Month: July 2016

Authored by Sue Chang via MarketWatch.com,

Andy Xie isn’t known for tepid opinions.

The provocative Xie, who was a top economist at the World Bank and Morgan Stanley, found notoriety a decade ago when he left the Wall Street bank after a controversial internal report went public. Today, he is among the loudest voices warning of an inevitable implosion in China, the world’s second-largest economy.

Xie, now working independently and based in Shanghai, says the coming collapse won’t be like the Asian currency crisis of 1997 or the U.S. financial meltdown of 2008.

In a recent interview with MarketWatch, Xie said China’s trajectory instead resembles the one that led to the Great Depression, when the expansion of credit, loose monetary policy and a widespread belief that asset prices would never fall contributed to rampant speculation that ended with a crippling market crash.

 

China in 2016 looks much the same, according to Xie, with half of the country’s debt propping up real-estate prices and heavy leverage in the stock market — indicating that conditions are ripe for a correction.

“The government is allowing speculation by providing cheap financing,” Xie told MarketWatch. China “is riding a tiger and is terrified of a crash. So it keeps pumping cash into the economy. It is difficult to see how China can avoid a crisis.”

A longtime critic of Chinese economic growth

Xie’s viewpoints have at times attracted unwelcome attention. In 2006, when he was a star Asia economist at Morgan Stanley, a leaked email to colleagues in which he said money laundering was bolstering growth in Singapore led to his abrupt departure from the bank.

In early 2007, he termed China’s surging markets a “bubble” that could lead to a banking crisis,” and in 2009 he likened them to a “Ponzi scheme.”

Xie, who is from China but was educated at — and earned a Ph.D. from — Massachusetts Institute of Technology, has said Chinese authorities have tried to characterize him as an American spy sent to disrupt their markets after his 2007 prediction. China’s consulate general in San Francisco and its embassy in Washington did not reply to requests for comment.

While he now works independently, Xie’s opinions on Asian affairs remain influential. He writes regularly for the South China Morning Post, among other publications, in May saying China is running a “gigantic monetary bubble that has corrupted virtually every corner of the economy.”

Xie “is a respected economist,” said Huawei Ling, managing editor of Caixin Weekly and a John S. Knight Journalism Fellow at Stanford University. “I appreciate his consistency and his analysis on China’s economic issues,” she said.

His 2007 forecast, meanwhile, turned out correct. Soon after his prediction, the Shanghai Composite Index started plunging. After hitting a peak of 6,092 on Oct. 19, 2007, it fell below 2,000 over the next 12 months.

Years before hedge-fund managers like Kynikos Associates founder Jim Chanos turned bearish and George Soros predicted a hard landing, Xie was a dissenting voice amid a chorus of prognosticators enamored with China’s late 20th Century emergence from poverty.

In an interview with this reporter more than a decade ago, Xie warned of a lack of depth in China’s dazzling rise, saying the rapid growth on the country’s coastal cities masked the fact that many inner areas of the country were stuck in the “Stone Age.”

Concerns about China’s economy are more commonplace now. Two camps have formed in 2016: those like Templeton Emerging Markets Group Executive Chairman Mark Mobius, who believe a resilient China is experiencing temporary growing pains, and those who, like Soros, foresee an imminent collapse.

Xie is firmly in the latter camp.

“China grew too fast,” Xie said. “The government is using its power to stop the unraveling but not address the issue. It is just buying more time.”

Fresh worries about China after the Brexit vote

Xie’s criticism coincides with fresh worries about China after the U.K.’s vote to quit the European Union, which triggered an across-the-board selloff in risky assets as investors sought cover in safe-haven assets. Global markets have rebounded somewhat, but uncertainty remains.

Subsequent strength in the U.S. dollar has prompted analysts to predict an accelerated weakness in the Chinese yuan. The yuan slumped to a nearly six-year low against the greenback this week, according to FactSet.

More broadly, fissures have started to appear in the world’s second largest economy. After years of expanding at a blistering pace. China’s gross domestic product grew 6.9% in 2015, its slowest pace in a quarter-century.

For 2016, Beijing has set a GDP target of 6.5% to 7%; The latest spate of global uncertainties prompted Bank of America Merrill Lynch and Deutsche Bank to trim their forecasts to 6.4% and 6.6%, respectively.

The export sector, long a driver of Chinese growth, is sputtering due to global saturation and household consumption is barely 30% of China’s GDP, Xie said. In the U.S., household consumption accounted for more than 68% of GDP in 2014, according to the World Bank.

China’s stock market last year dove in June, losing more than 30% in a month as regulators tightened margin-trading and short selling rules, making it more difficult for investors to borrow money to invest in stocks. A belief that the government was not properly responding to the economic slowdown also weighed on sentiment.

Then in August, authorities unexpectedly devalued the yuan in a bid to support the flagging economy, sparking unprecedented capital flight.

Xie and other observers say the surest way to get China out of its rut is to boost consumption, marking a deliberate turn away from a manufacturing-focused economy. Efforts are under way to move China in that direction, but analysts say the process could take years or even decades — during which China could reach a breaking point.

Total social financing, a broad measure of funds secured by households and nonfinancial companies, topped $22 trillion in March, more than twice China’s $10.4 trillion GDP, according to official data.

There’s no equivalent metric in the U.S., but household debt stood at $14.3 trillion while nonfinancial debt totaled $13 trillion at the end of the first quarter, according to the Federal Reserve. The combined tally of $27.3 trillion is roughly 1.5 times the U.S. GDP.

Torsten Slok, chief international economist at Deutsche Bank said in May that China’s credit bubble is worse than the U.S. subprime buildup that led to the last financial crisis. “It is clear that in China in recent years more and more capital has been misallocated and not resulted in higher GDP growth,” said Slok.

Kyle Bass of Hayman Capital Management, who was among the few on Wall Street to correctly predict the subprime mortgage crisis, shorted the Chinese yuan earlier this year, warning investors in a 13-page February letter that China is making the same mistakes the U.S. did 10 years ago.

“The unwavering faith that the Chinese will somehow be able to successfully avoid anything more severe than a moderate economic slowdown by continuing to rely on the perpetual expansion of credit reminds us of the belief in 2006 that U.S. home prices would never decline,” Bass wrote.

Xie, meanwhile, says he is doubtful of the Communist’s Party’s ability to manage and grow China’s economy — but believes that, if they become more hands-off, the country could become the world’s leading economic force. At the core of Xie’s concerns about China is the contention that the government is doing more harm than good.

“If government takes a step back instead of dominating the economy so much, China can be twice as big as the U.S. in 20 years,” he said.

‘The Communist Party isn't compatible with the future of China’

Today’s regime in China recalls the U.S.-backed Chinese National Party, or Kuomintang, that ruled the country until its defeat at the hands of the Communist rebels in 1949, according to Xie.

The Nationalists, he says, flooded the economy with easy money to support speculation that led to runaway inflation. That, in turn, shifted public sentiment in favor of the Communists, who drove the Nationalists out of the country.

“It was very similar to what is going on right now,” said Xie. “If you keep on printing money to use for speculation, you will have hyperinflation and a currency crash,” he said. “The Communist Party isn't compatible with the future of China.”

Xie’s criticism of the government hasn't resulted in his arrest although he was not certain whether that will not change in the future. Chinese officials have started to muzzle analysts and journalists who have published pessimistic reports on the economy, The Wall Street Journal has reported.

And his research reports are not currently distributed in China. “There are safety mechanisms to stop someone like me reaching the ordinary people,” said Xie.

Despite his frustration, however, he occasionally belies immense pride in his country and bemoans the fact that the global community may be underestimating China’s potential.

“The economists in the West who say that China isn't very important are wrong,” he said. “China isn't an emerging economy. It is the only country that caught up with the West, and it will shape the path of the global economy in the future.”

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Italy’s Prime Minister, Matteo Renzi, is getting desperate, and with good reason.

As we reported this morning, the rally in European stocks fizzled and Italian banks tumbled after Italy’s 3rd largest (and the world’s oldest) bank, Monte Paschi cratered after it confirmed receipt of a letter from the ECB which had asked the troubled lender to cut its bad debts by 40% within three years,  or to €14.6 billion 2018 from €24.2 billion at the end of 2015.

And since there are no natural buyers for these NPLs (at least not at the prices demanded by the insolvent bank), the ECB has effectively heaped even more pressure on Rome to stabilize its banking system at a time when Rome itself was hoping that Europe would help bail out its banks. This means that instead of being allowed to inject public – or rather European – funds into its banks while bypassing the much dreaded bail-in which could result in a panicked bank run as depositors scramble to avoid haicuts, Italian banks may have no choice but to dilute themselves to death, hence today’s abysmal price action which saw Monte Paschi’s stock price drop to an all time low.

All of this appears to have been too much for Renzi, and Italy’s troubled premier, who  as Citi wrote over the weekend is now facing a very shaky future as a result of the upcoming October constitutional referendum…

 

… has lashed out at Mario Draghi, the very man who was supposed to be on Renzi’s side and protect him from the animosity of Merkel et al, in what Reuters dubs a very rare instance of public criticism.

As Reuters reports, Matteo Renzi criticized European Central Bank Governor Mario Draghi for not having done more to resolve Italy’s banking woes when he held a key Treasury job in Rome in the 1990s.

After taking power in 2014, Renzi’s government introduced reforms aimed at strengthening the country’s cooperative banks, but several are struggling to stay afloat and a bailout fund took control of Veneto Banca last week after the ECB said it had to raise capital or close.

 

“If the measures concerning the cooperatives had not been taken by us but by the centre-left government that first put them forward, but was not strong enough to enact them in 1998 … then we would not have this problem,” Renzi said.

 

The prime minister said that Draghi was director general of the Treasury at that time, with Carlo Azeglio Ciampi serving as economy minister.

But the punchline, and the most damning quote was Renzi’s unexpected outburst saying that “if people had the strength and intelligence to keep politics out of the banking system a bit before we did it … we would not have had cases like Monte dei Paschi di Siena,” Renzi told a meeting of his centre-left Democratic Party (PD).

In short, just as we explained last week, a failure by any one major Italian bank, or the entire banking system, will be seen not so much as a failure of Renzi, but of Draghi, who not only had a key role in Italy’s Treasury, but between 2005 and 2011 was head of the Bank of Italy, making the financial plight of Italy’s banks from bad to worse.

Meanwhile, Monte dei Paschi has been in crisis mode for years, hit by a disastrous acquisition on the eve of the financial crisis, losses from risky derivatives trades and bad debts accumulated during Italy’s worst recession since the Second World War. And, as many suspect, somewhere in there are Draghi’s fingerprints all over the events that have doomed the bank. As such its failure would only accelerate the discovery of the fact that highlight it was Draghi’s failure all along to fix Italy’s banking sector, whose insolvency has ironically been re-exposed in the aftermath of Brexit – an event Renzi had hoped to use as a scapegoat for more bailouts yet which backfire massively after Merkel said “nein.”

Then again, Merkel’s position on the matter has been clear all along. What we are far more interested in is how the sudden scandal between Renzi and Draghi will play out, and whether in the coming days we may not all witness the modern version of the “Night of the Long Knives.” The only question is who will go down and just who will have oredered said night…

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Gold and silver have been the standout winners in the fallout from Britain’s decision to leave the European Union according to Bloomberg. They have compiled three charts showing how “precious” Brexit is for gold and silver.

Investors seeking a haven from volatile currencies and equities pushed prices of the metals to a two-year high. With central banks pledging more stimulus to prop up markets (the Bank of England may cut interest rates within months and traders have reduced odds on the Federal Reserve raising rates), the appeal of owning non-yielding assets like precious metals has increased.

Gold has climbed 6.2 percent and silver 11 percent since the June 23 referendum, outperforming global stocks, bonds and currencies, including those also often bought as a haven.

“Macroeconomic risk and geopolitical risk were already setting gold and silver up for a good year – the Brexit fall out has just been the icing on the cake,” said Mark O’Byrne, a director at brokerage GoldCore Ltd. in Dublin. “These metals will continue to outperform as market conditions remain unstable.”

See full article here

 

Gold and Silver News
Gold Climbs 1.3% on Week and Silver Soars 10.1% (Coin News)
Gold inches up, silver passes $20 threshold at near 2-yr highs (Reuters)
Gold Posts Longest Run of Gains in Two Years on Stimulus Bets (Bloomberg)
Silver scores biggest weekly jump in almost 3 years (DJ Marketwatch)
Gold heads for fifth week of gains and silver soars (Reuters)

Best And Worst Performing Assets In June And Q2 (Zerohedge)
How the UK’s vote affected Irish shares, sterling, bond prices and safe-haven gold (Irish Times)
Precious Metal Pandemonium – Silver Spikes Limit-Up, Gold Surges As China FX Basket Hits Record Low (Zerohedge)
500 Tons of Gold That Show Global Rise in Investor Angst (Bloomberg)
Read More Here

Gold Prices (LBMA AM)
04 July: USD 1,348.75, EUR 1,213.07 & GBP 1,016.42 per ounce
01 July: USD 1,331.75, EUR 1,199.51 & GBP 1,001.34 per ounce
30 June: USD 1,317.00, EUR 1,183.59 & GBP 976.82 per ounce
29 June: USD 1,318.00, EUR 1,191.64 & GBP 984.36 per ounce
28 June: USD 1,312.00, EUR 1,185.79 & GBP 985.84 per ounce
27 June: USD 1,324.60, EUR 1,200.49 & GBP 996.36 per ounce
24 June: USD 1,313.85, EUR 1,181.28 & GBP 945.58 per ounce

Silver Prices (LBMA)
04 July: USD 20.36, EUR 18.31 & GBP 15.36 per ounce
01 July: USD 19.24, EUR 17.29 & GBP 14.48 per ounce
30 June: USD 18.36, EUR 16.48 & GBP 13.61 per ounce
29 June: USD 18.21, EUR 16.42 & GBP 13.55 per ounce
28 June: USD 17.57, EUR 15.84 & GBP 13.17 per ounce
27 June: USD 17.70, EUR 16.06 & GBP 13.40 per ounce
24 June: USD 18.04, EUR 16.32 & GBP 13.18 per ounce

Recent Market Updates
– BREXIT Day – Markets Becalmed – Gold Panic Prelude – Trading Hours
– Gold Lower Despite “Panic” Due To “Supply Issues” In Inter Bank Gold Market
– Gold Slips Despite UK Gold Demand Surging – Investors “Seek Stability”
– Gold Prices Surge to Highest in Nearly Two Years On FED and Brexit Haven Demand
– Gold Bullion Has Little Downside, Brexit Or Not, Says HSBC
– Central Bank of Ireland Warns Risks are Debt, Brexit, Geopolitical Tensions and Migration
– Gold In Euros Surges 6.5% In June and 17% YTD On BREXIT Concerns
– Soros Buying Gold On BREXIT, EU “Collapse” Risk
– UK Gold Demand Rises On BREXIT “Nerves”
– Pensions Timebomb in “Slow Motion Detonation” In UK, EU, U.S.
– Silver – Perfect Storm Brewing in the Market
– Martin Wolf: There Will Be Another “Huge” Financial Crisis

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Student loans are incredibly difficult to discharge, even through bankruptcy, this is widely known. However in New Jersey, it appears as though student loans are still expected to be paid, even if someone gets cancer or even dies.

This is something that Marcia DeOliveira-Longinetti learned when trying to close out a list of things to take care of after her son's unsolved murder last year. When Marcia called about federal loans that her son had taken out for college, an administrator offered condolences and assured her that the balance would be written off. However, the New Jersey Higher Education Student Assistance Authority gave a quite a different response.

"Please accept our condolences on your loss. After careful consideration of the information you provided, the authority has determined that your request does not meet the threshold for loan forgiveness. Monthly bill statements will continue to be sent to you." a letter from the agency read.

Of course Marcia was shocked, and even though she co-signed the loans was left confused. However, as a joint investigation by ProPublica and the New York Times discovered, this was not an isolated case.

According to the NYT, New Jersey's loans, which total $1.9 billion, come with extraordinarily stringent rules that can lead to financial ruin.

As the NYT explains

New Jersey’s loans, which currently total $1.9 billion, are unlike those of any other government lending program for students in the country. They come with extraordinarily stringent rules that can easily lead to financial ruin. Repayments cannot be adjusted based on income, and borrowers who are unemployed or facing other financial hardships are given few breaks.

 

The loans also carry higher interest rates than similar federal programs. Most significant, New Jersey’s loans come with a cudgel that even the most predatory for-profit players cannot wield: the power of the state. New Jersey can garnish wages, rescind state income tax refunds, revoke professional licenses, even take away lottery winnings — all without having to get court approval.

 

“It’s state-sanctioned loan-sharking,” Daniel Frischberg, a bankruptcy lawyer, said. “The New Jersey program is set up so that you fail.”

 

The authority, which boasts in brochures that its “singular focus has always been to benefit the students we serve,” has become even more aggressive in recent years. Interviews with dozens of borrowers, who were among the tens of thousands who have turned to the program, show how the loans have unraveled lives.

 

The program’s regulations have destroyed families’ credit and forced them to forfeit their salaries. One college graduate declared bankruptcy at age 26 after struggling to repay his debt. The agency filed four simultaneous lawsuits against a 31-year-old paralegal after she fell behind on her payments.

Chris Gonzalez is another example of how strict the state is. Gonzalez got non-Hodgkin's lymphoma and was eventually laid off by Goldman Sachs (after three years of cancer treatments – nice bunch over there). While the federal government allowed him to suspend his payments because of hardship, New Jersey sued him, seeking $266,000 in payments, and seized a state tax refund he was owed.

One reason that is given for the tactics is that that the state depends on Wall Street investors to finance student loans through tax-exempt bonds, and the state needs to satisfy those investors by keeping the loans to a minimum. Also, loan revenues cover about half the agency's administrative budget. Governor Chris Christie declined to respond to questions, but Christie appointed its executive director Gabrielle Charette, and Christie also has the power to appoint at least 12 of the agency's 18 board members, and can veto any action taken by the board.

Marcia DeOliveira-Longinetti continues to pay on her son's loans, having made 18 payments to New Jersey in the amount of $180 a month, with about 92 payments to go. "We're not going to be poor because of this, but every time I have to pay this thing, I think in my head, this is so unfair." Marcia said.

As the NYT explains, for decades states served as middlemen for federal student loans, but in 2010 Congress and the Obama administration effectively eliminated the role of state agencies by having only the federal government lend directly to students. Some states decided to downsize and transfer their federal loan portfolios, but New Jersey went a different direction.

For decades, states served as middlemen for federal student loans. Most of the loans were made by banks and were handled and backed by regional and state-based agencies as well as by the federal government. The arrangement was unwieldy, expensive and marked by scandal.

 

After Pennsylvania’s student loan agency lost a public records lawsuit in 2007, documents revealed that the agency had spent nearly $1 million on things like fly-fishing, facials and falconry lessons.

 

That same year, New Jersey’s agency was caught in what amounted to a kickback scheme. The state attorney general found that the agency had improperly pushed one company’s loans in exchange for annual payments of $2.2 million. A subsequent investigation by the state’s inspector general found that the agency was in “disarray.”

 

In 2010, Congress and the Obama administration decided to effectively eliminate the role of state agencies by having only the federal government lend directly to students.

 

Some states, like California, decided to downsize and transferred their federal loan portfolios. Others, such as Pennsylvania, won contracts from the federal government to service debt from the federal loan program.

 

New Jersey chose a different path. In the years leading up to the end of the federal program, New Jersey sharply expanded its loan program, slowly replacing the federal loans it once handled with state loans. From 2005 to 2010, loans from the agency nearly tripled, to $343 million per year. Since then, the agency has reduced its loans by half, but its outstanding portfolio has remained roughly the same, about $2 billion.

 

Ms. Karrow said the growth of New Jersey’s program was simply a result of both the increasing number of students and the rising cost of tuition. But in fact, college enrollment and tuition have not grown as rapidly as the program’s size.

In contrast to New Jersey, Massachusetts, which is the next largest program with $1.3 billion in outstanding loans, automatically cancels debt if a borrower dies or becomes disabled, something many other states do also according to the NYT.

New Jersey's solution to the problem is to encourage students to buy life insurance in case they die to help co-signers repay. How very nice of them.

When consumer lawyers protested the program's onerous conditions at a 2014 agency meeting, the agency said that giving borrowers a break would make the bonds sold to finance loans "less attractive to the ratings agencies and investors." Which according to Moody's is an accurate assessment, as Moody's cited the authority's "administrative wage garnishing, which it uses aggressively for significantly higher collections" compared with other programs.

* * *

"I felt so comfortable because it was the State of New Jersey. It's the state, my government, trying to help me out and achieve my American dream. It turns out they were the worst ones" Gonzalez said. Indeed, when Wall Street is a key source of funding and the bond issuer dares not push back, apparently death nor cancer can't get you out of your student loan payment.

Read the full article here.

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Via ConvergEx's Nick Colas,

This report marks the 2-year anniversary of our quarterly survey on the legal recreational marijuana market in Colorado. We’ve picked up a couple more states since then, now covering prices and business developments in Washington and Oregon. We survey numerous stores’ managers to track how a new market matures and how its cost structure and product mix evolves. Each state reported downward pressure in pricing, but has seen it steady over the past couple of months. An eighth of retail cannabis in Colorado sells for an average range of $25 to $45, but our contacts said they are running more sales of $25 eighths during the week and $20 on the weekends. In Washington, we reported the price of a gram dropped to $10 three months ago; some contacts said it’s now as low as $8. A gram sells for about $10 to $15 in Oregon as well.

 

Foot traffic is starting to pick up as we carry forward into summer, as the industry benefits from tourism. As for sales, Colorado stores brought in $69.4 million during April, setting a monthly record; sales total $242 million this year thru April. Washington stores garnered $229.6 million in revenue, and Oregon stores have sold nearly $60 million. Expect Oregon’s figure to jump in the months ahead, as stores can now sell edibles/concentrates/extracts as of this month.

 

Bottom line, Colorado and Washington posted double digit growth in sales relative to 2015 every month of this year. Make no mistake, this is a fast growing industry with massive upside potential with as many as nine states possibly voting on marijuana-related measures this fall. Including California…

Note from Nick: We can’t be “All Brexit, all the time” so today we bring to you Jessica’s quarterly note on the state of the U.S. marijuana business. Simply put, it is going gangbusters. Read on for the details…

As of July 1st, you can’t buy one of retail marijuana stores’ top selling products in Colorado: gummy bears. Or gummy worms or chewy candies in the shape of animals or fruits for that matter. Governor Hickenlooper recently signed a bill into law that bans marijuana-infused edibles in shapes attractive to children.

We’ve conducted a quarterly survey on the recreational marijuana industry in Colorado for two years now, and one of our main contacts said gummies outsell all his store’s other products. He doesn’t see this change as “too big of a deal,” however, as vendors can make gummies that aren’t in kid friendly shapes. So how are cannabusinesses faring in Colorado these days? Here’s a breakdown of our usual price/units/product mix analysis:

#1 – Price: Stores can still sell an ounce of recreational cannabis for an average range of $150 to $350, and an eighth for $25 to $45. Our contacts said they continue to experience price drops, however, due to more competition and as bigger companies put pressure on smaller stores by cutting prices. Some respondents said the lowest they’ve seen larger players reduce the price of an ounce was to $100. Most stores run discounts, and our contacts said they have been selling more eighths for $25 during the week, and even $20 on the weekends. They don’t forecast prices falling too much further. One store said a full price eighth is still $40, but wouldn’t be surprised if it declines to $30 within the next six months or year.

#2 – Units/Traffic: The average transaction size has dropped slightly to about $40 to $50 dollars from $50 to $60. One store has successfully brought transaction sizes back up by prepackaging flower in eighths for some strains, rather than just half eighths to encourage customers to buy in larger quantities. Around 150 to 350 customers still visit our contacts’ stores each day, although some report there was greater foot traffic six months ago than the past three. This has to do with the time of year, as stores are busiest during the winter and summer since tourists make up about 50% of their customer base. One store even said the trend is moving towards more tourists, speculating that a greater number of locals may have decided to grow their own. All in all, respondents expect a bump in customers as students come back from college.

Stores are also gearing up for July 4th by planning some specials like a buy one edible get another half off sale. Our contacts typically experience an uptick in sales around holidays. July 4th falls on a Monday, so they expect customers to stock up on the prior Friday and Saturday. The biggest day of the year is always on April 20th, the so-called national holiday for marijuana. One of the largest festivals for the day relocated to California this year, but it didn’t stop stores from besting last year’s sales figures. Dispensaries were eager to beat last year’s comp and they did. Not only did our contacts say they outpaced sales from the previous year, but MarketWatch reported retail sales jumped 53% year over year to $7.3 million on April 20th according to BDS Analytics. Another plus, our contacts said they have been better prepared to deal with such high volumes due to learning from their experiences last year.

#3 – Mix: Our contacts still report a 50/50 split between flower and edibles/concentrates/accessories. They said numerous vendors continue to ask them to try out new products like concentrates or cartridges. The influx of vendors also puts downward pressure on wholesale prices, which contributes to lower prices at their stores. Overall, concentrates and cartridges are still the hottest products growing in popularity due to their discretion and ease of use.

In short, we’ll let the numbers do the talking on the success of the marijuana industry in Colorado. Stores brought in $69.4 million from recreational sales just in April, based on tax data from the Colorado Department of Revenue. That’s up 58.2% y/y and marks a monthly sales record since stores first started selling retail cannabis in January 2014. Dispensaries have already generated $242 million in retail sales from January thru April (latest available data), almost half the sales garnered in 2015 ($575.8 million) in just the first four months of this year.

So how are the economic and business developments shaping up in Washington and Oregon? Here’s the scoop:

Prices in Washington and Oregon abated slightly, down to an average range of $25 to $50 for an eighth from $25 to $60 three months ago. Prices continued to contract especially for grams. A gram of recreational cannabis sells for an average of $10 to $15, but some stores said it now sells for as low as $8. One Washington contact said “it used to be a $10 gram market,” but over the past three months it’s now “an $8 a gram market.” He also said his store is reluctant to raise prices due to the hefty sales tax of 37% on recreational cannabis. These stores run daily and weekly discounts just like in Colorado, such as “take $4.20 off an 1/8th or more of the strain of the day!”

 

In regards to Washington, medical growers and stores are not currently licensed or regulated, unlike the retail market. They will merge on July 1st, in which only recreational stores licensed under I-502 can remain in operation. Those who want products intended for medical use can buy them at retail stores that are medically endorsed. The Washington State Liquor and Cannabis Board (WSLCB) raised the retail store cap of 334 to 556 for the merger, but medical marijuana stores that don’t receive a license will have to shut down. Our contacts are generally happy about the merger as they are licensed and would appreciate more defined regulations. We asked the WSLCB what this would mean for prices. They said prices would likely continue to drop as there will still be plenty of licensed stores in operation and more will open; licensed stores will continue to compete against each other with their retail products as opposed to the medicinal products sold by unlicensed stores.

 

Average transaction sizes for both states are similar to Colorado at about $45. The number of daily customers is also similar at around 200 on average, although we received a wide range of answers all the way up to as many as 600 per day; many contacts also noted increases in foot traffic over the past month likely due to the time of year. In terms of 420 for Washington, one store manager said it was a “madhouse” and “absolutely crazy.” MarketWatch reported impressive figures compared to last year just like Colorado, as the state doubled the amount of sales on April 20th to $5.5 million according to Headset. They’re also getting ready for July 4th. Now it’s about beating 2015’s comps during this year’s holidays. There will be plenty of specials consequently, like a gram of retail cannabis for just $5 or pre rolls for $3. In Oregon, one contact expects a successful weekend for the 4th of July because her community’s payday is on that Friday.

 

Washington stores’ product mix is similar to Colorado in terms of selling about 50% flower and 50% edibles/concentrates. Our contacts said popular products include vape pens and pre rolls. While medical stores in Oregon have been able to sell flower since last fall (recreational stores don’t open until later this year), they haven’t been able to sell recreational edibles and extracts until this month. These new options have increased sales at our contacts stores across the board. With that said, some respondents noted the potency is too low. While one dose of cannabis-infused edible can have up to 15 milligrams of THC, the state wants to bring that figure down to 5 milligrams which is half of what’s allowed in Colorado. Washington received tourists from Oregon before it could sell edibles, but given the low potency in that state our Washington contacts said they still get customers from Oregon. One Oregon store manager even said he’s seen customers walk out of his store and complain that’s not what they were looking for in terms of edibles. For Oregon stores, however, they’re just thrilled they can sell recreational marijuana with one contact claiming it was “life-saving in terms of business sustainability.” The ability to sell edibles is still an added bonus.

Sales at Washington retail marijuana stores are growing at an impressive clip, even though they are outpaced by their Colorado counterparts. So far this year thru May, they’ve brought in $229.6 million compared to $357.6 million last year, according to data provided by WSLCB. Here are the numbers for each month: January ($39.6 million, +202% y/y), February ($42.3 million, +163% y/y), March ($46.7 million, +119% y/y), April ($49.1 million, +97% y/y), and May ($51.9 million, +71% y/y).

As for Oregon, the state’s Department of Revenue said it received $14.9 million in recreational tax payments as of May 30th. Only 57% of the 319 dispensaries in Oregon that have made at least one monthly tax payment have filed a quarterly tax return, however. With a tax rate of 25%, that suggests retail stores gained almost $60 million in revenue during the first five months of this year. It also implies stores have been bringing in about $12 million on average each month. By comparison, Colorado stores received $90.2 million and sales averaged about $18 million per month during the first five months it was sold legally. Nevertheless, Oregon’s figures will likely increase when recreational stores open later this year and now that they can sell edibles, concentrates, and extracts.

Even with money flowing in, the legal marijuana industry has its fair share of challenges. Regulations on products, packaging, and potency limits, for example, keep changing and are continually up for debate. These states still have a lot to figure out as the industry is still in its infancy, which gives stores a level of uncertainty. One of the most pressing issues is that the drug is still illegal on a federal level, making banks largely inaccessible to store operators. One store manager said he would love to accept debit and credit cards, but only makes cash transaction to avoid any complications and puts ATMs in all of his stores. Currently, marijuana is a Schedule I narcotic, but the U.S. Drug Enforcement Agency could reschedule the drug to allow medical use with a prescription or deschedule it to allow recreational use. Some reports suggest the DEA may reclassify the drug this summer. We’ll keep you posted.

This fall’s elections could put pressure on the DEA. There are as many as nine states in which people will potentially vote on cannabis measures this fall, most likely including California as it secured the necessary number of signatures to put the Adult Use of Marijuana Act on the ballot. Despite the possibility of losing some tourist activity, store managers across Colorado, Washington, and Oregon hope the ballot in California passes this fall. One contact said “every state that checks off another going recreational is a win” in his book and that it’s another in line until they get them all. They also said California already has the infrastructure in place since medical marijuana is legal.

In short, continue paying attention to this fast growing industry and we’ll keep you updated. If California legalizes recreational marijuana in the fall, it will likely produce a domino effect. And now voters and states can see the benefits from the ongoing successful case studies we laid out in this note. In the words of Donald Trump – also likely on the ballot in November – “It’s gonna be huge.”

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In order to mask the tremendous capital outflows leaving its country – in order to prevent and/or delay a depositor panic – China has resorted to various gimmicks: back in October, we reported that the first one involved the PBOC gradually shifting from FX spot intervention to the using forwards as a preferred mechanism of market intervention as it is not as obvious, or as transparent to detect, to wit: “we need to take account not only of the PBoC’s non-spot market intervention efforts in the offshore market, but also of banks’ forward books if we want to get a better read on capital outflows in China.”

Then, when Wall Street figured out how to back into the true capital outflow numbers, China stopped reporting key capital flow data outright. As SCMP reported in February, “sensitive data was missing from a regular central bank report in China amid concerns about the flow of cash out of the country as its economy slows and currency weakens.” FT added that the People’s Bank of China removed the data category “Position for forex purchase”, which tracked total foreign exchange purchases by both the central bank and other financial institutions. In its place, a separate series that captures only central bank forex purchases is substituted. A rise in forex purchases is considered a sign of capital inflows, while a drop suggests outflows.

However, not even this was enough to mask the massive outflow of capital leaving China’s economy and being parked offshore.

So what did China do? Why it resorted to the oldest trick in the book: fabricating data outright. Only… it was caught again. As Goldman calculates, cross-border yuan flow in recent months could have masked the true level of outflow pressure in China. According to the bank, SAFE data on onshore FX settlement show outflow of about $2b in May; was also $24b in RMB flow to offshore, meaning underlying outflow in May could be $26b, analysts including MK Tang and Maggie Wei write in a note released overnight.

More notably, they calculate that since October total net FX outflow has been about $500 billion, which is 50% above $330b implied by SAFE’s onshore FX settlement data.

They adds that there are no obvious market forces to explain RMB flow in recent months, adding that non-commercially driven factors seem a more likely explanation.  They note that it is possible that offshore clearing banks or Chinese entity have been buying CNH and selling back onshore; this is justified by near-daily anecdotes of frequent CNH smoothing operations by Chinese institutions. As a result, flow to offshore doesn’t show in foreigners’ holdings of CNH assets.

Goldman also observes that since the August yuan “reform”, CNH has been generally weak; but this hasn’t led to net flow from offshore to onshore. “In a stark contrast, the relationship is in total reverse since October last year – the cheaper the CNH (vs CNY), the greater the net flow of RMB from onshore to offshore.”

Here are the details from Goldman’s MK Tang:

China capital flows update—sources how cross-border RMB flow might mask outflow pressures

• We have updated our estimates of sources of China’s capital n outflows. Our analysis suggests net capital outflows at $123bn in Q1 (vs. $504bn in Q3-Q4 combined last year).
• Of the Q1 net outflows, about 70% was due to Chinese residents’ accumulation of foreign assets; 40% to repayment of FX liabilities; and -10% to foreigners’ demand for RMB assets (i.e., foreigners were a source of net inflows in Q1). This composition is broadly similar to our earlier estimates for 2015 H2.
• Separately, we flag a large $170bn net RMB flow from onshore to offshore since last October, which has helped reduce FX reserve drawdown and put downward pressure on CNH forward points. This flow  cannot be readily explained by marketbased factors in our view, and did not seem to result in an increase in foreigners’ CNH holdings. We think it might have masked the true FX outflow pressure in China, on the order of some $20bn (or 50%) per month in recent months.
• Going forward, we think it will be important to also track cross-border RMB movement to get a fuller picture on China’s underlying flow situation.

For those not intimately familiar with China’s capital outflow battle over the past year, here is a quick recap from Goldman:

We have updated our estimates of sources of China’s capital outflows based on the framework we introduced in January. In Q1 this year and 2H last year, the big picture was the same as we estimated in the  piece – Chinese residents accumulating foreign assets remains the dominant source of total capital outflows. The mix of the different sources appears slightly different though, and we will discuss in more detail in the following session.

• Corporates paying down FX debt: By our estimate, outflows driven by Chinese corporates paying down FX debt were US$156bn in 2H 2015, and around US$60bn in Q1 this year. As exhibit 1 and 2 show, we break down Chinese corporates FX debt into four major segments, namely trade liabilities, offshore banks’ claims on Chinese nonbanks, FX bonds issued by Chinese corporates, and FX loans lent out by onshore banks (such as Industrial and Commercial Bank of China etc.) to domestic Chinese nonbank sectors.
• Chinese residents’ cumulating FX assets: There were around US$372bn outflows driven by Chinese residents demand for foreign assets in 2H last year, and another US$108bn outflows in Q1 this year based on our calculation. In the headline reported data, Chinese residents cumulating FX assets include outward direct investment, portfolio investment assets and other investment assets. These three channels saw around US$ 268bn outflows in 2H last year and US$69bn outflows in Q1 this year. We also add “net errors and omissions” (NEO) as part of the outflows motivated by Chinese residents buying FX assets—as we’ve been discussing for a while3., we think the negative numbers in NEO might represent disguised capital outflows (Exhibit 3).
• Foreigners reducing RMB assets: This driver has become less obvious in Q1 this year, compared with 2H last year. Around US$7.4bn outflows were driven by foreigners reducing RMB assets in 2H last year, and in Q1 this year situation actually reversed, i.e. on net basis, foreigners accumulated around US$19.6bn RMB assets rather than reducing, mainly helped by inbound FDI and the relatively stable holding of offshore CNH (more on this in the second part of the report).

Goldman sums it up as follows:

Summing up different sources of outflows, in Q1 this year, of the total net capital outflows of $123bn, Chinese residents buying foreign assets accounted for around 70% of the outflows, and Chinese corporates paying down FX debt explained another 40% of the outflows. Foreigners’ adding RMB assets helped mitigate outflows by around 10%. In 2H last year, according to our calculation based on factual data, residents buying FX assets accounted for 70% of the outflows, FX debt repayment was another 29%, and foreigners reducing RMB assets only represented 1% of the outflows. This was broadly in line with our analysis in the January’s work (we estimated the split at 60%/30%/10%), although the final official data suggests that foreigners reducing RMB assets was an even less important driver, while residents buying FX assets was more important than what we found based on our estimates of some BOP and FX debt data.

So far so good: a modest $123 billion in Q1 outflows. There is just one problem: the real number is vastly greater. Here is Goldman’s explanation:

While according to the BOP the pace of capital outflows has slowed in Q1, it might not have in fact slowed by as much as the data suggest. We have in the past discussed various caveats to interpreting official flow and reserve data, and in the following we add one more, in light of a large unusual cross-border RMB flow in recent months that we believe could have masked the true outflow pressure in China.

A $170bn flow of RMB to offshore…

 

Specifically, since October last year we have seen a large net flow of RMB from onshore to offshore, primarily due to trade settlement in RMB (i.e., Chinese importers pay for the imports in RMB). This totaled $170bn through May or about $20bn per month on average (Exhibit 4). This flow has helped lessen the overall outflow pressure faced by China because it means that importers did not have to buy as much FX to pay for imports (since they just used RMB). This also helps explain in our view the general decline in CNH forward points (or equivalently, CNH interest rates) in the last few months (Exhibit 5), despite market perception of large-scale CNH smoothing operations by state-related entities (more on this below).

 

 

Compared to previous actions, this is somewhat unusual. In the past, net crossborder flow of RMB had typically been driven by offshore RMB sentiment, e.g., when offshore RMB sentiment is strong, CNH tends to be more expensive than CNY ($/CNH is below $/CNY), naturally driving a net flow of RMB from onshore to offshore (e.g., for trade settlement) to satisfy high RMB demand; and vice versa.

 

However, especially since the August 2015 RMB reform, offshore RMB has been generally weak. While the CNH-CNY gap has narrowed in the last few months, CNH has still been usually cheaper than CNY ($/CNH above $/CNY). Therefore, the typical market-driven relationship would have suggested a net flow of RMB from offshore to onshore instead. Indeed, in a stark contrast, the relationship is in total reverse since October last year—the cheaper the CNH (vs. CNY), the greater the net flow of RMB from onshore to offshore. This is more consistent with a supply-push pattern (an exogenous push of RMB from onshore to offshore, which causes CNH to trade cheaper), rather than a market driven demand-pull relationship.

 

In short, we cannot point to any obvious market forces that could explain the RMB flow in the last several months; non-commercially driven factors seem to be a more likely explanation, in our view.

 

… that does not seem to result in any increase in foreigners’ CNH holdings

 

Another interesting observation is that this large amount of net RMB flow to offshore does not seem to show up in foreigners’ holdings of CNH assets. In general, if the RMB is received by foreign non-banks, that would likely end up as CNH deposits; and if it is received by foreign banks, that would show up as an increase in banks’ holdings of CNH assets. However, CNH deposits in Hong Kong and Taiwan, two key CNH centers, have been on a decline in the last several months (Exhibit 7); and Hong Kong banks’ spot position of “other currencies” has also been falling (Exhibit 8).

 

 

More broadly, overseas entities’ holdings of onshore RMB deposits (which include placement of CNH by offshore banks to onshore banks) have as recently, sharply deviated from the hitherto synchronized pattern with the cumulative net flow of RMB from onshore to offshore, and have been even surpassed by the latter in absolute level (Exhibit 9).

What does this mean? In simple terms, China is masking massive capital outflows, far greater than the $123 billion reported for the first three months.

These various official data pieced together are consistent with either of the following two possibilities:

1. Some offshore RMB clearing banks buy RMB in the offshore market and sell the RMB back in the onshore FX market. In this scenario, it is unlikely that most of the RMB is sold to PBOC, because in the last few months PBOC’s FX reserve data have been roughly in line with the onshore demand for FX as suggested by SAFE’s onshore FX settlement data (i.e., it does not suggest that PBOC has used much of their reserves to meet offshore clearing banks’ demand for FX). In other words, in this scenario, it is likely that banks (or other non-PBOC participants of the onshore FX market) used their own FX position to buy the RMB. and in doing so, banks have likely suffered losses as CNY has generally weakened in the last few months. In late April, SAFE relaxed the regulatory floor on onshore banks’ FX net open position, expanding further their scope to short FX by $100bn.
2. A Chinese entity (possibly state-backed) that has access to both
   offshore and onshore markets buys RMB (with FX) in the offshore market
   and invests the RMB in onshore assets. Since this entity is Chinese, its
   RMB assets would not be reflected in foreigners’ holdings of RMB assets

Goldman notes that in this context, “there have been market anecdotes on frequent offshore CNH smoothing operations by Chinese institutions.” Actually, not anecdotes: those are all too daily, all too real interventions by “large banks” who keep a barrier on both the CNY and CNH from moving far beyond 6.65. It is precisely in these “streamlining” operations that this massive “outflow” is hidden.

Summing it all up, the reality is that instead of $330 billion in FX outflows since October, the real number is 50% greater, or half a trillion, which also suggests that instead of getting better, China’s capital outflow situation is as bad as it has been, and not only that, but the government is now actively covering up the reality. Here’s Goldman:

Given the discussion above, it is possible that the actual underlying FX flow situation (i.e., FX/RMB demand by Chinese corporates/households and foreigners) has been less encouraging than even the SAFE data on onshore FX settlement imply10. (e.g., according to that data alone, FX outflow was about $2bn in May.), but there was also $24bn in RMB flow to offshore during the month—if we assume that that flow was not market-driven and that it was not subsequently held by foreigners, then the underlying FX outflow could instead be $26bn in May. In the eight months since last October, this approach would have suggested a total net FX outflow of about $500bn, or 50% above the $330bn implied by SAFE’s onshore FX settlement data.

All of this is bad news for the PBOC, now that the market is on to it:

Going forward, we believe also tracking the data on cross-border RMB flow (released monthly by SAFE) will be important to coming to a more comprehensive view on the underlying flow picture. For the time being, we will be incorporating this into our measure of net FX flow (Exhibit 10 shows this modified version

This means that either China’s central bank will have to disclose the truth, or further cover up the true nature of China’s capital outflows, in the process unleashing even more skepticism, even more outflows, and even more concerns about China’s economy (and banking system), to the point where these concerns reflame the same cross-asset (and market) contagions that led to the December/January swoon and which have been temporarily brushed under the rug while the Shanghai Accord still forces central banks to avoid major market moves in response to the sweeping capital outflows undertaken by China. 

For now, however, we will be content to watch how the narrative that China’s capital outflows are “moderating” crashes and burns, and how long it takes other capital markets to realize that far from fixed, China is furiously burning through virtually any and all liquid reserves it still has access to, only doing so in a way that only a handful of central bankers were aware of it. Well, now everyone else knows as well thanks to Goldman…. which brings us tothe Goldman note from a month ago, in which Goldman revealed the FX doom loop…

… and in which the bank openly declared war on the Yuan, which it expects will crash in the coming months. To be sure, no better way to achieve that than by actually revealing the truth.

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Submitted by John Rubino via DollarCollapse.com,

Pretend, for a minute, that your country responds to the bursting of a credit bubble by borrowing unprecedented amounts of money and using it to prop up banks and construction companies. This doesn’t work, so you create record amounts of new money and push interest rates into negative territory in an attempt to devalue your currency. But this – amazingly – doesn’t work either. Your currency soars and the inflation you’d hoped to generate never materializes.

Now what? Is there even anything left to try, or is it simply time to stand back and let the current system melt down? Those are the questions facing Japan, and the answers are not obvious. Here, for instance, is its inflation rate two years into the largest major-country money creation binge since Wiemar Germany:

Deflation is to be expected and even desired in a well-run country where debt is minimal, money is sound and rising productivity makes things continuously cheaper. But in an over-indebted financial system, deflation is death because it magnifies the debt burden and raises the odds of an existentially threatening financial crisis. To continue to borrow money under such circumstances is to court disaster. And yet Japan is still at it:

What we’re witnessing, in short, is a catastrophic loss in the currency war. Contrary to every mainstream economic theory, debt monetization and full-throttle currency creation have resulted in a rising yen and falling prices. Here’s an excerpt from a recent — and really gloomy — Financial Times analysis of Japan’s situation:

It’s time for investors to admit it: Abenomics has failed

The past few weeks have not been happy ones for many central bankers — and none more so than Haruhiko Kuroda, the hapless governor of the Bank of Japan. That is because the threat of moving rates deeper into negative territory and buying up even more assets has done nothing to weaken the yen down as he desires. Brexit, which briefly sent the yen beyond the ¥100 mark against the dollar on Friday, is a fresh headwind.

 

The Bank of Japan is likely to move rates from negative 0.1 per cent to minus 0.3 per cent come the end of July, increase its holdings of ETFs from ¥3.3tn to ¥6.3tn as well as its purchases of Japanese Reits from ¥90bn to ¥200bn, economists at JPMorgan in Tokyo predict.

 

With the yen ever stronger, Abenomics and the desired impact of central bank policies are going into reverse. The irony is that these policies, which were meant not to change traditional Japan but to revive it, are likely to end up wounding it — perhaps irreparably.

 

Abenomics was never about real reform. Instead, it was merely meant to weaken the currency, undercutting competitors like Korea and China and allowing Japan Inc to more easily export its cars and other manufactured goods to the rest of the world.

 

Since corporate profits for the last three years were only ever about currency translation gains, these are now going in reverse and dragging down industrial shares with them.

 

Surveys suggesting companies plan to invest have failed to materialise: in April core machinery orders, the best proxy for capex, dropped 8.2 per cent from the previous year, while exports fell in May with the trade surplus down 32 per cent compared with the previous month.

 

The March tankan survey showed corporate Japan expected the yen/dollar rate at ¥117 going forward — today it sits at ¥101.5 to the dollar. Masaaki Kanno, chief Japan economist for JPMorgan, expects the currency to surge to ¥90 next year.

Meanwhile, negative rates are especially murderous for bank shares. “Why should a central bank policy that hurts bank shares be good for a credit-driven economy?” asks Christopher Wood, strategist for the CLSA unit of Citic Securities.

 

In a way, the fact that Mitsubishi UFJ is preparing to give up its primary dealership in the government bond market is immaterial — at least from a narrow economic or financial perspective. The Bank of Japan’s purchases of JGBs far exceed net new issuance. Trading volumes have collapsed.

 

But as a symbolic political gesture it is huge, suggesting that the mutual support and trust of the old convoy system have totally broken down. Moreover, it is no accident that the protest comes from Nobuyuki Hirano.

 

There are other signs that the private sector has become less compliant as well. Both the heads of the GPIF and Japan Postal Savings say this is no time to buy risky assets at home since they reflect only the BoJ’s buying (and perhaps foreign fund front-running of that buying). Given the flat yield curve, insurers can hardly hold JGBs, and anyway fear losses on their holdings should rates eventually move up.

 

In addition, there is likely worse to come for many major investors. They have been pushed abroad by the central bank. But with the yen rising in a world which has been mostly risk-off, they will have big losses on assets held in foreign currencies, especially since only a small part of their exposures have been hedged, according to data from JPMorgan.

 

Rather than reboot Abenomics, it is time to replace it. Investors should not bet on Japan any longer.

So what happens — and doesn’t happen — now? Several things:

The bad stuff gets worse. Post-Brexit Europe will be a source of anxiety and therefore capital flight for years. See What is Frexit: Will France leave the EU next?

That means more money looking for a place to hide, some of which will choose yen-denominated bonds. So Japan’s already-negative interest rates will fall even further, which is catastrophic news for the Japanese banks and pension funds now suffocating under the current yield curve.

Regime change — but not yet. In upcoming elections the ruling party looks likely to hold its legislative majority. Longer term, though, Japan will find itself in pretty much the same boat as every other major democracy, with inept incumbents having handed lethal ammo to opposition parties more than willing to pull the trigger. New leaders won’t be able to fix the problem (which is by now unfixable) but the uncertainty surrounding a contested election will raise the odds of a crisis of involving currencies, debt, banks or any number of other things.

Plunging US rates. Eventually, hundreds of trillions of yen will have to find a new home with more hospitable returns. And 30-year Treasuries yielding 2% will look pretty tasty in a relative if not absolute sense. Rising foreign demand will push down Treasury yields, killing off numerous US banks, pension funds and insurance companies but giving the remaining solvent Americans a chance to refinance their mortgages at 1%.

Governments become the biggest stock market players. This is already happening, as Japan, China and (probably) the US buy equities and ETFs to blunt natural corrections in share prices. But with nothing else left to try, expect these programs to be ramped up virtually everywhere. This will prop up stock prices until it doesn’t, and then look out below.

Soaring gold. Everything that happens these days points to higher precious metals prices. I’m thinking of writing a piece of boilerplate to that effect for placement at the end of every future article.

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As regular readers know, we have covered the manipulation of LIBOR for many years now going back to January 2009, and while our conspiracy theory once again became conspiracy fact, we do still follow the fallout of the scandal and the predictable scapegoating of lower level traders.

The first bank to admit that it engaged in massive manipulation of the LIBOR rate was Barclays back in 2012, and traders are still being scapegoated tried in court to this day. As Bloomberg reports, five traders learned their fate recently, nearly four years since the bank admitted to the charge. Three traders were convicted, while the jury was unable to reach a verdict on the final two.

From Bloomberg

Jonathan Mathew, 35, Jay Merchant, 45, and Alex Pabon, 38, were convicted last week of conspiring with other Barclays employees to rig the London interbank offered rate between June 1, 2005, and August 31, 2007.

 

The jury on Monday couldn’t reach verdicts on Stylianos Contogoulas, 44, and Ryan Reich, 34. The judge placed reporting restrictions on the initial verdicts last week until the jury finished its deliberations. A sixth ex-trader, Peter Johnson, the main Libor submitter, pleaded guilty to manipulating the rate in October 2014.

After Prosecutors spent the trial using emails and testimony to try link the traders to the conspiracy, the jury deliberations lasted 10 days over parts of three weeks, leading to the three convictions and two no verdict decisions.

As Bloomberg explains, the UK's Serious Fraud Office (SFO) is giving themselves a pat on the back with the three convictions, as they come after the acquittal of six brokers accused of conspiring with Tom Hayes, a former UBS trader who was convicted last August.

The verdicts are an important boost for prosecutors at the SFO, who had a mixed record in Libor cases before this week. Tom Hayes, a former UBS Group AG and Citigroup Inc. trader, in August became the first person to be convicted by a jury. That success was quickly tainted by the acquittal of six brokers accused of conspiring with Hayes in January.

 

While the results will buoy the embattled SFO after the defeat in the broker case, London criminal lawyer David Corker said that questions remain about why the prosecutions were only started “after loud political pressure.”

 

The cases “were about conduct widely condoned or encouraged at the time in a broken, poorly regulated system and these defendants were foot soldiers for the most part in a global financial system beyond their full understanding,” Corker said.

 

Prosecutors described the Barclays conspiracy as no better than a "bookmaker who says ‘if you look at the betting slip, there is nothing to say I cannot bribe the jockey or nobble the horse.’"

The SFO can't boast of any convictions other than lower level traders of course, as the absolutely laughable narrative that no supervisors were aware of anything continues to be used as a means not to get at the actual root of the corruption. Jay Merchant, one of the traders found guilty, has repeatedly said that senior Barclays managers approved requests being made to the cash desk, despite providing no documentation to back up the claim. Hell, Tom Hayes even provided evidence in court of a LIBOR manipulation manual distributed to traders and nothing came of it, so we are not surprised at all that the allegations Merchant is making are falling on completely deaf ears. Always easier to convict the lower level types and pretend all is well than to actually dig into the problem and find out just how far the rabbit hole goes.

Bloomberg notes that the scapegoating trials will continue, as the UK has put 13 individuals before the London courts to date, and seven more ex-traders from Barclays and Deutsche Bank are scheduled to stand trial in September 2017 who are accused of rigging EURIBOR. In the US, there isn't much activity – surprise surprise – as two former Rabobank traders were convicted at trial last November, and five other traders between Rabobank and Deutsche bank have plead guilty.

* * *

Here are the five traders that were accused of rigging LIBOR (just by themselves of course) as profiled by Bloomberg.

Jonathan Mathew

London cash desk
Age: 35
Verdict: Guilty

Mathew was portrayed as the nice, but ever so slightly dim Libor submitter who only got a job at Barclays because of his dad. A homebody who married his childhood sweetheart, he struggled through school, never went to university and his first finance job as a clerk at Cazenove in 1999 paid 10,500 pounds ($13,925) a year. With becoming a trader firmly in his sights, he took the regulator's exams and failed three times before passing.

 

Once on the cash desk, he managed the Canadian dollar book under the tutelage of Peter Johnson, the man the prosecution would hang the whole conspiracy around. Mathew told tales of trading floor hazing that resulted in regular humiliation, including being "whacked" round the head with a 12-inch baseball bat.

 

Since losing his job at the bank Mathew has trained as a chef and volunteered for a homelessness charity.

 

"I just felt married to the lie," Mathew said of being dishonest with prosecutors and regulators in a string of interviews. "I could not see a way out and I didn’t know what to do."

Stylianos Contogoulas

London swaps desk
Age: 44
Verdict: Jury unable to reach a verdict

Contogoulas served 19 months in the Greek military and worked as a computer engineer for five years before moving into financial services. Married with a wife and two children, his family stayed in Athens for the duration of the trial. He'd often leave early on Fridays to fly back to see them.

 

He believed what he was doing wasn't improper or unfair, while prosecutors mocked him for not knowing what the word manipulation meant.

 

"There was no monetary advantage" to passing on requests to fix the rate at a certain level," Contogoulas told the jury. "As far as I was concerned it was part of my job, a very small part of my job but I still had to do it."

Jay Merchant

New York and London swaps desk
Age: 45
Verdict: Guilty

Born in Kolkata, Merchant showed great promise with a tennis racket in his hand, training six days a week from the age of four. He won a scholarship to Southern Illinois University where he was the best player on the squad, according to a teammate. After a stint as hitting partner to the Williams sisters, he turned his back on a professional tennis career to focus on finance. Joining Barclays in 2002 to work on the short-end book before the euro desk and then on the dollar desk in New York with the "glamor boys" and "big dogs" of the trading floor.

 

Merchant repeatedly said that senior Barclays managers approved requests being made to the cash desk, despite providing no documentation to back up the claim. Prosecutors said Merchant took young and inexperienced traders Alex Pabon, Ryan Reich and Contogoulas, under his wing and brought them in on the conspiracy to rig rates. Merchant was the best paid of all the defendants, making 2.2 million pounds in 2007.

 

"Everybody knew the banks set Libor to their own commercial interests," – Merchant said. "No one was trying to influence anything. We were just doing our job."

Alex Pabon

New York swaps desk
Age: 38
Verdict: Guilty

Alex Jesus Julian Huffy Pabon was born in Louisiana and studied industrial engineering at Texas A&M University before getting a masters degree at the University of California, Berkeley, in financial engineering.

 

He came close to tears describing attempts to leave Barclays in 2006 because he was burnt out. He said he made Libor requests at the direction of Merchant and was trying to help Johnson better reflect the derivatives market.

 

Prosecutors highlighted the lack of evidence of any information given in his requests to Peter Johnson other than what suited his trading book and accused him of purely looking to gain an advantage over his counterparties.

 

"I guess it's three months between when I first tried to resign and when I actually resigned," Pabon said, explaining his departure from the bank in 2006. "I didn't really see anything getting better at Barclays. So, you know, this time I thought that I would resign and it would stick."

Ryan Reich

New York swaps desk
Age: 34
Verdict: Jury unable to reach a verdict

Over 6-feet-tall with a shaved head, Reich played baseball at Princeton University and gives everything "100 percent." Princeton's head baseball coach testified as a character witness for him at trial.

 

Reich, who was born on the "Jersey Shore,” was only 24 when he joined Barclays. He said he never asked for false rates outside the acceptable range and there weren't clear guidelines. Prosecutors claimed Reich knew sending Libor-submission requests was dishonest.

 

"I'm a bit dull, I guess," Reich said while describing himself during his testimony. "I didn't drink in high school so that was kind of a thing. Most people do that. I didn't do that. I've never taken a drug. I'm not a big partier. I go to bed early. I like to exercise. I like sports."

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Submitted by Doug Casey via InternationalMan.com,

What you’re going to read in the next few minutes will be shocking and unbelievable. But it’s also factual and logical. That will make it upsetting and disturbing. Most people are at least vaguely aware of what’s happening. But very, very few are aware of its degree or the implications.

As you probably know, I believe times are about to get quite rough economically and politically. But, at the same time, I’m very optimistic about what’s happening in science and technology. So let me hazard some predictions. And break the old rule about how, if you predict an event will occur, to make sure you don’t predict its timing.

THE RECENT PAST

I was born just after the end of WW2. It was an idyllic era to be an American. The U.S. had more wealth than the rest of the world combined. Things were mellow at home as “Leave It to Beaver” in the ’50s transitioned into “California Girls” in the early ’60s.

True, there were at least a couple of times (the 1962 Cuban Missile Crisis and a while in the early ’80s) when it looked like there might be a global thermonuclear war. We not only dodged those bullets, but things kept improving. The average American accumulated so much stuff that he had to rent a storage unit, after filling up his two-car garage.

The USSR collapsed, and the U.S. government went on to become the world’s only superpower. Things have been pretty good within the living memory. No matter that the last couple of generations of prosperity were financed mostly with borrowed money.

Although everybody (including me) tends to focus on political events, it’s a mistake to pay too much attention to them. Governments, and even countries, come and go, rise and fall. Political events should be viewed as flavoring to the stew, painting on a house, or trim tabs on a flight. They’re worth noting, but—unless they’re really bad—only marginally important over the long run.

What is important? From a long-term point of view, there are really just three things: science, technology, and capital. Science lets you understand how and why things work. Technology lets you put the theory into practice. And capital gives you the time and material to make use of science and technology.

Let’s look at civilization from that long-term point of view. Since the appearance of Homo sapiens about 200,000 years ago, things improved at only a glacial pace until the end of the last ice age about 12,000 years ago. Then, with the start of the Neolithic era and the Agricultural Revolution, things started getting better every millennium. Then, since the start of the Bronze Age about 5,000 years ago, they started getting better by the century. Then, with the Renaissance and the Enlightenment, by the decade.

Since the Industrial Revolution, about 200 years ago, they’ve been getting better every year. And it’s been an accelerating trend. Exponentially accelerating. Most people don’t keep up with these things, but important advances are now being made weekly.

Why are these things accelerating at an exponential rate? There are several reasons, I think. One is that, since all the past advances in science and technology still exist, we don’t have to constantly reinvent the wheel. Another is that, in earlier eras, there was very little surplus left over after covering basic food, shelter, and clothing; now there’s a lot. That’s capital, and it’s compounding. But, very important, there are more scientists and engineers alive today than have lived in all previous human history put together.

Not only that, but radically new technologies are coming into existence – not gradually at an arithmetic rate, but at a geometric rate. So things are on the verge of becoming much, much better, and very, very quickly. Not only better than you imagine, but better than you can imagine.

Moore’s Law was formulated in 1965; it states that computational power will double, and costs will halve, about every 18 months. But it appears to apply to several areas besides computing.

As a result, it’s highly probable that Timothy Leary was not just right, but conservative, when he anticipated SMIILE—Space Migration, Intelligence Increase, and Life Extension. Those things are just part of the picture.

So here’s the good news. It’s likely the very nature of life is going to change for the better, almost unrecognizably, over the next 20 years or so.

I’ve very arbitrarily divided the areas of progress into 10 areas. There’s a lot of overlap between them because all the areas of science and technology are an increasingly integrated whole.

I’m sure you’re familiar with all these trends. But the chances are low that you’ve adequately considered how quickly they’re advancing and where that advance is going to lead—very soon. I only want to broach the subjects; libraries can be written on all of this. The takeaway is that the very components of reality itself—Matter, Energy, Space, and Time—will soon be manipulated on a cosmic scale.

THE NEXT INDUSTRIAL REVOLUTION

Some of these things, like energy and space exploration, are just extensions of current technologies. Others, especially nanotech, are game changers.

Energy—With the exception of nuclear, all power comes from the sun. In the past, solar, wind, and similar power sources existed mainly in the dreams of economically illiterate hippies. But now, combined with rapidly advancing battery technology, they finally make sense. Better yet, oncoming generations of modular nuclear reactors will be tiny, extremely safe, simple, and cheap. Maybe fusion power will finally become practical—although that would just be a bonus.

Oil and gas? They’re important as feedstocks, but mainly because they provide very dense energy. They are, however, essentially compounds of hydrogen and carbon, two of the most common and simplest elements. With adequate (and sufficiently cheap—this is the key) power, they can be created in unlimited quantity; the chemistry is quite basic and well understood. Among other things, algae can be programmed to manufacture them in quantity.

Space—One of the good things about most governments being bankrupt is that they’re being forced to cede the conquest of space to entrepreneurs, who will colonize the moon, the asteroids, and the planets. I love Elon Musk’s quip: “I hope to die on Mars. Just not on impact.” Of course, if he’s lucky, he may live to be several hundred years old because of other developments.

You need “stuff” to make what you need. A lack of raw materials has always been a major reason for conflict. But digging things out of the Earth, using big yellow trucks, will no longer be humanity’s only option. The asteroids are full of dense elements. They’ll soon become available in massive quantity, cheaply.

Life extension—It’s clear we’re on the edge of solving the problem of aging; it should be addressed as a degenerative disease. All other diseases are simply footnotes to aging. If you live long enough, you can be, do, and have everything that you can imagine. It’s likely to be possible soon.

Biological engineering—The creation of not just new body parts, but new bodies, made to order, is in the works. And new species. And much more. Who really knows what can be done with DNA? But the answer is probably: Almost anything, in lots of ways.

Distributed manufacturing—A.E. van Vogt’s The Weapon Shops of Isher predicted machines that would create advanced weapons for you, in the privacy of your own home. Now that’s possible with 3-D printing. Soon, if you can design something, or get the design, you can create it. At home.

Robotics—Not just smart machines in factories. In fact, factories themselves may be on their way out. Humanoid beings—products of bioengineering and AI—could replace them. They’ll perhaps be almost indistinguishable from normal people.

This alone, the creation of intelligent machines, will overturn the nature of society, family, warfare, work—everything.

Artificial intelligence—I believe that a difference that makes no difference is no difference. That’s the concept behind the Turing test. At some point, very soon, machines will be smarter than their creators and will, in turn, create other machines smarter than they are. And continue doing so at a geometric rate.

Nanotech—I did a chapter on this in Crisis Investing for the ’90s. At the time, not one person in 100 had a clue what it was. In its ultimate form, nanotech—the use of molecular-sized assemblers and supercomputers—will change the character of reality itself. Totally and unrecognizably. It amounts to pixie dust, making it possible to manipulate the 92 naturally occurring elements into useful compounds cheaply and easily. It’s becoming possible to fabricate totally new materials, like carbon nanotubes, vastly more capable than any “natural” material.

Computer science—Electromechanical switches, then vacuum tubes, then transistors, now silicon chips, and soon quantum computing are taking place on a molecular level. All the knowledge in the world contained in a cube. Or perhaps in the head of a biologically enhanced robot. Or perhaps in an interface to your own brain.

Virtual reality—You’ll be able to immerse yourself in a world of your own creation, activating all of your senses, in a veritable Star Trek holodeck that will be almost indistinguishable from real reality. Perhaps you will prefer to live in unreality. All in the privacy of your own home.

Editor’s Note: Over the next 20 years or so, Doug says technology will create the biggest change in human history.

But in the short term, we’re on the verge of a financial hurricane that could wipe out a huge chunk of your savings. It’s going to be much worse, much longer, and very different than what we saw in 2008 and 2009.

That’s exactly why Doug Casey and his team just released a video, “America: Ground Zero.” It will show you exactly how to survive the coming financial storm so that you can benefit from the amazing long-term changes in technology that Doug described. Click here to watch it now.

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It never ceases to amaze how vastly different the investment styles of gold paper vs physical traders are: while we have documented previously how the latter tend to buy progressively more the lower the price (as traditional “buy low, buy more lower” investing would suggest), “investors” in gold paper-derivatives such as ETFs and ETPs are quite the opposite: in fact, they rarely buy until someone else is buying and generating momentum. At that moment a reflexive buying spree is unleashed and paper buying begets even more paper buying.

Nowhere is this more evident than in today’s daily report of ETF Securities, where “inflows into gold ETPs of US$263mn on Friday 1st July were at their highest since inception.”

More:

Demand for safe haven ETPs rise as uncertainty continues. Last week saw long gold, silver and long CHF recording strong inflows of US$433.5mn in total. Inflows into gold ETPs of US$263mn on Friday 1st  July were at their highest since inception. Gold and the Swiss Franc have historically been sought after for their safe haven traits allowing investors to hedge portfolios from downside risks. We expect demand for haven assets to remain elevated as uncertainty surrounding the UK’s leadership contest and its formal exit from the EU block remain high. While the Bank of England is preparing for more monetary policy easing, Deutsche Bank and Santander failed the US Federal Reserve stress test again, keeping investors nervous.

 

While dramatic in the aftermath of Brexit, the sudden influx of funds into paper-ETFs tracking gold is hardly new: in March we noted that “The Last Time Gold ETF Flows Were This Strong, The Fed Was Starting QE.”

 

Updating the gold fund inflow ETF chart shows the following:

 

It has gotten to the point where even Bloomberg, the majority of whose financial TV anchors and “pundits” abhor gold, was forced to report about the surge in ETF allocations.

Global gold holdings have expanded by more than 500 metric tons since bottoming in January in a signal of investors’ rising concern about slowing growth, a Federal Reserve that’s probably on hold and the ructions caused by Britain’s vote to quit the European Union. Assets in bullion-backed exchange-traded funds rose 6.6 tons to 1,959.1 tons on Friday, up from 1,458.1 tons on Jan. 6, according to data compiled by Bloomberg. Holdings increased 37 tons last week as investors reacted to the U.K.’s vote, and swelled in five months out of six in the first half.

 

Bullion prices climbed to the highest level in more than two years in June as investors absorbed the implications of the U.K. result, adding to a rally that’s been driven by the Fed’s hesitation in raising borrowing costs and the spread of negative rates in Europe and Japan. Banks including Goldman Sachs Group Inc. raised their outlooks for gold after the vote, while yields on 10- and 30-year U.S. Treasuries have touched record lows.

Actually the simple reason why everyone, including momentum-chasing algos, is once again rushing into gold is because not only are central banks about to unleash the latest and greatest round of currency devaluation, one which will require trillions more in FX “warfare” tools, but because with over 30% of all global debt trading in negative yields, gold’s 0% nominal yield is increasingly looking attractive to those who would rather not pay insolvent government for the privilege of lending them money. And if last night’s Chinese short squeeze-driven 7% explosion in silver is any indication, the scramble for precious metals is only just starting.

Finally, those wondering where gold may be headed next, here is a blog post from the abovementioned ETF Securities, which calculates the “fair value” based on net spec exposure and ongoing trends in FX:

Gold’s fair value at US$1440 as uncertainty reigns

 

Net speculative futures market positioning in gold had already risen to all-time high before the “Brexit” vote and we suspect positioning has moved considerably higher in recent days (data only available weekly with delay). Net speculative positioning hit a record high of 316,525 long contracts last Tuesday, far above the 289,250 net longs hit during the worst of Greek sovereign crisis and considerably above the 83,000 contract average since beginning of the series.

 

The US Dollar basket (DXY) has risen by close to 4% since the announcement of Brexit. We believe that it could rise further as investors look for haven assets. We also assume the US Federal Reserve will at some point in the coming year raise interest rates (on the assumption that Brexit contagion to the real economy of the US is limited).

 

While US Dollar appreciation is usually gold price-negative, the rise in haven demand is often more price-positive. Indeed we have seen over the past few days that gold and the US Dollar have both risen.

 

 

Given the heightened uncertainty about how events will unfold, we present some scenarios for gold prices. We use our proprietary gold model that we presented in “Policy mistakes provide upside potential for gold” and vary the assumptions on US Dollar movements and level of speculative positioning (presented above). We assume that US inflation will hover around 1.1% (around current levels), based on 1yr-1yr break-evens and nominal 10 year Treasury rates will also remain around current levels even if policy rates rise (we assume a bond curve flattening rather than a shift).

 

In a scenario where the US Dollar appreciates 5% and speculative positioning remains elevated, but moderates to 200,000 contracts, gold is likely to trade around US$1440/oz by June 2017. In the absence of any US Dollar appreciation, gold could trade closer to US$1500/oz.

One thing is sure: the BIS’ gold price appreciation desk will be very busy in the weeks ahead.

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