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Submitted by Koos Jansen from BullionStar.com.

More proof the "precious metals assets" on Chinese commercial bank balance sheets have little to do with the “surplus” gold in China's domestic market.

The "surplus" in the Chinese gold market is the difference between withdrawals from the Shanghai Gold Exchange vaults and gold demand as measured by consultancy firms like the World Gold Council and Thomson Reuters GFMS. The "surplus" accounts for more than 4,000 tonnes. In reality the "surplus" is true gold demand by Chinese individuals and institutional investors directly at the SGE. Some analysts think the huge tonnages in "precious metals assets" on the balance sheets of Chinese commercial banks have anything to do with the "surplus", but this is not true. And I prefer to explain in detail. 

 

One of the topics about the Chinese gold market that has not been fully illuminated is the "gold" on the 16 Chinese commercial banks' balance sheets. At the end of 2015 the aggregated "precious metals assets" on the bank balance sheets accounted for 598 billion yuan (RMB), which translates into approximately 2,682 tonnes of gold – if all the precious metals were gold related, which is very likely. In my previous post on this subject we learned from examining the banks' annual reports from 2015, that there are at least five gold assets that can appear in the “precious metals” line item on the balance sheets. Namely:

1. Gold savings that belong to the banks’ customers (Gold Accumulation Plans, GAP)
2. Gold inventory for the banks’ retail gold bar business
3. Gold leasing business
4. Gold held for hedging purposes
5. Gold held outside China

In this post we’ll examine more thoroughly the (Chinese and English) annual reports from 2007 until 2014 of the 16 banks, to learn more on what these huge tonnages represent. The most significant new finding is that Chinese banks conduct synthetic leases – in other words: swaps. By performing synthetic leases,  Chinese banks can show "precious metals assets" but no "precious metals liabilities" on their balance sheets. Then, at the very surface it seems these banks own gold, in reality they own zero gold.

Exhibit 0. Precious Metals Assets Chinese Banks.

Also note, swaps can be executed with foreign banks, through which gold is subsequently imported into the domestic market. And because the Chinese banks have been importing thousands of tonnes in recent years, it should come as no surprise these trades have influenced the “precious metals” line item on their balance sheets. More findings that will be addressed in this post are:    

1. Chinese reported lease volume reflects yearly turnover.
2. Gold stored in Shanghai Gold Exchange (SGE) designated vaults owned by commercial banks does not to appear on the custodial bank’s balance sheet.
3. More confirmation some gold on the balance sheets is stored outside China.

My conclusion is that the “precious metals” on the Chinese commercial bank balance sheets do not account for the “surplus” gold in the Chinese domestic market Western consultancy firms pretend to be ignorant about. The Chinese banks do not own much gold of themselves, as some analysts have speculated, nor are these banks preparing for a new gold standard designed by the PBOC, according to my sources and analysis.

This post is divided in three segments. The first segment is about accounting, which supports the second segment about swaps and other gold related line items on the Chinese bank balance sheets. The first segment can be skipped if you already posses thorough knowledge on accounting. The third segment displays all the "precious metals" related data of the 16 bank balance sheets from 2007 until 2015.

I Accounting Background

Before we can discuss the details of the “precious metals” mentioned in the financial statements of the annual reports of the 16 banks, we need to do some studying on accounting structures (study the definitions of a financial statement, balance sheet, an income statement, assets/liabilities, financial assets/liabilities and derivative financial assets/liabilities). This study will prove valuable for future posts as well. The bank balance sheets are an important topic in the Chinese gold market; understanding accounting helps us to illuminate the Chinese gold market.

Financial Statement

Financial statements of banks are divided in three main segments: a balance sheet, an income statement and a cash flow statement.

Balance Sheet

On Investopedia we can read the definition of a balance sheet:

Balance Sheet

A balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.

The balance sheet adheres to the following formula:

Assets = Liabilities + Shareholders' Equity

A number of ratios can be derived from the balance sheet, helping investors get a sense of how healthy a company is. These include the debt-to-equity ratio and the acid-test ratio, along with many others. The income statement and statement of cash flows also provide valuable context for assessing a company's finances, as do any notes or addenda in an earnings report that might refer back to the balance sheet.

An example would be, ICBC holding 1 tonne of gold in small ICBC brand bars as inventory for retail sales. This gold is an asset of ICBC.

Income Statement

Next to a balance sheet, banks disclose an income statement in their annual reports. From Investopedia we read:

Income Statement

An income statement is a financial statement that reports a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses …. It also shows the net profit or loss incurred over a specific accounting period.

Unlike the balance sheet, which covers one moment in time, the income statement provides performance information about a time period.

In example, ICBC buys gold at the SGE worth 1,000,000 RMB and has the metal recast in small 200 gram ICBC brand bars. If ICBC subsequently sells the newly casted bars for in total 1,100,000 RMB, then 100,000 RMB is profit and will be included in the income statement.

Cash Flow Statement

Next are the cash flows, from Investopedia:

Cash flow is the net amount of cash … moving into and out of a business.

Total aggregated cash flows are measured over the course of a period, for example one year, as with the income statement. But unlike the income statement, it records all things related to cash flows. For example, if ICBC buys a new building worth 10,000,000 RMB, this will affect the balance sheet (cash decrease, asset increase) and the cash flow statement, but not the income statement.

An Asset

From China’s Accounting Standard for Business Enterprises: Basic Standard we can read how an asset is defined:

Article 20 An asset is a resource that is owned or controlled by an enterprise as a result of past transactions or events and is expected to generate economic benefits to the enterprise.

“Past transactions or events” mentioned in preceding paragraph include acquisition, production, construction or other transactions or events. Transactions or events expected to occur in the future do not give rise to assets.

“Owned or controlled by an enterprise” is the right to enjoy the ownership of a particular resource or, although the enterprise may not have the ownership of a particular resource, it can control the resource.

“Expected to generate economic benefits to the enterprise” is the potential to bring inflows of cash and cash equivalents, directly or indirectly, to the enterprise.

Article 21 A resource that satisfies the definition of an asset set out in Article 20 in this standard shall be recognized as an asset when both of the following conditions are met:

(a) it is probable that the economic benefits associated with that resource will flow to the enterprise;

and

(b) the cost or value of that resource can be measured reliably.

Article 22 An item that satisfies the definition and recognition criteria of an asset shall be included in the balance sheet. An item that satisfies the definition of an asset but fails to meet the recognition criteria shall not be included in the balance sheet.

Financial assets/liabilities

Financial assets/liabilities can be subdivided in several categories, such as financial assets/liabilities designated at fair value through profit and loss, financial assets/liabilities held for trading and derivative financial assets/liabilities. Financial assets/liabilities are included on the balance sheet and the change in fair value of most financial asset/liabilities will appear in the income statement. Not all banks subdivide financial assets/liabilities in the same manner. For example, ICBC lists “financial assets/liabilities held for trading” parallel to “financial assets/liabilities designated at fair value through profit and loss”. Other banks only disclose “financial assets/liabilities designated at fair value through profit and loss” as a total. The details on accounting are beyond the scope of this post.

Let’s have a look at an example of a financial liability. We’ll use plain gold leasing. Suppose ICBC borrows 1 Kg of gold for 1 year and instantly sells the gold at 280 RMB/gram. ICBC will then record a cash asset of 280,000 RMB and a financial liability held for trading of 280,000 RMB on its balance sheet. Say, after one month the gold price surges to 380 RMB/gram. For ICBC the cash asset remains at 280,000 RMB, but the bank will increase the carrying amount of the financial liability held for trading to 380,000 RMB. The 100,000 RMB, which is a loss, will go into the income statement. In the income statement there is a separate line for this called net profit or loss on financial assets or liabilities designated at fair value through profit and loss.

Below is part of the income statement from ICBC’s 2015 annual report.

Exhibit 1. Courtesy ICBC. “Consolidated Statement of Profit or Loss” is the income statement. In accounting amounts in between brackets are negative.

Derivative financial assets/liabilities

Derivative financial assets/liabilities on balance sheets must not be commingled with derivative instruments such as futures or forwards, of which the notional values are recorded off-balance sheet. Let me show how derivative financial assets/liabilities are acquired.

We’ll use futures as an example. Suppose ICBC buys long a SHFE gold futures (1,000 grams) contract at 280 RMB/gram on 1 November 2016 that is to expire in June 2017. The futures contract itself (derivative instrument) is recorded off-balance sheet, but the profit or loss arising from it creates a “derivative financial asset/liability” recorded on the balance sheet and the income statement. At 1 November 2016 the fair value of the futures contract is 0 because the future price has not moved yet so there is no profit or loss. The notional value of the futures contract is 280,000 RMB (1,000*280). On 1 November 2016 ICBC’s financial statement would be:

• ICBC’s derivative financial asset/liability held for trading on the balance sheet = 0
• Fair value ICBC’s derivative financial asset/liability held for trading recorded in the income statement’s “net profit or loss on financial assets or liabilities designated at fair value through profit and loss” = 0 RMB
• Notional value of ICBC’s derivative financial instrument recorded off-balance sheet = 280,000 RMB

Suppose one month later, on 1 December 2016, the gold price has surged to 380 RMB/gram. ICBC is long gold so it will have a mark-to-market profit of 100,000 RMB. This profit will go into the income statement in “net profit or loss on financial assets or liabilities designated at fair value through profit and loss”. At the same time ICBC has created a derivative financial asset held for trading worth 100,000 RMB. (If gold would sink below 280 RMB/gram, ICBC would record a derivative financial liability held for trading.) On 1 December 2016 ICBC’s financial statement would be:

• Derivative financial asset held for trading on the balance sheet = 100,000 RMB
• Fair value ICBC’s derivative financial assets held for trading recorded in the income statement’s “net profit or loss on financial assets or liabilities designated at fair value through profit and loss” = 100,000 RMB
• Notional value of ICBC’s derivative financial instrument recorded off-balance sheet = 380,000 RMB

Below you can view a balance sheet and an off-balance sheet account from ICBC’s 2015 annual report.

Exhibit 2. Courtesy ICBC. Balance sheet from ICBC’s 2015 annual report.

Exhibit 3. Courtesy ICBC. Off-balance sheet account from ICBC’s 2015 annual report.

Having said this, the practice of categorizing precious metals assets and liabilities varies from bank to bank in China. Nevertheless, there are excellent observations to make from the financial statements of the banks. This will be quite complex, if I didn’t explain it properly, please refer to the introduction of this post that serves as a simplified summary.

II Findings

Banks Do Synthetic Back-To-Back Gold Leasing Through Swaps

From the previous post, we know that gold leasing – mainly back-to-back borrowing and lending – overstates the precious metals assets and liabilities of Chinese banks. However, what was not mentioned in the previous post was that banks do synthetic back-to-back leasing through swaps. This way, it’s possible that banks that are active in the gold lending market, will show precious metals assets on their balance sheet – without precious metals liabilities, while not owning a single gram of metal themselves. The bank will synthetically borrow gold through a swap, and lend it out for a few extra basis points. The result is synthetic back-to-back leasing.    

From a Chinese bank’s perspective a synthetic gold lease is conducted by borrowing RMB to buy spot gold, lend that metal to a customer, and at the same time sell short a forward contract. When the gold loan to the customer comes due the metal is returned to the bank, which then will be sold through the forward contract to repay the bank’s RMB loan. That’s the definition of a swap: buy spot and sell forward (sell spot and buy forward for the counterparty).

If gold is in contango, and the forward price is higher than spot, the Chinese bank will make a profit on the swap. However, in contango, the costs for the RMB loan transcend the swap profit. The difference between both is the cost equal to the gold lease rate (GLR). In my previous post Understanding GOFO And The Gold Wholesale Market we could read about these relationships (and the exact workings of swaps).

Fiat interest rate – swap rate = GLR

Effectively, by borrowing RMB for a swap the bank pays GLR to synthetically borrow gold.

As the international gold lease rate is likely lower than the gold lease rate in China, Chinese banks can make a profit by (synthetically) borrowing gold abroad, import the metal and lend it through the SGE system at a higher GLR. (Whenever a gold loan is to be repaid from the Chinese domestic gold market to an international lender, not the physical metal is exported, but funds cross the Chinese border, as physical gold export is prohibited from the Chinese domestic gold market.)

For example, Minsheng Bank can synthetically borrow gold for 3 months from HSBC at GLR in the interbank market. When Minsheng lends the gold for 3 months to a jeweler at GLR + 30 BPs, then Minsheng earns 30 BPs in this trade.

Exhibit 4. All precious metals related data from Minsheng Bank’s financial statements 2007 – 2015. We can observe a significant surge in precious metals assets, lease volume and precious metals derivatives in 2014.

In the real world, this is exactly what banks have been doing. Let’s still use Minsheng Bank as an example. Please view the table above. We can see Minsheng’s gold lease volume jumped from 13 tonnes in 2013 to 101 tonnes in 2014, and the precious metals assets surged from 2,913 million RMB in 2013 (~12 tonnes) to 25,639 million RMB in 2014 (~107 tonnes). The surge in precious metals assets was fully caused by the increment in the gold lease business, as can be seen in the excerpt below from Minsheng Bank’s 2014 annual report. All the numbers are in millions of RMB.

Exhibit 5. Courtesy Minsheng Bank.

It’s disclosed the precious metals assets jumped from 2,913 million RMB in 2013 to 25,639 million RMB in 2014, due to a 22,726 million “increase in precious metals lease business”. 

But note we can only see an increase in “precious metals assets” on Minsheng’s balance sheet (exhibit 4), there are no “precious metals liabilities”. This is because the gold lend by Minsheng was sourced through swaps. Minsheng didn’t literally borrow gold (precious metals liability), it swapped gold for RMB collateral.

This is how it works in Minsheng’s case. When it enters a swap transaction these are the spot and the forward legs to be recorded in the financial statement. Minsheng borrows RMB and buys spot gold to lend out to a customer at GLR plus a few basis points. At that moment a precious metals asset (the gold loan) is recorded on the balance sheet, but not a precious metals liability (the related RMB liability is not disclosed in exhibit 4). Simultaneously, Minsheng sells short a forward contract that is recorded off-balance sheet. In due time the gold loan is repaid, the forward settled, etc.

The off-balance activities are shown in exhibit 4, additionally they’re disclosed in Minsheng’s financial statement to be viewed below. Again all numbers are in millions of RMB. 

Exhibit 6. Courtesy Minsheng Bank.

We can see that the large increase in precious metals derivatives trading from 2013 to 2014 was mainly caused by “3 months to 1 year” “forwards and swaps”, of which most have been swaps used for synthetic back-to-back leasing. Also note:

• Exhibit 5 shows there was a 22,726 million RMB (~ 94 tonnes) increase in leases from 2013 to 2014. Exhibit 6 shows ~ 24 billion RMB (~ 100 tonnes) in “3 months to 1 year” swaps have been executed in 2014, over zero in 2013. Likely, the majority of the swaps have been in tenors close to 1 year, as by 31 December 2014 roughly 107 tonnes in precious metals assets were on the balance sheet.

• In 2014 the “3 months to 1 year” “cash inflow” (Minsheng’s sell forward leg) transcended the “cash outflow” (buy spot leg) because gold was in contango that year in China. (Exhibit 6)

• Perhaps you have noticed that Minsheng Bank counts only 1 leg of the gold swap off-balance sheet. Yes, if we compare the total “precious metals forwards and swaps” “cash outflow” 32,865 million RMB with the total notional amount in precious metals derivatives off-balance sheet, 32,844 million RMB, the two numbers are roughly equal.

All in all, at the surface it seems Minsheng Bank holds approximately 100 tonnes in precious metals assets, in reality this is merely reflecting synthetic back-to-back leasing through swaps. More proof there can be little “surplus” gold on the commercial banks balance sheets. 

As long as Chinese annual lease volume grows, the commercial bank balance sheets can mushroom as a consequence.

Exhibit 7.

Chinese Lease Volume Reflects Yearly Turnover. 

In the past there has been some doubt whether the reported Chinese gold lease volume reflected the total turnover over a certain period, or the gold that has been leased out at a certain point in time. Already in May 2015 I wrote China's reported gold lease volume reflects turnover – because traders at Chinese banks told me – and now there is more confirmation to be presented. From Minsheng Bank’s financial statements we can understand that the gold lease volume means the lease turnover per annum. Have another look at exhibit 4.

Minsheng bank leased out 116 tonnes of gold in 2015, which was an increase from 2014. But at the end of 2015, the “precious metals assets” wherein gold leasing is recorded, decreased to 83 tonnes. This can only be possible if the lease volume is annual turnover. Apparently, in 2015 Minsheng’s leasing business grew, but it conducted more deals in tenors shorter than 1 year, causing the annual turnover to increase (to 116 tonnes) but the outstanding leases at year-end on the balance sheet to decline from the previous year.  

The World Gold Council (WGC) seems the have come to the same conclusion recently. In the Gold Demand Trends Q2 2016 report, it stated (page 15) the gold lease volume “captures the total amount of gold leased in the reporting period, for example, if Commercial Bank A lends 1t to Jeweller B for three months and Jeweller B returns it back for the Commercial Bank A to lend again to Bank C, a total of 2t of leasing volume will be recorded for the period”. This confession by the WGC is remarkable, because from April 2014 until early 2016 the WGC was spreading a myth about the gold involved in the Chinese lease market. From the WGC’s China’s Gold Market Progress And Prospects, April 2014:

No statistics are available on the outstanding amount of gold tied up in financial operations [leases] linked to shadow banking but Precious Metals Insights believes it is feasible that by the end of 2013 this could have reached a cumulative 1,000t.

For several years the WGC pretended any lend/borrowed gold was “tied up in illegal leasing schemes”, and if the leases would be unwound this event would flush the physical market dragging down the price. Although this was nonsense, copy-paste media outlets like Reuters and the Financial Times simply reproduced what the WGC was writing, adding to the confusion in the gold community. (By the way, the consfusion simply appeared to be a pack of lies invented by Western consultancy firms that were trying to uphold the illusion the supply and demand data they had been selling for decades was complete.)

While at it, the WGC admitted most of the leased gold doesn’t leave the SGE vaults:

It’s estimated that around 10 % of the leased gold leaves the SGE’s vaults. The majority is for financing purposes and is sold at the SGE for cash settlement.    

This is what I’ve written since February 2015: gold leasing has little impact on SGE withdrawals, as the vast majority of leases are for financing purposes and are thus settled within the SGE system.

Gold In SGE Vaults Is Not On The Custodian’s Balance Sheets

In China, most of the SGE vaults are actually owned by commercial banks but approved by the SGE as “designated vaults”. In addition there are other types of enterprises that own “SGE designated vaults” – probably jewelry companies in Shenzhen, the heart of China’s jewelry manufacturing industry. In my previous post I shared the possibility that SGE vaulted gold appears on the balance sheets of custodian commercial banks. But further research has pointed out that is not the case. SGE vaulted gold does not appear on the balance sheet of the custodians, only on the balance sheet of the owner.

As has been written at the beginning of this post, in order for a custodian, in this example ICBC, to recognise the gold owned by another entity, in this example BOC, in its SGE-designated vault as an asset, the gold has to be “owned or controlled” by ICBC. In reality ICBC wouldn’t have any ownership of this gold. ICBC would have, to a certain extent, some control over BOC’s gold, but in order for ICBC to recognise the gold as an asset on its balance sheet, it should be “probable that the economic benefits associated with that resource will flow to the enterprise”. In other words, ICBC should be able to sell or lease out BOC’s gold in its vaults to record the metal as asset. Though, an SGE custodian would never go there or its business would collapse promptly.

Exhibit 8. Balance sheet of Ping’ An Bank.

There is more confirmation. On the balance sheet of Ping’ An Bank, the volume of precious metals holdings for 2011 and 2010 were both nil. At the same time, according to Ping’ An’s annual report of 2010, its total gold withdrawals ranked No. 8 among all SGE designated vaults. 

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Gold vaulting service keeps increasing and the withdrawal number is listed the eighth among SGE designated vaults.

And in 2011 Ping’ An’s gold deposit and withdrawal total accounted for 10% of all SGE warehouse activity. It is hard to believe that Ping’ An had no gold in its SGE-designated vaults at the end of 2010 and 2011, while Ping’ An’s vaults were such an important part of the SGE system. Concluding, Ping’ An didn’t recognize other SGE clients’ or members’ gold in its vaults as its assets. Hence we have for 0 for Ping’ An’s precious assets in 2010 and 2011.

Some readers may point out the following paragraph in ICBC’s 2015 annual report:

The Group records the precious metals received as an asset. A liability to return the amount of precious metals deposited is also recognised.

However, if readers check ICBC’s 2015 annual report in Chinese, they will find the original paragraph was written like this:

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The group recognises an asset when the group receives the precious metals deposited by the customer for accumulation, and at the same time recognises the related liability.

Therefore, ICBC was actually referring to the gold in its Gold Accumulation Plan (GAP) and the key information was lost in translation.

Gold in Chinese ETFs is neither recognized by its custodian as an asset. 

Some Of Chinese Banks’ Gold Is Indeed Outside China

I mentioned in the previous post that some of Chinese banks’ precious metals holdings could be outside China. ICBC acquired Standard Bank in 2015 and Standard Bank’s precious metals are outside China. However, even some medium-sized Chinese banks hold precious metals outside China. The following table is from Ping’ An’s 2014 annual report (page 196, numbers are in millions of RMB).

Exhibit 8. Screen shot of Ping’ An Bank’s annual report 2014.

What we see is that Ping’ An held gold assets in US dollars worth 2,420 million RMB. The disclosed “foreign exchange equivalent” for Ping’ An’s precious metals would only be mentioned like this if the precious metals are held outside China. If the precious metals would have been located inside China, Ping’ An never would have listed the value of the assets as “USD (in CNY equivalent)”.

III Data

We will not extensively analyze every Chinese bank’s financial statement like we’ve done with Minsheng Bank and Ping’ An Bank above, though I do like to share all the data I’ve collected. The practice of categorizing precious metals assets and liabilities varies from bank to bank so readers should pay attention to the notes below the tables and are recommended to read the original annual reports for more information. The derivative instruments are listed according to the notional amount (off balance sheet) instead of the fair value. The notional amount is not comparable between banks because for swaps, some banks only consider one leg while others add both the spot and forward legs, for example Bank of Ningbo, together.

Assuming all precious metals mentioned are gold related.

1. Industrial and Commercial Bank of China (ICBC)

We can observe ICBC precious metals assets started to transcend its financial liabilities related to gold in 2014. The possible causes are increases in ICBC brand gold bar sales (more inventory), customers purchased more options (ICBC would need to buy more gold to hedge), and more synthetic gold leasing.

2. Bank of China (BOC)

“Commodity derivatives and others” were called “precious metals derivatives and other derivatives” before 2010. BOC doesn’t have any significant numbers related to precious metals in financial liabilities designated at fair value through profit and loss.

Noteworthy, at the end of 2007 BOC had 7,982 million RMB (~ 41 tonnes of gold) in precious metals pledged as collateral, and late 2009 this figure had grown into 27,271 million RMB (~ 114 tonnes of gold). The precious metals were used as collateral in swap transactions for financing, according BOC’s accounting practice.

From BOC’s 2009 Annual Report:

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Precious metals swap transactions, based on the transaction nature, are treated as precious metals sales under collateral agreement. The precious metals pledged as collateral are not ceased to be recognized and the related liability is reflected in “borrowings through interbank lending”

3. Bank of Communications

Bank of Communications lists precious metals assets in two separate categories. I'm not sure what is identified with "precious metals contracts". Bank of Communications reported in its 2013 annual report that it conducted overseas gold swap business:

??????????????

[Bank of Communications] successfully conducted overseas gold swap transactions.

In 2013, Bank of Communications conducted gold interbank lending with HSBC and HSBC became the most important source of physical gold for the Bank of Communications:

???2013??????????????????????????????????????????????????????

The two parties [Bank of Communications and HSBC] not only conducted “first deal” cooperation in gold consignment and gold borrowing, but also realized surging cooperation volume. HSBC has become an important import source of physical gold for the bank.

4. China Construction Bank

Not everything in the “other derivatives” category are precious metals.

China Construction Bank (CCB) wrote in its annual reports that the market share of physical sales to the public was No. 1 in 2010, and in the same year the market share of gold leasing was 40 %. From CCB’s 2010 annual report:

????????????????????????????40.30%????????37.41%?

The Bank [China Construction Bank] has maintained the rank of No 1 in branded physical gold to individuals. The market share of gold leasing was 40.30 %. The market share of account gold was 37.41 %.

CCB offered physical withdrawal on precious metals accounts since 2013 and its own gold accumulation plan since 2015.

5. Agricultural Bank of China

Before 2014 “precious metals contracts” were called “precious metals lease contracts”. Not sure what “precious metals contracts” can be next to “precious metals lease contracts” – perhaps SGE physical contracts like Au99.99. Before 2011, precious metals derivatives were reported separately as forwards and swaps. The precious metals lease business was reported to be launched in 2010.

6. Shanghai Pudong Development Bank

The change in “Financial liabilities at fair value through profit and loss” was caused by precious metals shorts (?) according to Shanghai Pudong Development Bank’s annual reports.

7. China Merchants Bank

The increase in “precious metals assets” was caused by the increase in proprietary trading and gold lease according to the annual reports. From China Merchants Bank’s 2014 annual report:

In 2013, China Merchants Bank reported to have conducted precious metals leasing of 60 tonnes, a 203 % increase from 2012. 

8. China Minsheng Bank

The fine data was discussed in the previous chapter.

9. Industrial Bank

The 644 million RMB precious metals related liabilities were caused by “gold pledge business” according to Industrial Bank’s 2008 annual report. “Precious metals shorts and leased precious metals” are a subcategory under “financial liabilities held for trading”.

10. China CITIC Bank

According to the annual reports, the surge in the precious metals and precious metals contracts in 2014 was caused by the increase of precious metals lease and proprietary business. According to CITIC bank’s 2014 annual report:

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In the reporting period, the gold lease business and precious metals proprietary trading business all achieved rapid growth.

11. Ping’ An Bank (former Shenzhen Development Bank)

Before 2014 precious metals derivatives were called gold derivatives. Before 2009, Ping’ An only gave a lump sum of all the derivatives. Just in case there were any gold derivatives in this category, I’ve included the lump-sum numbers.

The increase in the “financial liabilities designated at fair value through profit and loss” in 2013 was caused by the increase in “financial liabilities held for trading” related to “gold business”, according to the annual report. Therefore all the numbers in “Financial liabilities designated at fair value through profit and loss” are listed here, although this category may include some liabilities not related to precious metals. From Ping’ An’s 2013 annual report:

12. Huaxia Bank

The precious metals assets in 2007 and 2008 were a result from physical gold sales according to the annual reports.

13. Everbright Bank

According to the annual reports, Everbright Bank started to conduct gold consignment sales and gold leasing in 2013. Therefore, the increase in precious metals holding in 2013 was probably caused by these activities. From to Everbright Bank’s 2013 annual report:

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[Everbright Bank] acquired the gold import qualification, started to conduct gold consignment and gold lease business.

14. Bank of Beijing

Clearly the Bank of Beijing participates in back-to-back leasing, as precious metals leased out are exactly equal to precious metals leased in.

15. Bank of Nanjing

The Bank of Nanjing only disclosed 6 million RMB in precious metals assets in 2014 and 7 million RMB in 2015.

16. Bank of Ningbo

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Being a millionaire is overrated, according to Visual Capitalist's Jeff Desjardins. The term itself has quite a few connotations, including many that have been ingrained in us since we were children. Becoming a “millionaire” meant being set for life, and not having to worry about things like personal finances again. After all, millionaires are supposed to be destined for early retirement, right?

That was then, and this is now.

Time magazine recently estimated that for a millennial with 40 years until retirement, $1 million in savings is not likely sufficient. Taking into account 3% inflation over that time period, it would be worth just $306,000 in today’s dollars. That’s a pretty questionable nest egg for a “millionaire”.

HOW MUCH IS A MILLION DOLLARS?

The infographic from Carson Wealth shows that things have changed over time, and that a million dollars of wealth ain’t what it used to be.

Fun facts: the preferred car for millionaires is actually a Ford, and the majority of millionaires envision working all the way until their retirement.

In today’s world, reaching the magical “millionaire” mark of a $1 million net worth is less meaningful than it used to be. In fact, roughly 9% of households in the United States have “millionaires” living in them – this is a record amount, caused partially through the devaluation of currency over time.

That said, there are many cities (San Francisco, Vancouver, New York, London, Melbourne, Tokyo, etc.) where even a million dollars isn’t even enough to purchase a home.

The “millionaire” case is a stark example of the erosion of a dollar’s purchasing power over time. To get a full sense, take a look at some historical numbers:

• To have the purchasing power of a millionaire from the 1900s, you would need at have nearly $30 million in today’s dollars.
• To have the same impact or influence on the economy as a millionaire from the 1900s, you’d need closer to $100 million in today’s dollars.

For more perspective on the topic, see how much money exists with this video from The Money Project:

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Originally posted at ChinaDaily.com,

Recently, the Chinese currency fell to its lowest level since late 2008. The renminbi has been trading around 6.92 to the US dollar. The plunge is typically explained with the anticipated US Federal Reserve rate increase in December and president-elect Donald Trump's threat to label China a currency manipulator and slap tariffs on Chinese exports.

In reality, there is much more to the story.

 

In the long term, China's growth will translate to currency power in foreign-exchange markets. In October, the renminbi officially joined the International Monetary Fund's currency reserve basket, known as Special Drawing Rights. In the coming decade, the renminbi will expand rapidly through the IMF reserve basket, the allocations of central banks, and those of public, private, sovereign and individual investors.

After summer, the renminbi's fundamentals improved thanks to positive spillover effects from overcapacity reduction, fiscal stimulus and a boost to export competitiveness, due to weaker exchange rate.

In the fourth quarter, the Chinese currency will also feel the adverse impact of a mild correction of property prices.

The renminbi's short-term volatility is also compounded by the tumultuous global environment and the US dollar. Along with other emerging market currencies, the renminbi must cope with the US dollar, which recently hit a 14-year high, driven by rising US bond yields, expectations of a Trump fiscal stimulus and the impending Fed rate hike. In the process, other Asian currencies?the Japanese yen, Indian rupees, Korean won, Indonesian rupiah and the Malaysian ringgit?suffered a sell-off.

In the long term, the spillovers from the US and Chinese financial markets are likely to have a different impact on financial markets in the Asia-Pacific region. Studies conducted by central banks suggest that in normal times China's influence in the equity has risen close to the US' level, although the relative impact of the US has been stronger during crisis periods.

The influence of China is based on a regional pull, while that of the US reflects a global push. The current crisis favors the dollar, but over time stability will support the renminbi.

Unfortunately, the renminbi, along with other emerging market currencies, must also cope with the dollar's growing risk in the world economy. Before the 2008-09 global financial crisis struck, there was a close correlation between leverage and the volatility index (VIX). When the VIX was low, the appetite for borrowing went up, and vice-versa. That correlation no longer prevails, due to years of ultra-low rates and rounds of quantitative easing by advanced economies' central banks.

Recently, the Bank for International Settlements reported that the US dollar has replaced the volatility index as the new fear index.

As the VIX's predictive power has diminished, the dollar has become the indicator of risk appetite and leverage. This dynamic has distressing implications, because it has pushed international borrowers and investors toward the dollar.

And yet, as the dollar's appreciation is exposing borrowers and lenders to valuation changes, the US' fundamentals are eroding, as president-elect Trump himself has acknowledged. The US' sovereign debt has soared to $19.9 trillion. And in the past year, foreign central banks sold almost $375 billion in US Treasuries.

In these conditions, the Fed rate hikes could boost the US dollar as a kind of global Fed funds rate, which would result in dollar tightening and deflationary constraints?which, in turn, could impair emerging economies that today fuel global growth prospects.

 

 

It is not the renminbi but the US dollar that today poses the greatest risk to the global economy and serves as its fear gauge.

 

*  *  *

Authored by Dan Steinbock, the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore).

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Submitted by Brandon Smith via Alt-Market.com,

As I noted in my last article World Suffers From Trump Shellshock – Here’s What Happens Next, there are two primary consequences of a Trump presidency that actually serve globalists and elites in the long run.

The first is the consequence of a perfect scapegoat for the economic crisis which the elites have been gestating since 2008.  Trump enters the White House with a clear political mandate, a mandate that supposedly gives conservatives more power than at any other time in U.S. history.  This mandate might seem like a miracle, a free hand of power to sovereignty and liberty champions to defeat the collectivist tyranny of cultural Marxists on the Left once and for all.  However, it could also backfire, because under this mandate EVERYTHING bad that happens under Trump’s watch can be blamed on Trump and his followers.  Conservatives have been given almost absolute influence over government (or apparent influence); by extension, they also inherit absolute responsibility, whether they like it or not.

I examined this first consequence in detail in numerous articles leading up to the 2016 election.  In fact, it is the primary reason why I was so certain Trump would be president.  He is the perfect scapegoat, or the perfect conduit.  Under Trump, the last stage of economic collapse can finally be initiated by the financial elites and most of the world including half the population of the U.S. will immediately and without question blame conservatism, nationalism, sovereignty advocates and Trump for the disaster.  They won’t think twice about looking in the direction of global bankers.

For those that immediately scoff at such a notion, I highly recommend they research the concept of 4^th Generation Warfare.  I also highly recommend study into a Department of Defense paper called 'From Psyop To Mindwar: The Psychology Of Victory', written by Major Michael Aquino (a self proclaimed “satanist”) and Colonel Paul Vallely (today a self proclaimed liberty champion).  I would also compel people to read 'The Art Of War' by Sun Tzu, the same manuscript that all recruits of the CIA are required to read.

The essence of the most advanced form of warfare is the ability to defeat an opponent, or a population, without having to fight at all.  Instead, the master tactician seeks to influence his opponent to surrender without fighting, or, to influence his opponent to destroy himself.  This is accomplished primarily through propaganda, subversion, asymmetric warfare (terrorism and insurgency) and most importantly, co-option.

As I noted in my last article, if you want to be able to accurately predict future events, you must understand the minds of the people with the most influence over those events.  The financial elites, highly motivated and highly organized, are the single most important gatekeepers to geopolitical change today.  Know their mind, and you will know the general path tomorrow will take.

This is not to say that the elites are “omnipotent.”  Frankly, they don’t need to be.  With the utter lack of vigilance and awareness within our society, the elites only need to be relatively intelligent and exceedingly morally bankrupt to manipulate the masses. When skeptics argue with me that the elites would “have to be omnipotent to influence the social narrative in the manner I describe,” I have to laugh.  Any person of above-average intelligence and unlimited capital (as the financial elites have) can do considerable damage to a society, bring empires to their knees and condition the populace to think and react in a specific fashion.

If I had the same resources at my disposal as the elites have (and the same lack of conscience), I could probably do a far better job than they when manipulating geopolitical outcomes. They make numerous mistakes if you pay close attention to their actions.  I hardly consider myself the smartest person around, let alone “omnipotent.”  This is a silly notion.  The reality is, the more ignorant the population, the easier it is to control and misdirect them.  To the ignorant, the elites might seem “omnipotent.” They aren’t; they merely have more-intelligent-than-average people at their disposal and printing presses to pay for everything they want.

The smarter and more vigilant any given population, the more difficult it is to influence them through deception.  This is very simple.  To put it even more bluntly, the elites get away with subversive tyranny because there are too many willfully stupid people.

Following this line of thinking, there is a second consequence of Election 2016 that greatly concerns me — the potential for co-option of the Liberty Movement, the only existing opposing force to globalism.  Co-option requires the centralization of a group in thought and deed under the influence of a small number of hands, or a single white knight figure.  As I noted in my article Will A Trump Presidency Really Change Anything For The Better?, published in March of this year:

"The other ingenious aspect of the Trump campaign is really who he is running against — Hillary Clinton, a rabidly liberal candidate even more hated than Barack Obama. A candidate with a potentially serious criminal record and a penchant for an outright communistic world view far beyond that of Bernie Sanders. Those of us who have been in the writing field for a long time and have dabbled in fiction know that in order to create a fantastic hero, you must first put even more work into creating a fantastic villain. The hero is nothing without the villain."

The unmitigated horror inherent in the prospect of a Hillary Clinton presidency is like adding jet fuel to the Trump campaign. (And yes, I am assuming according to the results of the primaries so far that the final election will be between Trump and Clinton).

And, as I explained in my article Clinton Versus Trump And The Co-Option Of The Liberty Movement published in September:

"Whenever you have a rebellion focused on the inherent ideals of freedom, totalitarian institutions struggle to intervene. The issue is, freedom is not only moral, but practical. Wherever true freedom exists, people are not only happier, but more productive and prosperous. It’s hard for a tyrant to fight a rebellion based on freedom because the idea is more powerful than any weapon or any form of treachery. No matter how advanced the tyranny is, and no matter how many rebels they imprison or kill, the idea of freedom endures.

 

The only way to destroy a rebellion like this, a rebellion like the liberty movement, is to make it about something other than freedom. The powers that be have to convince that movement to support policies that are destructive to their own ideals. If this can be done, then that rebellion has lost the advantage of principle — the only advantage that really matters."

The co-option of the liberty movement is not necessarily direct.  It can be achieved through what I call “absorption.” Take note that the mainstream media and elitists avoid using the label “liberty movement” at all costs because this is something we labeled ourselves many years ago.  Instead, they seek to control what we are called; labeling us “populists” of the “Alt-Right.”  The liberty movement has been fighting the globalists in the information war for a long time.  The average conservative Republican is new to this party, and yet the liberty movement is being called the “Alt-Right?”

Even Bloomberg pointed out with relative glee that the Tea Party (liberty movement), a movement which leftists despise with every fiber of their being, could be devoured by Trump’s campaign and reconstituted into something else.  Read their editorial The Tea Party Meets Its Maker, but only if you have a strong stomach.

In the battle against the Marxist left, it is important that we do not lose track of our original identity, or the elites at the top of the pyramid.  Also important is that we do not forsake our original principles in order to achieve “victory” over our adversaries.  This is a very difficult problem to discuss when you consider who we are fighting against.

I have always said that it was the social justice cult and their zealotry that drove the rise of Trump.  It was they that created the public firestorm with their open contempt for our right to free thought and free expression.  But keep in mind, this has all happened before, and with terrible results.

In Europe during the 1920s and early 1930s, the overall rise of Fascism was in direct response to economic crisis and the insurgency of communism.  Communism is essentially collectivism on the far left side of the political spectrum. Fascism is a collectivist trap the "Right" sometimes falls into.  Both lead to centralization and tyranny.

Communism is tyranny in the name of undermining the strong and independent in order to make room for the weak.  Fascism is tyranny in the name of routing out the weak to make room for the strong.

It is these two political extremes that the elites have used over the past century to dominate geopolitical outcomes.  Again, for those who are skeptical I highly recommend the extensive research and evidence presented by Antony Sutton, who outlined succinctly the FACT that both the Bolshevik Revolution and the rise of the Third Reich were funded and managed by Wall Street moguls and international banking interests.

The elites are notorious for playing the extreme left against the right in order to drive conservatives to the opposite extreme.  My concern is not only that through Trump the elites can easily scapegoat conservative movements for a global economic crisis, but also that through the intense vitriol of the social justice left, infuriated by their loss to Trump in the election, conservatives may be driven to abandon their constitutional ideals and become the monster they hoped to destroy.

Carroll Quigley, CFR elitist and mentor to Bill Clinton, was highly open about the plans of globalists to establish one world governance in his book “Tragedy And Hope.”  The following quote from Carroll Quigley’s Dissent: Do We Need It? could be taken as anti-right propaganda, but I take it as a warning that the elites see potential exploitation of the political right in America:

“For example, I’ve talked about the lower middle class as the backbone of fascism in the future. I think this may happen. The party members of the Nazi Party in Germany were consistently lower middle class. I think that the right-wing movements in this country are pretty generally in this group.”

Again, the liberty movement cannot be defeated by the globalists directly.  If the fight comes down to an open confrontation between freedom versus globalism, the globalists will inevitably lose.  Instead, it appears to me that the globalists are more than happy to either allow Trump into the White House, or to install him in the White House as a means to rewrite the liberty movement into a villainous character, rather than the rebellious hero of our story.

So far it would seem that the temptations to revert to fascism are many.  Set aside the threat of ISIS terrorism and think about the insanity showcased by the Left.

When I mentioned in my last article the crippling of social justice, I did not mention that this could have some negative reverberations.  With Trump and conservatives taking near-total power after the Left had assumed they would never lose again, their reaction has been to transform.  They are stepping away from the normal activities and mindset of cultural Marxism and evolving into full blown communists.  Instead of admitting that their ideology is a failure in every respect, they are doubling down.

When this evolution is complete, the Left WILL resort to direct violent action on a larger scale, and they will do so with a clear conscience because, in their minds, they are fighting fascism.  Ironically, it will be this behavior by leftists that may actually push conservatives towards a fascist model.  Conservatives might decide to fight crazy with more crazy.

The mainstream media and popular media largely controlled by leftist elements are only pouring gasoline on the fire, with major pundits and media personalities steadily hinting at “revolution” in the face of a “Trumpist” America.  But here is the thing, these people are kidding themselves.

The alternative media is eclipsing corporate media today.  Their time is coming to an end.

Leftists including groups like Black Lives Matter are also ill equipped to violently combat a conservative movement with a lifetime of experience in arms and the will to use them.  If the Left leaps into the realm of violent Marxist revolution, they will lose in America.  That said, there is a cost.

The cost could very well be the heritage of freedom that conservatives desire to protect.  The alternative media may overrun the corporate media, but will we become the corporate media in the process?

If under Trump conservatives fall to temptation and exploit the “ring of power” that is government to exert dominance in the name of stopping the Left, then they will ultimately be destroyed as well.

In this case history will not remember conservatives as freedom fighters rebelling against globalist machinations, but as evil “populists” that caused global economic collapse and the re-establishment of the institution of fascism.  The globalists can swoop in after the dust has settled and use the American collapse fable as a story to tell children for the next century.  A reminder that nationalism and sovereignty are harbingers of war and death.  Conservatism will be abhorred as “deplorable,” an ugly ideal akin to Nazism.

At this point, the globalists will have won, for no other philosophy contrary to globalism will ever exist again.  No one would want to associate themselves with historical “villains” and bogeymen.

As I have mentioned consistently, I have no idea whether or not Donald Trump is aware of this potential trap.  I also have no idea if he was sincere in his campaign or simply telling people what they wanted to hear.  At this time, his consideration of neo-con political elites and Goldman Sachs bankers for cabinet positions does not leave a positive impression.  And, his seeming refusal to commit to prosecution of Hillary Clinton (which I also predicted) for her obvious crimes is a warning bell of liberty advocates.

My position is that the Liberty Movement must always remain the Liberty Movement if conservatives and sovereignty proponents want a chance to survive.  We have to be willing remain just as watchful and critical of Trump as we would have been with Hillary Clinton.  And, if he breaks his promises or goes against his oath to the constitution, we must be willing to go to war with him, just as we would have with Clinton.

This puts us in a tenuous position — fighting the Left is bad enough.  Going against Trump if he steps out of line is worse, because then we can be labeled leftists as well.  This is the essence of 4^th Generation warfare — cornering an opponent so that each move he makes is a sacrifice.  If the opponent is not careful, he might just destroy himself.

There is a way to undermine this strategy by the elites; as conservatives we must treat Trump like a new employee.  We have to put him on probation and watch him, not give him the keys to the store on the first day.  We must also continue to educate fellow conservatives (and any on the Left that have the sense to listen) that this fight is FAR from over.  In fact, it has just begun.  In the end, our strategy must be for the Liberty Movement to absorb the "Alt-Right", instead of being absorbed.  And, we must focus our efforts and actions against top globalists and their organizations rather than only focusing on the regressive left.

People must understand that the real threat in all of this has been and always will be the globalists.  Instead of fighting each other in a futile theater of the absurd, we must fight and remove them from the chess board, wherever and whenever they show their faces in the daylight.

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As Trump gears up to take the oval office, vendors are already lining up to get a piece of his massive infrastructure projects, including his “Big, Beautiful, Powerful Border Wall.”  Ironically, one of the first vendors to publicly announce their interest in bidding on the border wall is none other than Mexican cement producer, Grupo Cementos de Chihuahua.  While Trump’s border wall has been fiercely protested by numerous senior elected officials in Mexico, including former President Vicente Fox, Grupo Cementos’ CEO admits “we can’t be choosy.”

A Mexican cement maker is ready to lend its services to U.S. President-elect Donald Trump to build the wall he wants to erect on the southern border of the United States to curb immigration.

 

“We can’t be choosy,” Enrique Escalante, Chief Executive Officer of Grupo Cementos de Chihuahua (GCC) said in an interview. “We’re an important producer in that area and we have to respect our clients on both sides of the border.”

 

Based in Chihuahua, a large northern state bordering Texas and New Mexico, GCC is one of the biggest construction materials companies in Mexico. It generates around 70 percent of its sales in the United States, where it also has three plants.

 

Escalante said Trump’s plans to invest in energy and infrastructure in the United States augured well for the firm.

 

“For the business we’re in, Trump is a candidate that does favor the industry quite a bit,” Escalante said.

Luckily for Trump, and Grupo Cementos, the National Enquirer has already drawn up “construction plans & blueprints.”

Pro-Trump tabloid celebrating his victory/sending him a message? http://pic.twitter.com/5vhBkyINSg

— Brian Stelter (@brianstelter) November 23, 2016

 

Meanwhile, as TMZ points out, “Bikers 4 Trump” have already started building a commemorative border wall of their own just outside of Atlanta.  For the bargain price of $60 per brick, or $100 for two, you too can purchase a custom-etched brick for the wall.

Bikers 4 Trump tells TMZ they’ve been plugging away for a couple months on a brick border wall of their own, which they plan to move to the Mexican border should Trump ever get the real deal constructed.

 

We’re told they already have 200 bricks stacked in Atlanta next to State Hwy 49, and they feature names like Antonio Sabato Jr. and Joe Bonsall ?of The Oak Ridge Boys. Bricks have also been purchased in Scott Baio, Ted Cruz and Ted Nugent’s names — although none made their own donation.

 

And, lest you thought this was a joke, here is some video of the newly etched bricks hot off the press and bound for the Atlanta wall.

Welcome @DGallup to the wall! She is a 100% Disabled Vet & she ordered 2 Bricks @ https://t.co/cGkVjf2Psh#RETWEET http://pic.twitter.com/wli5ZcY9QP

— Bikers 4 Trump (@Bikers4Trump) August 15, 2016

 

What more is there to say?  The next 4 years are going to be surreal.

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Submitted by Mac Slavo via SHTFPlan.com,

The lawlessness of the Obama Administration knows no bounds.

Not only has President Obama made every move he can through executive order to create and foster amnesty for illegal immigrants, but his Justice Department is now attempting to force people to hire undocumented workers.

Ironically, the agency on the other end of intimidation is the Denver County Sheriff’s Office.

Incredibly backwards…

via the Daily Caller:

Denver County’s sheriff office has been slapped with a fine by the Department of Justice (DOJ) because it refused to hire non-citizens as deputies.

 

From the beginning of 2015 through last March, the Denver Sheriff Department went on a major hiring binge, adding more than 200 new deputies. But those jobs ended up only going to citizens, because the department made citizenship a stated requirement on the job application. The department admitted as much in a new settlement with the U.S. government, which requires it to pay a $10,000 fine.

 

The department will also have to comb through all of its job applications from the past two years, identifying immigrants who were excluded from the hiring process and giving them due consideration.

How can counties, state agencies, small businesses or individuals be forced to hire in violation of the law, in order to comply with non-discrimination?

Obviously the system has a logical loop failure, either that, or someone wants this country to eat itself.

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It’s no surprise that the largest employer of mathematicians in the United States is the National Security Agency.  These jobs are not all ‘codebreakers’ – why does the NSA employ so many mathematicians, second only to Wall St.?  

The biggest secret propaganda and sales tool used by experts in the modern world is the deliberate twisting and false presentation of data, specifically – numbers and ‘statistics.’  They do so in such a subtle way, that the argument leads into a heated debate about the inference of the obvious conclusions – NOT the calculation of the numbers themselves!  Very rarely are the methods of statistical calculations, data collection, formulations, and other operations ever questioned.

This is used by governments, to paint a picture they want, in the case of the military, to ‘sell war’ – as outlined eloquently by mathematician Nassim Taleb:

When Pasquale Cirillo and I examined the historical accounts of wars for our statistical analysis of violence, we discovered huge holes –people take numbers for gospel, yet many accounts were fabrications. Many historians, political “scientists”, and others for fall for them, then get to write books. For instance we saw that the scientific entertainer Steven Pinker based his analysis of the severity of the An Lushan rebellion on a shoddy overestimation –the real numbers of casualties could to be lower by an order of magnitude. Much of Pinker’s thesis of drop in violence depends on the past being more violent; it thus gets further discredited (the thesis is shaky anyway as Pinker’s general assertions conflict with the statistical data he provides). Peter Frankopan, in his magesterial The Silk Roads, seem to get the point: estimations of casualties from the Mongol invasions were inflated as their accounts exaggerated the devastation they caused in order to intimidate opponents (war is not so much about killing as it is about bringing submission). Our main (technical) paper is here.  But it is not just the bullshitting of Steven Pinker: numbers for many wars seem to have been pulled out of a hat. Some journalist cites some person at a conference; it finds it way to Le Monde or the New York Times, and that number becomes fixed for future generations. For our attempt to build a rigorous method of quantitative historiography, we devised statistical robustness techniques: they consist in bootstraping “histories” from the past, considering the past a realization between the lowest and the highest estimate available, producing tens of thousands of such “historical paths” and evaluate how “robust” an estimator to changes in the aggregate. More depressingly, we found that no historian had bothered to do similar cleaning up work or robustness check –yet the statistical apparatus is there to help.

(In case you haven’t heard of Nassim Taleb this book is a MUST READ as a primer for any trader or investor to understand MATH as it pertains to the MARKETS:  Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets.  Taleb is no academic he runs a multi-billion dollar hedge fund).

Inflated numbers of enemy casualties, or deflated numbers of aggressor casualties, pose an obvious example of why such agencies would use bad math to display data in such a way as to further their argument, for one side or another.  But what other examples?  Why would Wall St. use such a strategy, considering their entire business is numbers?

Consider the example of the Fed and interest rate policy.  If the current interest rates are 1%, and the Fed hikes to 2%, that’s a 1% increase but in percentage terms, it’s a 100% increase!  If you had interest rate derivatives, you could with no leverage potentially earn a 100% return on your money, in a day (supposing it was a surprise and the market wasn’t already pricing in the hike). 

Another popular statistical misconception, is that of loss recovery.  Recovering from a loss is not linear.  For example, if your fund has a 10% loss, you need 11.11% just to break even.  This becomes more extreme, the deeper the loss hole.  If you start with 100 units, lose 10% of them – you have 90.  But to increase from 90 back to your original starting 100, you need 11.11 units, which is 11% just to get back your lost 10 units.  Yes!

And speaking about performance, let’s knock the industry standard performance capsule and its big gaping hole.  According to most reporting standards, such as prescribed by NFA, FINRA, and many others – funds report monthly performance based on a ‘snapshot’ of performance during that month.  This sounds reasonable until you actually calculate monthly performance numbers and see that it’s really only performance based on a 1 or 2 day period intra-month.  If there was a big profit or a big loss on the days taken as ‘snapshots’ that’s what will show in the capsule.

What’s misleading about this, it doesn’t represent to investors what happened DURING the month.  For many strategies, this is not relevant – but for some strategies, it is very relevant.  For example, imagine a scenario where there was a huge 30% loss and then recovery, and the month ended up being 2% positive.  It would seem to be a low-volatility fund, and likely attract conservative investors, like Pension funds.  They wouldn’t know about the intra-month risk, unless the manager told them (but why would they, it’s not in the required documents, and maybe THEY don’t even know about it).

However you add it up, the difference between balance and equity can be misleading.  Skipping the monthly performance capsules that 99% of Wall St. uses, if one has access to it, one can compare the balance and equity curves over time.  For those who don’t know, balance is closed positions, equity includes live trades.  So if a position is still open, the floating profit or loss will show up in the equity.  Take a look at this discrepancy:

The red line is the balance, yellow/orange line is the equity.  These lines must separate when trades are placed, otherwise an account would never lose or gain.  But how wide are these gaps, how frequent are they?  Absent of rigorous statistical analysis as done by Taleb in his war casualties paper, comparing these 2 lines is the most basic form of drawdown analysis.  What caused the lines to diverge?  What dates did they diverge on, and what forces caused them to converge?  These are questions astute investors should be asking.  

For a full education on statistical analysis, checkout Fortress Capital’s Introduction to Foreign Exchange.  For a pocket guide designed to make you a due diligence expert, checkout Splitting Pennies – Understanding Forex for only $6.11 on kindle, or get some awesome financial books here.

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A new study just released by the USDA, offers a very detailed look at exactly how participants in the “Supplemental Nutrition Assistance Program” (SNAP, aka Food Stamps) spend their taxpayer-funded subsidies.  Unfortunately for taxpayers, the amount of money spent on soft drinks and other unnecessary junk foods/drinks is fairly staggering.  But, we suppose it’s a nice taxpayer funded subsidy for the soda industry…so score one for Warren Buffett and the Coca Cola lobbyists.

Per the study, nearly $360mm, or 5.4% of the $6.6BN of food expenditures made by SNAP recipients, is spent on soft drinks alone.  In fact, soft drinks represent the single largest “commodity” purchased by SNAP participants with $100mm more spent on sodas than milk and $150mm more than beef.

Soft drinks were the top commodity bought by food stamp recipients shopping at outlets run by a single U.S. grocery retailer.

 

That is according to a new study released by the Food and Nutrition Service, the federal agency responsible for running the Supplemental Nutrition Assistance Program (SNAP), commonly known as the food stamp program.

 

By contrast, milk was the top commodity bought from the same retailer by customers not on food stamps.

 

In calendar year 2011, according to the study, food stamp recipients spent approximately $357,700,000 buying soft drinks from an enterprise the study reveals only as “a leading U.S. grocery retailer.”

 

That was more than they spent on any other “food” commodity—including milk ($253,700,000), ground beef ($201,000,000), “bag snacks” ($199,300,000) or “candy-packaged” ($96,200,000), which also ranked among the top purchases.

 

Even worse, when we added up all of the commodities that would typically be considered “junk food” (i.e. soft drinks, candy, cakes, energy drinks, etc.), we found that roughly $950mm, or just over 14% of the aggregate $6.6BN of food expenditures made by SNAP recipients, is spent on unnecessary, unhealthy products.

 

As CNS News points out, the study was conducted by IMPAQ international and analyzed the sales of a single national retail chain back in 2011. 

The dollar amount that food stamp recipients spent on soft drinks and other commodities comes from data a retailer provided to a data analysis company the federal government hired to find out what kind of foods people on foods stamps—and Americans not on foods stamps—were buying.

 

“The Food and Nutrition Service (FNS) awarded a contract to IMPAQ International, LLC, to determine what foods are typically purchased by households receiving Supplemental Nutrition Assistant Program (SNAP) benefits,” the study explained. “This study examined point-of-sale (POS) food purchase data to determine for what foods SNAP households have the largest expenditures, including both SNAP benefits and other resources, and how their expenditures compare to those made by non-SNAP households.”

 

“POS transaction data from January 1, 2011 through December 31, 2011 from a leading grocery retailer were examined for this study,” the report said.

It’s a good thing democrats re-branded Food Stamps as the “Supplemental Nutrition Assistance Program”….otherwise we would have confused it for a blatant waste of taxpayer money on sodas and energy drinks.

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Having exploded higher in the run-up to the election, market expectations of the correlation between stocks within the S&P 500 have completely collapsed since to new record lows.

Simply put, massive systemic overlays were placed ahead of the election event, and were forced to be unwound increasingly aggressively as the post-Trump rally caught everyone offside (the unwind would mean relatively heavy selling of Index protection relative to single-name protection).

As a reminder, implied correlation measures the relative demand for macro overlays (index hedges) vs micro risk (individual stock hedges/concerns). The higher it is, the more systemically worried investors are and the more traders believe a high correlation 'event' is due (typically the high correlation event is a big downturn in stocks).

As The Wall Street Journal reports, sectors and styles in the S&P 500 index have started to move independently after seven years of depressed volatility and tighter correlations.

While the S&P 500 climbed to a record for a second day on Tuesday, “there are elements of a bull market and a bear market at the same time,” said Andrew Wilkinson, chief market analyst at Interactive Brokers.

“You’re seeing pressure on different sectors. In a typical bull market, you’re going to get all stocks going higher.”

 

“It makes it very interesting for the stock picker and the active manager who’s on his game,” Mr. Wilkinson said.

 

The relationship between growth and value stocks in the benchmark equity measure has also decoupled, with the rolling correlation between the two groups sliding since voting day, FactSet data show. A Republican sweep of the U.S. presidency and Congress has boosted the inflation outlook, pushing investors into value names. Before the election, investors crowded into growth companies in 2015 amid a sluggish economy and then poured money into low-volatility equities in the first half of this year.

But it is not just correlations between individual stocks that is crashing. The correlation between bonds and stocks has collapsed back to its norms…

 

Which, as we noted previously, is raising notable concerns over a risk-parity fund blow up. As BofA warns: "Latent risk remains worth monitoring, as (i) leverage is still near max levels across a variety of risk parity  parametrizations, (ii) bond allocations are historically elevated, and (iii) markets continue to be sceptical of a 2016 Fed hike."

If BofA is correct, it would mean that a day which sees a -4% SPX drop and +1% bond rally (good diversification) would generate no selling pressure, "underscoring the critical role played by bond-equity correlation in governing the severity of risk parity unwinds."

 

However, a troubling scenario is one where even a relatively benign 2% selloff of the S&P coupled with just a 1% selloff of the 10Y could result in up to 50% deleveraging, which in turn would accelerate further liquidations by other comparable funds, and lead to a self-fulfilling crash across asset classes.

 

Which incidentally sounds like precisely the scenario that could happen when the Fed tries to raise rates, and is also why asset classes continue to move without fear of any rate hike, as they now realize – very well – just how trapped the Fed truly is. That said, in short order, we will see if the Fed, for once, has the intestinal fortitude to actually raise rates in the face of the extreme volatility awaiting equities in the event they do… we doubt it.

As RBC's Charlie McElligott notes, the classic risk-parity pain-trade ensues— developed mkt sovereign bonds, stocks, EM, credit and commodities (ex-crude) all under the cosh right now at the same time (shocker–a strategy built on a core concept of ‘negative correlation btwn bonds and risk stocks’ is going to be exposed in a regime change of this magnitude).

And as the chart below shows, Risk Parity funds are plunging…

As is clear, he massive decoupling between stocks and risk-parity funds is not unpredented… but has not ended well in the past (for stocks).

via http://ift.tt/2giM3xe Tyler Durden