule that they don’t. To be honest, a lot of people see this is a major advantage of using BANs; they can pretend they have lower debt than they really do.” And the LGFVs never have to worry about principal repayments because banks are happy to roll over BANs as they come due. In short, LGFVs have nearly unrestricted access to notes that allow them to make payments, do not get recorded as debt, and never have to be paid down – i.e., their very own money.

Local governments printing their own money has led to a partial fracturing of the monetary system. A BAN issued by a local bank is likely to be accepted within its province, but its credit might not be honored – or honored only at a punitive discount – across provincial borders. An employee at an LGFV in Jiangsu engaged in contract work for infrastructure projects said his company routinely accepts BANs from Jiangsu banks. However, it refuses scrip from neighboring Anhui; out-of-province banks must pay in cash.

“A lot of smaller, local banks print more BANs than their balance sheet can support; in fact the reason they print BANs in the first place is because they don’t have the cash to make loans,” explains a banker at the Zhuhai branch of a major commercial bank, “Their BANs won’t be accepted outside of that province. It’s kind of like in international currency markets. The U.S. dollar is accepted in every country as the reserve currency.  Similarly, RMB are accepted anywhere in China. But provincial BANs can only be used within their native province.” It’s almost as if the non-consumer part of the Chinese economy had reverted to the 1930s, when each province issued its own legal tender.

It is impossible to estimate how much of China’s outstanding BANs were issued to LGFVs, but it is meaningful enough for the Guangdong Audit Bureau to list BANs as a new financing channel available to local governments. If China is to maintain a coherent fiscal and monetary regime, sooner or later its LGFV debt will have to be digested, either by paying it or writing it down. When regulators attempt to do so, they will find the National Audit Office’s estimate of 19 trillion RMB in LGFV debt understated, in part owing to BANs issued to LGFVs.

According to the People’s Bank of China, almost nine trillion RMB of BANs are circulating in an economy with a monetary base of 107 trillion RMB.  This huge economic underground is a measure of the extent to which highly speculative investment is outpacing the ability of Chinese banks to finance through deposits. If LGFVs and property developers had sufficient cash flows they would not need to resort to BAN funding. If returns on invested capital were sufficient, banks would see their deposits grow organically and not be reduced to purchasing RMB with this strange breed of banknote. These notes may behave like money, but their use is constricted; they cannot be used to purchase groceries or pay wages and will never be acceptable internationally. The BAN economy is thus separate, unable to be integrated with the rest of China’s economy. How long can it be sustained?

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4cNPzThFgkw/story01.htm Tyler Durden

Two phrases sum up the 'new normal' farce that is the world's equity markets in 2013… "Don't fight the Fed (or BoJ, or PBoC, or BoE)" and "Climbing the wall of worry"… one wonders, of course, what happens to 'climber' once the central bank's 'belay' is taken away (but that's just silly talk because it's all priced in, right?)…

 

Via Strategas' Jason Trennert (WSJ blog),

“YOU’RE NOT JUST FIGHTING THE FED”

The Federal Reserve’s $85 billion-a-month bond-buying program has been a major driver of the stock market rally. But as the chart below shows, it’s not just the Fed that has been attempting to stimulate the economy. Central banks around the globe, from the Bank of England to the European Central Bank to the Bank of Japan, have launched policies designed to kickstart economic growth. Even as the Fed may start trimming its bond purchases later this month or early next year, global monetary policy remains very easy. The old Wall Street adage is “don’t fight the Fed.” But as Mr. Trennert points out, it’s now more like don’t fight the world’s central banks.

 

 

 

which means "The Wall Of Worry" has been handily ascended…

 

 

So what next?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/U6Ykm_nRt28/story01.htm Tyler Durden

Healthcare.gov may or may not be fixed, depending on who one listens to (and if one reads the WSJ’s, “Errors Continue to Plague Government Health Site” this morning, there is much more fixing left despite the administration’s most sincere promises), but a greater issue is already looming: payment. “We have a bigger number of applicants than people who have paid,” Aetna Chief Financial Officer Shawn Guertin said in an interview today in New York. “That’s a situation that I am a little bit worried about, that people will think they have completed the process but haven’t paid the premium yet.” Whether Americans didn’t realize there would be an actual payment involved in America’s socialized healthcare system, or simply there is too much confusion over how the process is run, is irrelevant – the bottom line is that for whatever reason people are simply not paying their premiums.

As Bloomberg reports, the disjointed process of having customers shop through the government-run marketplace and then pay insurers separately has created a risk that people who have chosen a plan won’t actually be covered Jan. 1. And if people don’t pay by Dec. 31, insurers may end up stuck with a disproportionate number of sicker and costlier customers.

“You have to remember that many times we are dealing with low-income people,” Robert Laszewski, an Alexandria, Virginia-based consultant to carriers, said in a telephone interview last week. “They signed up and they certainly want the insurance, but do they have the money or have they changed their mind by Dec. 31? Nobody’s done this before.”

And while the government has been touting the surge in sign up numbers, with the CMMS announcing yesterday that some 365,000 people have signed up for a private plan through November, what the government has not said is how many of these people have already paid their premium. Judging by the Aetna CFO remarks there is a major, gaping discrepancy between the two. And even if people do expect to get completely free healthcare, that is not what Obamacare is about, at least not yet. So suddenly Obama may have a situation where he has millions signed up for the ACA, and only a fraction has actually paid. Recall that Obama has a goal of 7 million sign ups by the March 31 end of open enrollment.

In the meantime, while it remains to be seen if the new plans will be feasible, the old healthcare plans have already been largely scrapped.

Aetna, based in Hartford, Connecticut, also said it faces too many administrative hurdles to reinstate policies that it’s terminating next year because they don’t meet the new standards set by the health law. Hundreds of thousands of people around the country have gotten cancellation notices from insurers this year, prompting a political firestorm for President Barack Obama.

 

Obama responded last month by giving insurers and state regulators the option of extending the policies by an extra year. Aetna decided it would be too difficult to do in time for Jan. 1, Guertin said. Some customers were able to renew their policies early before the termination notices arrived. Guertin declined to say how many.

 

“It gets them a plan frankly that we’re ready to service,” he said. “It would just be too administratively burdensome to try to get everything ready to restore all the old plans.”

Well, nobody said central planning works everywhere. The good news that for now, at least, the fourth – monetary – branch of government is offsetting any and all other disappointments created by the legislative and executive. Because no matter how vast the shock, or how acute the disappointment, one can always point to an S&P that is just shy of all time highs. And all is well if the “markets” say it is…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-s3w92mNsTs/story01.htm Tyler Durden