Tag: finance

The following is an excerpt from ALL THE PRESIDENTS’ BANKERS: The Hidden Alliances that Drive American Power by Nomi Prins (on sale April 8, 2014).  Reprinted with permission from Nation Books. Nomi Prins is a former managing director at Goldman Sachs.

NIXON’S BANKERS: When What Was Good for Wall Street Was Good for the President

Wall Street’s War

While the protests against the Vietnam War intensified in the first years of the Nixon administration, the financial elite was fighting its own war—over the future of banking and against Glass-Steagall regulations. National City Bank chairman Walter Wriston was a steadfast warrior in related battles, as he fought with Chase chairman David Rockefeller for supremacy over the US banker community and for dominance over global finance.

Rockefeller’s sights were set on a grander prize, one with worldwide implications: ending the financial cold war. He made his mark in that regard by opening the first US bank in Moscow since the 1920s, and the first in Beijing since the 1949 revolution.

Augmenting their domestic and international expansion plans, both men and their banks prospered from the emerging and extremely lucrative business of recycling petrodollars from the Middle East into third world countries. By acting as the middlemen—capturing oil revenues and transforming them into high-interest-rate loans, to Latin America in particular—bankers accentuated disparities in global wealth. They dumped loans into developing countries and made huge amounts of money in the process. By funneling profits into debts, they caused extreme pain in the debtor nations, especially when the oil-producing nations began to raise their prices. This raised the cost of energy and provoked a wave of inflation that further oppressed these third world nations, the US population, and other economies throughout the world.

Bank Holding Company Battles

When Eisenhower signed the 1956 Bank Holding Company Act banning interstate banking, he left a large loophole as a conciliatory gambit: a gray area as to what big banks could consider “financially-related business,” which fell under their jurisdiction. In practice, that meant that they could find ways to expand their breadth of services while they figured out ways to grow their domestic grab for depositors. On May 26, 1970, the “Big Three” bankers— Wriston and Rockefeller, along with Alden “Tom” Clausen, chairman of Bank America Corporation—appeared before the Senate Banking and Currency Committee to press their case for widening the loophole.

During the proceedings, Wriston led the charge on behalf of his brethren in the crusade. Tall, slim, elegantly dressed, and the most articulate of the three, he dramatically called on Congress to “throw off some of the shackles on banking which inhibit competition in the financial markets.”

The global financial landscape was evolving. Ever since World War II, US bankers hadn’t worried too much about their supremacy being challenged by other international banks, which were still playing catch-up in terms of deposits, loans, and global customers. But by now the international banks had moved beyond postwar reconstructive pain and gained significant ground by trading with Cold War enemies of the United States. They were, in short, cutting into the global market that the US bankers had dominated by extending themselves into areas in which the US bankers were absent for US policy reasons. There was no such thing as “enough” of a market share in this game. As a result, US bankers had to take a longer, harder look at the “shackles” hampering their growth. To remain globally competitive, among other things, bankers sought to shatter post-Depression legislative barriers like Glass-Steagall.

They wielded fear coated in shades of nationalism as a weapon: if US bankers became less competitive, then by extension the United States would become less powerful. The competition argument would remain dominant on Wall Street and in Washington for nearly three decades, until the separation of speculative and commercial banking that had been invoked by the Glass-Steagall Act would be no more.

Wriston deftly equated the expansion of US banking with general US global progress and power. It wasn’t so much that this connection hadn’t occurred to presidents or bankers since World War II; indeed, that was how the political-financial alliances had been operating. But from that point on, the notion was formally and publicly verbalized, and placed on the congressional record. The idea that commercial banks served the country and perpetuated its global identity and strength, rather than the other way around, became a key argument for domestic deregulation—even if, in practice, it was the country that would serve the banks.

The Penn Central Debacle

There was, however, a fly in the ointment. To increase their size, bankers wanted to be able to accumulate more services or branches beneath the holding company umbrella. But a crisis in another industry would give some legislators pause. The Penn Central meltdown, the first financial crisis of Nixon’s presidency, temporarily dampened the ardency of deregulation enthusiasts. The collapse of the largest, most diverse railroad holding company in America was blamed on overzealous bank lending to a plethora of non-railroad-oriented entities under one holding company umbrella. The debacle renewed debate about a stricter bank holding company bill.

Under Wriston’s guidance, National City had spearheaded a fifty-three-bank syndicate to lend $500 million in revolving credit to Penn Central, even when it showed obvious signs of imminent implosion.

Penn Central had been one of the leading US corporations in the 1960s. President Johnson had supported the merger that spawned the conglomerate on behalf of a friend, railroad merger specialist Stuart Saunders, who became chairman. He had done this over the warnings of the Justice Department and despite allegations of antitrust violations called by its competitors. With nary a regulator paying attention, Penn Central had morphed into more than a railroad holding company, encompassing real estate, hotels, pipelines, and theme parks. Meanwhile, highways, cars, and commercial airlines had chipped away at Penn Central’s dominant market position. To try to compensate,
Penn Central had delved into a host of speculative expansions and deals. That strategy was failing fast. By May 1970, Penn Central was feverishly drawing on its credit lines just to scrounge up enough cash to keep going.

The conglomerate demonstrated that holding companies could be mere shell constructions under which other unrelated businesses could exist, much as the 1920s holding companies housed reckless financial ventures under utility firm banners.

Allegations circulated that Rockefeller had launched a five-day selling strategy of Penn Central stock, culminating with the dumping of 134,400 shares on the fifth day, based on insider information he received as one of the firm’s key lenders. He denied the charges.

In a joint effort with the bankers to hide the Penn Central debacle behind a shield of federal bailout loans, the Pentagon stepped in, claiming that assisting Penn Central was a matter of national defense.5 Under the auspices of national security, Washington utilized the Defense Production Act of 1950, a convenient bill passed at the start of the Korean War that enabled the president to force businesses to prioritize national security–related endeavors.

On June 21, 1970, Penn Central filed for bankruptcy, becoming the first major US corporation to go bust since the Depression. Its failure was not an isolated incident by any means. Instead, it was one of a number of major defaults that shook the commercial paper market to its core. (“Commercial paper” is a term for the short-term promissory notes sold by large corporations to raise quick money, backed only by their promise to pay the amount of the note at the end of its term, not by any collateral.) But the agile bankers knew how to capitalize on that turmoil. When companies stopped borrowing in the flailing commercial paper market, they had to turn to major banks like Chase for loans instead. As a result, the worldwide loans of Chase, First National City Bank, and Bank of America surged to $27.7 billion by the end of 1971, more than double the 1969 total of $13 billion.

A year later, the largest US defense company, Lockheed, was facing bankruptcy, as well. Again bankers found a way to come out ahead on the people’s dime. Lockheed’s bankers at Bank of America and Bankers Trust led a syndicate that petitioned the Defense Department for a bailout on similar national security grounds. The CEO, Daniel Haughton, even agreed to step down if an appropriate government loan was provided.

In response, the Nixon administration offered $250 million in emergency loans to Lockheed—in effect, bailing out the banks and the corporation. To explain the bailout at a time when the general economy was struggling, Nixon introduced the Lockheed Emergency Loan Act by stating, “It will have a major impact on the economy of California, and will contribute greatly to the economic strength of the country as a whole.” After the bill was passed, not a single Lockheed executive stepped down.

It would take several years of political-financial debate and more bailouts to sustain Penn Central. One 1975 article labeled the entire episode “The Penn-C Fairy Tale” and condemned the subsequent federal bailout: “While the country is in the worst recession since the depression and unemployment lines grow longer every day, Congress is dumping another third of a billion dollars of your tax payer dollars down the railroad rat hole.” (The incident was prologue: Congress would lavish hundreds of billions of dollars to sustain the biggest banks after the 2008 financial crisis, topped up by trillions of dollars from the Fed and the Treasury Department in the form of loans, bond purchases, and other subsidies.)

More Bank Holding Company Politics

Despite the Penn Central crisis, the revised Bank Holding Company Act decisively passed the Senate on September 16, 1970, by a bipartisan vote of seventy-seven to one. The final version was far more lenient than the one that Texas Democrat John William Wright Patman, chair of the House Committee on Banking and Currency, or even the Nixon administration had originally envisioned. The revised act allowed big banks to retain nonbank units acquired before June 1968. It also gave the Fed greater regulatory authority over bank holding companies, including the power to determine what constituted one. Language was added to enable banks to be considered one-bank holding companies if they, or any of their subsidiaries, held any deposits or extended any commercial loans, thus broadening their scope.

President Nixon signed the bill into law without fanfare on New Year’s Eve 1970. In fact, his inner circle decided against making a splash about it. They didn’t think the public would understand or care. Plus, they realized that there was a prevailing attitude that the Nixon administration had favored the big banks, and though it had, this was not something they wanted to draw attention to.

The End of the Gold Standard

The top six banks controlled 20 percent of the nation’s deposits through one-bank holding companies, but second place in that group wasn’t good enough for Wriston, who noted to the Nixon administration that his bank was really the “caretaker of the aspirations of millions of people” whose money it held. Wriston flooded the New York Fed with proposals for expansion. His applications “were said to represent as many as half of the total of all of the banks.” The Fed was so overwhelmed, it had to enlist First National City Bank to interpret the new law on its behalf.

By mid-1971, the Fed had approved thirteen and rejected seven of Wriston’s applications. His biggest disappointment was the insurance underwriting rejection. The possibility of converting depositors for insurance business had been tantalizing. It would continue to be a hard-fought, ultimately successful battle.

Around the same time, New York governor Nelson Rockefeller (David Rockefeller’s brother) approved legislation permitting banks to set up subsidiaries in each of the state’s nine banking districts. This was a gift for Wriston and David Rockefeller, because it meant their banks could expand within the state. Each subsidiary could open branches through June 1976, when the districts would be eliminated and banks could merge and branch freely.

Several months later, First National City Bank was paying generous prices to purchase the tiniest upstate banks, from which it began extending loans to the riskiest companies and getting hosed in the process; a minor David vs. Goliath revenge of local banks against Wall Street muscle.

By that time, the stock market had turned bearish, and foreign countries were increasingly demanding their paper dollars be converted into gold as they shifted funds out of dollar reserves. Bankers, meanwhile, postured for a dollar devaluation, which would make their cost of funds cheaper and enable them to expand their lending businesses.

They knew that the fastest way to further devalue the dollar was to sever it from gold, and they made their opinions clear to Nixon, taking care to blame the devaluation on external foreign speculation, not their own movement of capital and lending abroad.

The strategy worked. On August 15, 1971, Nixon bashed the “international money speculators” in a televised speech, stating, “Because they thrive on crises they help to create them.”16 He noted that “in recent weeks the speculators have been waging an all-out war on the American dollar.” His words were true in essence, yet they were chosen to exclude the actions of the major US banks, which were also selling the dollar. Foreign central banks had access to US gold through the Bretton Woods rules, and they exercised this access. Exchanging dollars for gold had the effect of decreasing the value of the US dollar relative to that gold. Between January and August 1971, European banks (aided by US banks with European branches) catalyzed a $20 billion gold outflow.

As John Butler wrote in The Golden Revolution, “By July 1971, the US gold reserves had fallen sharply, to under $10 billion, and at the rate things were going, would be exhausted in weeks. [Treasury Secretary John] Connally was tasked with organizing an emergency weekend meeting of Nixon’s various economic and domestic policy advisers. At 2:30 p.m. on August 13, they gathered, in secret, at Camp David to decide how to respond to the incipient run on the dollar.”

Nixon’s solution, pressed by the banking community, was to abandon the gold standard. In his speech the president informed Americans that he had directed Connally to “suspend temporarily the convertibility of the dollar into gold or other reserve assets.” He promised this would “defend the dollar against the speculators.” Because Bretton Woods didn’t allow for dollar devaluation, Nixon effectively ended the accord that had set international currency parameters since World War II, signaling the beginning of the end of the gold standard.

Once the dollar was no longer backed by gold, questions surfaced as to what truly backed it (besides the US military). According to Butler, “The Bretton Woods regime was doomed to fail as it was not compatible with domestic US economic policy objectives which, from the mid-1960s onwards, were increasingly inflationary.”

It wasn’t simply policy that was inflationary. The expansion of debt via the joint efforts of the Treasury Department and the Federal Reserve was greatly augmented by the bankers’ drive to loan more funds against their capital base. That established a debt inflation policy, which took off after the dissolution of Bretton Woods. Without the constraint of keeping gold in reserve to back the dollar, bankers could increase their leverage and speculate more freely, while getting money more easily from the Federal Reserve’s discount window. Abandoning the gold standard and “floating” the dollar was like navigating the waters of global finance without an anchor to slow down the dispersion of money and loans. For the bankers, this made expansion much easier.

Indeed, on September 24, 1971, Chase board director and former Treasury Secretary C. Douglas Dillon (chairman of the Brookings Institution and, from 1972 to 1975, the Rockefeller Foundation) told Connally that “under no circumstances should we ever go back to assuming limited convertibility into gold.” Chase Board chairman David Rockefeller wrote National Security Adviser (and later Secretary of State) Henry Kissinger to recommend “a reevaluation of foreign currencies, a devaluation of the dollar, removal of the U.S. import surcharge and ‘buy America’ credits, and a new international monetary system with greater flexibility . . . and less reliance on gold.”

With the dollar devalued, investors poured money into stocks, fueling a rally from November 1971 led by the “Nifty Fifty,” a group of “respectable” big-cap growth stocks. These were being bought “like greyhounds chasing a mechanical rabbit” by pension funds, insurance companies, and trust funds. The Chicago Board of Trade began trading options on individual stocks in 1973 to increase the avenues for betting; speculators could soon thereafter trade futures on currencies and bonds.

The National Association of Securities Dealers rendered all this trading easier on February 8, 1971, when it launched the NASDAQ. The first computerized quote system enabled market makers to post and transact over-the-counter prices quickly. With the stock market booming again, NASDAQ became a more convenient avenue for Wall Street firms to raise money. Many abandoned their former partnership models whereby the firm’s partners risked their own capital for the firm, in favor of raising capital by selling the public shares. That way, the upside—and the growing risk—would also be diffused and transferred to shareholders. Merrill Lynch was one of the first major investment bank partnerships to go “public” in 1971. Other classic industry leaders quickly followed suit.

Meanwhile, corporations were finding prevailing lower interest rates more attractive. Instead of getting loans from banks, they could fund themselves more cheaply by issuing bonds in the capital markets. This took business away from commercial banks, which were restricted by domestic regulation from acting as issuing agents. But bankers had positioned themselves on both sides of the Atlantic to get around this problem, so they were covered by the shift in their major customers’ financing preferences. While their ability to service corporate demand was dampened at home, overseas it roared. Currency market turmoil also led many countries to the Eurodollar market for credit, where US banks were waiting. Thus, the credit extended through international branches of major US banks tripled to $4.5 billion from 1969 to 1972.

The market rally, cheered on by the media, was enough to bolster Nixon’s fortunes. In the fall of 1972, Nixon was reelected in a landslide on promises to end the Vietnam War with “peace and honor.” Wall Street reaped the benefits of a bull market, and more citizens and companies were sucked into new debt products. The Dow hit a 1970s peak of 1,052 points in January 1973, as Nixon began his second term.

via Zero Hedge http://ift.tt/1htj3HQ Tyler Durden

Submitted by Sara Hsu via The Diplomat,

China is coming under close scrutiny these days, as the leadership scurries to find new sources of economic growth and control its debt. Some analysts have reassured China watchers that the Chinese government can simply write off its bad debt, at least within the major banks, and pass it on to the asset management companies that handle that resale of distressed debt (or have it later purchased by the Ministry of Finance). Others have warned that some of the debt is serious, such as that incurred by local government financing vehicles, and are dubious about the sustainability of these entities.

[ZH: As we have noted before, the dats is ugly…

From November 2012, The Chinese Credit Bubble – Full Frontal:

 

 

And from November 2013, "How China's Stunning $15 Trillion In New Liquidity Blew Bernanke's QE Out Of The Water"

 

 

It seems people are starting to listen, and not a moment too soon: as of December 31, China's corporate debt just hit a record $12 trillion. From Reuters:

China's corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults, as credit repayment problems rise.

 

Chinese non-financial companies held total outstanding bank borrowing and bond debt of about $12 trillion at the end of last year – equal to over 120 percent of GDP – according to Standard & Poor's estimates.

 

Growth in Chinese company debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 percent, from 1.82 trillion yuan ($298.4 billion) to 4.74 trillion yuan ($777.3 billion), between December 2008 and September 2013.

 

While a credit crisis isn't expected anytime soon, analysts say companies in China's most leveraged sectors, such as machinery, shipping, construction and steel, are selling assets and undertaking mergers to avoid defaulting on their borrowings.

 

More defaults are expected, said Christopher Lee, managing director for Greater China corporates at Standard and Poor's Rating Services in Hong Kong. "Borrowing costs already are going up due to tightened liquidity," he said. "There will be a greater differentiation and discrimination of risk and lending going forward."

And then there was the worst capital misallocation in history:

Exacerbating China's corporate troubles has been the questionable use of 4 trillion yuan in stimulus that Beijing pumped into the economy following the onset of the global financial crisis in 2008, explained Lee of Standard & Poor's.

 

"Many companies invested heavily into competitive and low-return projects because funding was readily available," he said. "These investments aren't doing well and are making little contribution to profitability."

Of course, there is also this:

]

 

To worry or unwind? How much debt can China really absorb?

The first step in answering this would be to examine what types of debt has gone bad in China and what is likely to continue to sour, as well as how these products have been dealt with. There are three general categories of bad debt that have been bailed out in recent years (there is other bad debt that has not been bailed out): bank loans, trust loans, and loans from smaller sectors such as informal finance and credit guarantee companies. Problems with trust loans and loans from smaller sectors have generally been handled by local governments, while bank loans have been bailed out via asset management companies funded through the Ministry of Finance. Trust loans bailed out by local governments have involved sums in the low billions of RMB, while non-performing bank loans amounted to about 1.5 trillion RMB between 2011 and 2013.

The second step is to consider how well the central and local governments can cope with a potential increase in bad debt. While local governments are overly indebted, as revealed by a recent report by the National Audit Office, and have experienced fiscal shortfalls for some time, the central government has maintained relatively low deficits, even coming in under the projected deficit in 2013. The way in which the central government deals with non-performing loans is easy on the fiscal budget as long as the debt can be recovered; the worst impact of this process is that it may very lightly constrain lending, as non-performing loans are taken off books and bonds are issued and purchased by banks, changing the nature of capital held on the books. In reality, however, much of the distressed debt is not recovered, and in the past has been purchased by the Ministry of Finance. Both central and local governments, then, face issues with bailing out bad loans either directly or indirectly.

The third question we ask is whether the scale of bad debt will grow sufficiently to threaten the financial health of the central and local governments. For local governments, the question is moot. Their health is already threatened by a serious lack of revenue. This can only be addressed by increasing revenue, perhaps land revenue or an increase in revenue redistribution from the central government. As it stands, it seems that the fallout from trust bailouts has been relatively low and may turn out to be less onerous on local governments than it has been on the psyche of financial analysts, but if the trust debt increases and bailouts do rise, local governments will suffer, as they have little capacity to withstand a further accumulation of debt.

The central government can bear a small increase in bad debt, but as long as the deficit is kept in check, bailouts will replace policies that spur much-needed growth, trading future prosperity for past profligacy. The recent 3-year non-performing loan amount of just less than 1.5 trillion RMB (about 500 billion per year and growing) seems like a tidy sum compared to fiscal expenditures of 7 trillion RMB (in 2013). With mounting non-performing loans and declining revenue in the short run, the gap between these numbers will only narrow. Although the government can pay down the debt later, postponing the bailout, many new nonperforming loans would present a challenge to officials as to how to classify, recover, and ultimately relieve the financial system of this burden.

These numbers tell us that it does not appear that China can bear a very large increase in debt, and that the idea that the government can simply “bail out the financial sector” is erroneous, or at least, a stretch. China does not have the luxury of the United States, which can spend excessively because foreign countries continue to buy U.S. government debt (as the dollar is the world reserve currency). If the leadership attempts to spend down its large cache of dollar reserves, it will lose control of its currency, as a larger supply of U.S. dollars relative to the Chinese RMB would depreciate the currency unless sterilized. The only remaining option is the least savory: the Chinese government must control its debt, and this includes reducing overindulgence within the real economy. It seems that the punch bowl is empty already and the party is winding down. Now the question is, who will clean up the mess?

via Zero Hedge http://ift.tt/1htdo4H Tyler Durden

With all the hoopla about missing airplanes, re-cold wars, and rigged markets, it is easy to forget that America is now officially a totalitarian state of the Orwellian kind, where the population has – involuntarily – ceded all of its privacy in exchange for… something. Because it certainly isn’t security. So we are happy to provide a reminder of just this, especially since as BusinessWeek notes, it gets harder to keep track of all the bizarre ways the National Security Agency has cooked up to spy on people and governments. This may help.

Data in Motion

NSA’s spies divide targets into two broad categories: data in motion and data at rest. Information moving to and from mobile phones, computers, data centers, and satellites is often easier to grab, and the agency sucks up vast amounts worldwide. Yet common data such as e-mail is often protected with encryption once it leaves a device, making it harder—but not impossible—to crack.

Data at Rest

Retrieving information from hard drives, overseas data centers, or cell phones is more difficult, but it’s often more valuable because stored data is less likely to be encrypted, and spies can zero in on exactly what they want. NSA lawyers can compel U.S. companies to hand over some of it; agency hackers target the most coveted and fortified secrets inside computers of foreign governments.

Where the Data Goes

Much of the data the NSA compiles from all these efforts will be stored in its million-square-foot data center near Bluffdale, Utah. It can hold an estimated 12 exabytes of data. An exabyte is the equivalent of 1 billion gigabytes.

And some of the specific methods the NSA uses to spy on US citizens and the occasional offshore “terrorist”:

• Call Recorder – The agency can intercept and store for up to a month 100 percent of a foreign country’s telephone calls, which can be sorted and played back.
• Clone Phones – Foreign targets’ cell phones can be surreptitiously swapped for an identical model with built-in listening and data collection devices.
• Fake Shops – Diplomats at the 2009 G-20 summit in London were tricked, with the NSA’s help, into using an Internet cafe that had been rigged to send data to British intelligence.
• Travel Trackers – The NSA has several ways to follow the movements of intelligence targets as they get off planes, drive across borders, or move around a city, including an implant that directs a cell phone SIM card to send geolocation data via text message.
• Special Delivery – Spies intercept computers that foreign targets buy online, fit them with devices that send data to the NSA, and box them back up for normal delivery.
• X-Ray Vision – Radar waves beamed into a room can detect what is being typed on a keyboard or displayed on a computer screen.
• Credit Cards – The agency tapped into the network of Visa and major banking systems to collect troves of transaction data.
• Satellites – The NSA infiltrated German satellite communications used in remote locations such as drilling platforms—and by the country’s diplomats.
• Gamer Spies – Agency employees join World of Warcraft and Second Life communities, hunting for criminal networks and recruiting informants. They’ve also infiltrated Microsoft’s Xbox Live network.
• Cell Towers – Base stations mimicking cell towers siphon location data from targets’ phones. Agents can also intercept mobile calls with a shoe-box-size receiver.
• Submarines – The agency can collect worldwide Internet traffic with a modified nuclear submarine that taps undersea fiber-optic cables—allowing spies to vacuum data from millions of users.
• Secret Selfies – Malware planted in an iPhone can secretly activate its camera and microphone, turning it into a listening device. Malware for Windows mobile phones enables complete remote control of the handset.
• Fake Rocks – Transmitters hidden inside rocks and other objects can receive information from NSA taps implanted in nearby computers even if they’re “air gapped” machines or networks that aren’t hooked up to the Internet—among the hardest of all digital targets.

The Stasi is spinning in its grave… with jealousy. The full interactive presentation can be found after the jump:

via Zero Hedge http://ift.tt/1lBt8I6 Tyler Durden

A mere two weeks since former JPMorgan banker, Kenneth Bellando jumped to his death, Bloomberg reports that the former CEO of Dutch Bank ABN Amro (and his wife and daughter) were found dead at their home after a possible "family tragedy." This expands the dismal list of senior financial services executive deaths to 12 in the last few months. The 57-year-old Jan Peter Schmittmann, was reportedly discovered by his other daughter when she arrived home that morning. Police declined to comment on the cirumstances of his (and his wife and daughter's) death. This is not the first C-level ABN Amro banker to be found dead. In 2009, former CFO Huibert Boumeester was discovered with (assumed self-inflicted) shotgun wounds.

 

As Bloomberg reports,

Former ABN Amro Group NV Netherlands Chief Executive Officer Jan Peter Schmittmann, his wife and a daughter were found dead at their home today after a possible “family tragedy,” Dutch police said.

 

“The bodies of a father and mother and their daughter were found at the property” in the town of Laren, 32 kilometers (20 miles) southeast of Amsterdam, Dutch police said in a statement on their website today. Leonie Bosselaar, a police spokeswoman, said in a telephone call with Bloomberg News that the deceased were Schmittmann and two family members.

 

The police received a call around 10:30 a.m. local time from a family acquaintance who said something may be wrong at the property, according to the statement. Bosselaar declined to comment further on what may have happened.

 

The Dutch newspaper AD reported, without citing anyone, that the family was discovered by Schmittmann’s second daughter when she arrived home this morning. She was scheduled to travel to India with her parents, where she had an internship lined up, the newspaper said.

 

Schmittmann, 57, joined ABN Amro in 1983 as assistant relationship manager and was named head of the lender’s Dutch unit in 2003. He stepped down from the Amsterdam-based bank in December 2008, after the company was nationalized earlier that year.

Sadly, given recent trends, the default assumption is that it is suicide until proven otherwise which is just as disturbing from a sociological perspective. (on the bright side, at least as far as we know, we was not involved in HFT) but further to that, this is not the first ABN Amro seniot executve to be found dead. In 2009, Schmittmann's former CFO was found dead from shitgum wounds:

The former chief financial officer of Dutch bank ABN Amro has been found dead with shotgun wounds near his home in Surrey, the BBC has reported.

 

Huibert Gerard Boumeester was found dead yesterday, Sunday, with shotgun wounds, one week after being reported missing and “vulnerable”. Reports claim he was found with two shotguns which he had brought from his home, though Thames Valley Police say his death is currently being treated as "unexplained".

 

Boumeester, 49, left his role as CFO encompassing responsibility for group-wide finance, risk management, investor relations, communications and strategic decision support in March 2008 citing "personal reasons" six months after ABN Amro was bought by Fortis, Royal Bank of Scotland and Santander. The Dutch government now owns Fortis Bank and has taken direct ownership of its stake in ABN Amro. The British government owns most of RBS.

 

There are suggestions that Boumeester took his own life…

Schmittmann owned 2phase2 (apparently an asset management company) and was a co-founder of 5 Park Lane (what appears to be a private equity / management consultancy) according to his LinkedIn profile:

 

 

This brings the sad list of senior financial services exectives who have died in the last few months to 12:

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

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

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

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

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

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

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

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

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

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

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

12 – Jan Peter Schmittmann, 57, the former CEO of Dutch bank ABN Amro found dead at home near Amsterdam with wife and daughter.

via Zero Hedge http://ift.tt/1kcPWAD Tyler Durden

Submitted by Pater Tenebrarum of Acting-Man blog,

The ethical problems associated with the US 'drone war', as well as the enormous blow-back potential it harbors are seemingly finally rousing Congress into asking questions. It  would surely be a case of 'better late than never', but one should actually better not get one's hopes up:

“Are drone strikes creating more enemies for America than they are killing extremists? That’s the question at the heart of new bipartisan legislation aimed at requiring the executive branch to issue an annual report detailing the combatant and civilian death toll from missile strikes by U.S. unmanned aerial vehicles.

 

Rep. Adam Schiff of California, a top Democrat on the House Intelligence Committee, and Republican Rep. Walter Jones of North Carolina, a frequent critic of “war on terrorism” policies, introduced the “Targeted Lethal Force Transparency Act.” The goal? Find out who is dying in drone strikes.”

(emphasis added)

After hundreds of civilian deaths and the enormous help they have reportedly provided to Al Qaeda's recruitment drive in the regions concerned, it may indeed be time to wonder 'who is actually killed' by US drone strikes. The problem is especially acute in Yemen:

“According to Ibrahim Mothana, a Yemeni youth activist, “Drone strikes are causing more and more Yemenis to hate America and join radical militants; they are not driven by ideology but rather by a sense of revenge and despair .” During the latest escalation of violence, Yemeni bloggers have claimed “there is more hostility now in Yemen against the US because of these attacks”. Even Robert Grenier, a former CIA station head, has said that the US’ policy in Yemen runs the risk of turning the country into a "safe haven" for al-Qaeda.”

 

[…]

 

"At the moment, the US is the worst and most feared enemy,” a Yemeni-born blogger known as Noon  told  me over email. “The US drones have claimed the lives of many more people than al-Qaeda. While al-Qaeda targets military personnel in Yemen, the US drones kill arbitrarily without differentiating between civilians and so called ‘militants’.”

 

One of the main attractions drones hold for the US is that they allow them to wage war remotely, thus avoiding the loss of life to military personnel and the domestic ill-feeling back home that comes with it.”

(emphasis added)

Gee, who would have thought that people might actually resent getting killed indiscriminately from afar? The 'blow-back' often arrives with a considerable delay, but if ever Yemeni terrorists immolate themselves in a strike on Western civilian targets at some point in the future, it is probably quite certain that 'hating our freedoms' won't be on their list of motives.

As one might imagine, US drone strikes are not exactly winning any popularity contests. Below are the results of a Pew survey showing 'drone approval rates':

 

This was the state of affairs as of July 2013. Those finding themselves on the receiving end of drone strikes not surprisingly like them least. We would bet that if indeed only militants were killed by drones, these survey results would look a lot different – via Pew Research.

 

Nothing Will Change

Further down in the report on the new legislation, we learn that although it 'might be useful' to learn what effects the drone strikes actually have, nothing is going to be done about it anyway. The proposed legislation will almost certainly land in 'file 13':

“But while Obama called in a speech in May 2013 for an overhaul of the law at the core of the “war on terrorism,” lawmakers say there is zero appetite ahead of the 2014 midterm elections for any sweeping changes.

 

“Drone strikes are sort of a resolved issue on Capitol Hill,” said Micah Zenko, a drone warfare expert with the Council on Foreign Relations. “I don’t see how this (bill) passes,” Zenko said. “These are CIA operations that are covert by definition. You cannot acknowledge or describe them in any way. I don’t see how they could disclose this.”

 

Asked about this potential obstacle, Schiff said the bill “doesn’t require identification of any agencies that may be involved, it doesn’t require that specific incidents be identified, only the raw counts at the end of each year.” Still, he acknowledged, “it’s going to be a tough legislative pathway.”

 

The human rights group Amnesty International USA endorsed the bill. “The White House approach to drone killings has been ‘trust us,’ but that’s untenable,” Steven W. Hawkins, its executive director said. “Instead of responding with generalizations to our documentation of potentially unlawful drone killings, the White House needs to provide the data it’s apparently sitting on.”

(emphasis added)

Rest assured that they will keep 'sitting on the data'. There is not a snowball's chance in hell that the White House will ever officially admit to how many innocent people have been killed and maimed in the drone war. It is in fact a good bet that its own knowledge of the casualties is far from perfect, similar to the drone strikes themselves.

Not surprisingly, the 'intelligence community' has 'little appetite' for drone war disclosures. And of course they assure us that it's all good, with the CIA's Mr. Brennan providing a moment of unintentional hilarity with his apodictic certainty that drones are 'mitigating the threats to the homeland'.  Since they are helping to create thousands of fresh recruits for the jihadists via 'collateral damage', one may be forgiven for doubting this assertion:

The intelligence community has shown little appetite for Schiff’s proposal, which he previewed in a Feb. 4 House Intelligence Committee hearing with CIA Director John Brennan and Director of National Intelligence James Clapper.

 

[…]

 

Rep. Jan Schakowsky, a Democrat on the committee, asked Brennan whether signature strikes might be motivating people to join extremists groups, effectively increasing the threat of attacks on the United States.

 

“From an intelligence community perspective, we're always evaluating and analyzing developments overseas to include any counter-terrorism activity that we might be involved in to see what the impact is,” Brennan replied. "And I think the feeling is that the counterterrorism activities that we have engaged in with our partners — we the U.S. government broadly, both from an intelligence perspective as well as from a military perspective — have greatly mitigated the threat to U.S. persons both overseas as well as in the homeland.”

(emphasis added)

Contrary to Mr Brennan's statements above, the threat has probably not only not been mitigated, but has been made a great deal worse. 20 or 30 years ago, Westerners could travel to most of the countries in which the drone wars are taking place without having to fear a thing. These days it is at best a coin flip whether one will survive such a trip unmolested or end up abducted or killed. Some 'threat mitigation'!

 

It's Better to Fight them with Coca Cola

In principle there is nothing wrong with taking measures against terrorists. Even though one man's terrorist is quite often another man's freedom fighter, the non-aggression principle should always apply. Whatever traumas the medieval throwbacks manning the jihadi groups believe to provide justification for their actions cannot excuse their killing of innocent people.

However, the same principle must apply to those seeking to defend themselves against the jihadists. In what way does killing a supposed 'Al Qaeda leader' from afar justify the killing of countless innocent people in the process? Note here that the US is often not even sure whether the intended targets are guilty or not (and hence deserving of being killed, which is debatable even if guilt could actually be established beyond doubt). After all, they are not subject to a trial, but are simply picked at will. Consider for instance this report on a drone strike in Yemen last year:

“The strike, which took place in the southern province of Lahj, targeted a vehicle as it traveled "on a mountain road late on Saturday evening,"  Reuters  reported. The vehicle was "believed to be carrying arms and its occupants were suspected members of al Qaeda."

No senior al Qaeda operatives or leaders are reported to have been killed at this time. The identities of the two al Qaeda operatives who were killed have not been disclosed.”

(emphasis added)

In another words, not only is no trial required,  but not even anything  remotely resembling definitive evidence. As the above example demonstrates, all it takes for a killing strike is for a vehicle to be 'believed' to be carrying arms, and its occupants to be 'suspected' of being members of Al Qaeda.

Admittedly, there may at times be a fine line between what constitutes justifiable defensive action and aggression. However, the fact that there is plenty of so-called 'collateral damage' (the euphemism for 'killing perfectly innocent people who simply happen to be at the wrong place at the wrong time') by itself clearly makes drone strikes unethical. They are in definitely  conflict with the values allegedly defended and promoted by Western democracies. The people in the countries targeted are no doubt acutely aware of the hypocrisy involved.

Let us remember that the proper weapon to fight Marx was always Coca Cola, not nuclear arms. It is exactly the same with radical Islamists. They can probably never be defeated by force of arms – on the contrary, it appears that fighting them with drones is like adding fertilizer, as it swells rather than diminishes their ranks. What will defeat them is ultimately the economic advancement of the countries harboring them at present. Islamic terrorism is a reactionary phenomenon – a rearguard fight against modernity if you will. In   a way the jihadists are fighting a battle they have lost before it even began. However, it appears as though the US is hell-bent on continually providing the movement with a new lease of life, whether it is by invading Iraq or fighting the 'video game war' with drones.

 

via Zero Hedge http://ift.tt/1lAZ3Z4 Tyler Durden

I didn’t start out with much interest in the stock market—though, like most people, I enjoy watching it go boom and crash. When it crashed on October 19, 1987, I happened to be hovering around the fortieth floor of One New York Plaza, the stock market trading and sales department of my then employer, Salomon Brothers. That was interesting. If you ever needed proof that even Wall Street insiders have no idea what’s going to happen next on Wall Street, there it was. One moment all is well; the next, the value of the entire U.S. stock market has fallen 22.61 percent, and no one knows why. During the crash, some Wall Street brokers, to avoid the orders their customers wanted to place to sell stocks, simply declined to pick up their phones. It wasn’t the first time that Wall Street people had discredited themselves, but this time the authorities responded by changing the rules—making it easier for computers to do the jobs done by those imperfect people. The 1987 stock market crash set in motion a process—weak at first, stronger over the years—that has ended with computers entirely replacing the people.

      – Michael Lewis, Flash Boys

 

While we welcome the recent surge in attention directed toward high frequency trading courtesy of Goldman’s endorsement of what we said in 2009 even if with a 5 years delay (at least Michael Lewis got a book deal out of it), perhaps the biggest irony is that attention is once again completely misdirected.

Judging by the escalation in various probes and investigations by the FBI, the DOJ and, amusingly the SEC, the primary issue under focus is that of whether or not the market is “rigged”, i.e., whether HFT is legal or not. Well, of course it is legal! After all that was the whole point of redoing Reg NMS in 2005 – so those who would soon become HFT billionaires and the financial backers of the HFT lobby, would get a stamp of approval by the various regulators and legislators, completely clueless about what they would usher into the world of trading, and thus a green light to engage in riskless frontrunning of orderflow. Frontrunning which scalps pennies and subpennies, billions and billions of times.

The red herring was also planted: “we provide liquidity“, the ‘Flash boys’ screamed when we first shone a light on their practices in 2009, and are still screaming now that the entire world is looking at them, adding that only thanks to HFT have trade commissions collapsed to record lows, so it must be wonderful for the retail investors, right.

Wrong. Because not only does HFT not provide liquidity when it merely frontruns big order blocks, and all the other time churns hollow quotes with zero intention to execute but merely gauges how all the other HFT algos in the market operate leading to an unprecedented explosion in quote stuffing, layering and churn which together with the complete inability of HFT to provide real liquidity – or take prop risk with limit orders against the trend when there is no bid block to fruntrun – was also the reason for the May 2010 flash crash when the market literally went bidless for several seconds, but the reason why trading has gotten so cheap is that indicated HFT liquidity is a mirage with zero order book depth: something all the major institutions have realized and have long since moved to dark pools when intending to trade large orders.

In fact, the only reason the bid/ask spread has collapsed as much as it has, is because the retail investor is the last hope of the dying “lit” (and rigged) markets, which have nearly cannibalized themselves out of all profitability if not existence (there is a reason why there has been an unprecedented surge in exchange M&A in the past three years), and exchanges are hoping to make up in volume (“oh look how cheap trading has become”) what they will never regain in hefty fees. To be sure, commission-free stock trading is coming next in the last desperate attempt to lure the retail sucker who still hopes to “get rich quick” despite a rigged market. Of course, this simply means that equities will soon join the world of FX and bond traders, where there are no commissions, but simply a bid/ask spread. Perhaps we should look to the certifiably rigged FX market to see what a bang up job HFT has done in “lowering transaction costs” there too?

Which brings us to the topic at hand, because it is not whether or not frontrunning by HFTs is legal – it certainly is based on current laws – but what the trade off is to a market in which, as Michael Lewis correctly observes, computers have entirely replaced the people.

The answer is simple – unprecedented fragmentation and instability: a market that is not only rigged, but far worse: completely broken.

• It is this that should be the focus of regulators, legislators and enforcers, sadly of whom are part of the rigged market spiel. 
• It is this that we explained, showing empirical evidence, in July of 2010 is the basis of why the flash crash of May 2010 occurred, in “Scientific Proof That High Frequency Trading Induces Adverse Changes In Market Microstructure And Dynamics, And Puts Market Fairness Under Question“… An HFT-driven flash crash that we predicted, correctly, would happen in April of 2009.
• But most ironic, is that it was this that none other than Shearson Lehman Hutton warned would happen in January 1988, just months after the Black Monday market crash so deftly described by Michael Lewis’ up top. 

Irony points that it was the same Shearson that was making millions with “program trading” when everyone was enjoying the ride up and only saw it fit to “warn” about electronic trading after the event that saw a quarter of the entire market cap wiped out in hours (sorry HFT – you too will be the scapegoat after the next crash, as we laid out previously).

Double irony bonus points that it is this same Shearson Lehman Hutton whose well-known spin off would, some 20 years later, nearly cause the end of western civilization as Hank Paulson’s 3-page term sheet knows it.

Triple irony, of course, is reserved for the fact that it is now none other than Goldman Sachs which is stepping into the shoes of Shearson Lehman and warning the world about the dangers that are looming unless market structure isn’t promptly overhauled.

h/t @Dvolatility

via Zero Hedge http://ift.tt/1dZ4RMj Tyler Durden

In terms of economic might, BBVA has created an index of “world market power” enabling an at-a-glance view of a nation’s impact on the global economy via relevance of exports, exposure to external shocks, technological content, and retained value-added. And the winner is… Hint, not USA…

 

As BBVA sums up,

China shows the highest value not only among emerging economies but also when considering all the sample, inverting with the US the rank order given by the exports’ share in nominal terms.

 

China holds the largest share among emerging markets in the sample for 9 out of 18 industries, including all manufacturing groups except food (surpassed by Brazil). The largest industry share corresponds to textiles and leather (above 30%).

 

Russia and especially Saudi Arabia are well ahead in the ranking due to their key role in the oil market for which they show a high degree of product concentration.

 

India and Mexico have a similar share of world exports, although the market power index is significantly higher for the former on dominant positions in ‘other manufactures’ and business services.

 

 

 

On a side note, as Constantin Gurdgiev notes, three out of current G7 states should not be anywhere near G7. You might argue about Saudi Arabia’s place in the world’s ‘power by exports’ rankings, but China and Russia certainly are diversified enough and have a strong enough sway to be in G7.

 

 

BBVA’s Full Report below:

140402_EW_exports_tcm348-438276

via Zero Hedge http://ift.tt/1ic1uNE Tyler Durden

Submitted by Alasdair Macleod via GoldMoney.com,

Geopolitical and market background

I have been revisiting estimates of the quantities of gold being absorbed by China, and yet again I have had to revise them upwards. Analysis of the detail discovered in historic information in the context of China's gold strategy has allowed me for the first time to make reasonable estimates of vaulted gold, comprised of gold accounts at commercial banks, mine output and scrap. There is also compelling evidence mine output and scrap are being accumulated by the government in its own vaults, and not being delivered to satisfy public demand.

The impact of these revelations on estimates of total identified demand and the drain on bullion stocks from outside China is likely to be dramatic, but confirms what some of us have suspected but been unable to prove. Western analysts have always lagged in their understanding of Chinese demand and there is now evidence China is deliberately concealing the scale of it from us. Instead, China is happy to let us accept the lower estimates of western analysts, which by identifying gold demand from the retail end of the supply chain give significantly lower figures.

Before 2012 the Shanghai Gold Exchange was keen to advertise its ambitions to become a major gold trading hub. This is no longer the case. The last SGE Annual Report in English was for 2010, and the last Gold Market Report was for 2011. 2013 was a watershed year. Following the Cyprus debacle, western central banks, seemingly unaware of latent Chinese demand embarked on a policy of supplying large quantities of bullion to break the bull market and suppress the price. The resulting expansion in both global and Chinese demand was so rapid that analysts in western capital markets have been caught unawares.

I started following China's gold strategy over two years ago and was more or less on my own, having been tipped off by a contact that the Chinese government had already accumulated large amounts of gold before actively promoting gold ownership for private individuals. I took the view that the Chinese government acted for good reasons and that it is a mistake to ignore their actions, particularly when gold is involved.

Since then, Koos Jansen of ingoldwetrust.ch has taken a specialised interest in the SGE and Hong Kong's trade statistics, and his dedication to the issue has helped spread interest and knowledge in the subject. He has been particularly successful in broadcasting market statistics published in Chinese to a western audience, overcoming the lack of information available in English.

I believe that China is well on the way to having gained control of the international gold market, thanks to western central banks suppression of the gold price, which accelerated last year. The basic reasons behind China's policy are entirely logical:

• China knew at the outset that gold is the west's weak spot, with actual monetary reserves massively overstated. For all I know their intelligence services may have had an accurate assessment of how much gold there is left in western vaults, and if they had not, their allies, the Russians, probably did. Representatives of the People's Bank of China will have attended meetings at the Bank for International Settlements where these issues are presumably openly discussed by central bankers.

• China has significant currency surpluses under US control. By controlling the gold market China can flip value from US Treasuries into gold as and when it wishes. This gives China ultimate financial leverage over the west if required.

• By encouraging its population to invest in gold China reduces the need to acquire dollars to control the renminbi/dollar rate. Put another way, gold purchases by the public have helped absorb her trade surplus. Furthermore gold ownership insulates her middle classes from external currency instability which has become an increasing concern since the Lehman crisis.

For its geopolitical strategy to work China must accumulate large quantities of bullion. To this end China has encouraged mine production, making the country the largest producer in the world. It must also have control over the global market for physical gold, and by rapidly developing the SGE and its sister the Shanghai Gold Futures Exchange the groundwork has been completed. If western markets, starved of physical metal, are forced at a future date to declare force majeure when settlements fail, the SGE and SGFE will be in a position to become the world's market for gold. Interestingly, Arab holders have recently been recasting some of their old gold holdings from the LBMA's 400 ounce 995 standard into the Chinese one kilo 9999 standard, which insures them against this potential risk.

China appears in a few years to have achieved dominance of the physical gold market. Since January 2008 turnover on the SGE has increased from a quarterly average of 362 tonnes per month to 1,100 tonnes, and deliveries from 44 tonnes per month to 212 tonnes. It is noticeable how activity increased rapidly from April 2013, in the wake of the dramatic fall in the gold price. From January 2008, the SGE has delivered from its vaults into public hands a total of 6,776 tonnes. This is illustrated in the chart below.

This is only part of the story, the part that is in the public domain. In addition there is gold imported through Hong Kong and fabricated for the Chinese retail market bypassing the SGE, changes of stock levels within the SGE's network of vaults, the destination of domestic mine output and scrap, government purchases of gold in London and elsewhere, and purchases stored abroad by the wealthy. Furthermore the Chinese diaspora throughout South East Asia competes with China for global gold stocks, and its demand is in addition to that of China's Mainland and Hong Kong.

The Shanghai Gold Exchange (SGE)
The SGE, which is the government-owned and controlled gold exchange monopoly, runs a vaulting system with which westerners will be familiar. Gold in the vaults is fungible, but when it leaves the SGE's vaults it is no longer so, and in order to re-enter them it is treated as scrap and recast. In 2011 there were 49 vaults in the SGE's system, and bars and ingots are supplied to SGE specifications by a number of foreign and Chinese refiners. Besides commercial banks, SGE members include refiners, jewellery manufacturers, mines, and investment companies. The SGE's 2010 Annual Report, the last published in English, states there were 25 commercial banks included in 163 members of the exchange, 6,751 institutional clients accounting for 81% of gold traded, and 1,778,500 clients of the commercial banks with gold accounts. The 2011 Gold Report, the most recent available, stated that the number of commercial bank members had increased to 29 with 2,353,600 clients, and given the rapid expansion of demand since, the number of gold account holders is likely to be considerably greater today.

About 75% of the SGE's gold turnover is for forward settlement and the balance is for spot delivery. Standard bars are Au99.95 3 kilos (roughly 100 ounces), Au99.99 1 kilo, Au100g and Au50g. The institutional standard has become Au99.99 1 kilo bars, most of which are sourced from Swiss refiners, with the old Au99.95 standard less than 15% of turnover today compared with 65% five years ago. The smaller 100g and 50g bars are generally for retail demand and a very small proportion of the total traded. Public demand for smaller bars is satisfied mainly through branded products provided by commercial banks and other retail entities instead of from SGE-authorised refiners.

Overall volumes on the SGE are a tiny fraction of those recorded in London, and the market is relatively illiquid, so much so that opportunities for price arbitrage are often apparent rather than real. The obvious difference between the two markets is the large amounts of gold delivered to China's public. This has fuelled the rapid growth of the Chinese market leading to a parallel increase in vaulted bullion stocks, which for 2013 is likely to have been substantial.

By way of contrast the LBMA is not a regulated market but is overseen by the Bank of England, while the SGE is both controlled and regulated by the People's Bank of China. The PBOC is also a member of both its own exchange and of the LBMA, and deals actively in non-monetary gold. While the LBMA is at arm's length from the BoE, the SGE is effectively a department of the PBOC. This allows the Chinese government to control the gold market for its own strategic objectives.

 

Quantifying demand

Identifiable demand is the sum of deliveries to the public withdrawn from SGE vaults, plus the residual gold left in Hong Kong, being the net balance between imports and exports. To this total must be added an estimate of changes in vaulted bullion stocks.

SGE gold deliveries
Gold deliveries from SGE vaults to the general public are listed both weekly and monthly in Chinese. The following chart shows how they have grown on a monthly basis.

Growth in public demand for physical gold is a reflection of the increased wealth and savings of Chinese citizens, and also reflects advertising campaigns that have encouraged ordinary people to invest in gold. Advertising the attractions of gold investment is consistent with a deliberate government policy of absorbing as much gold as possible from western vaults, including those of central banks.

Hong Kong
Hong Kong provides import, export and re-export figures for gold. All gold is imported, exports refer to gold that has been materially altered in form, and re-exports are of gold transited more or less unaltered. Thus, exports refer mainly to jewellery which in China's case is sold directly into the Mainland without going through the SGE, and re-exports refer to gold in bar form which we can assume is delivered to the SGE. Some imported gold remains on the island, and some is re-exported from China back to Hong Kong. This gold is either vaulted in Hong Kong or alternatively turned into jewellery and sold mostly to visitors from the Mainland buying tax-free gold.

The mainstream media has reported on the large quantities of gold flowing from Switzerland to Hong Kong, but this is only part of the story. In 2013, Hong Kong imported 916 tonnes from Switzerland, 190 tonnes from the US, 176 tonnes from Australia and 150 tonnes from South Africa as well as significant tonnages from eight other countries, including the UK. She also imported 337 tonnes from Mainland China and exported 211 tonnes of it back to China as fabricated gold.

Hong Kong is not the sole entry port for gold destined for the Mainland. The table below illustrates how Hong Kong's gold trade with China has grown, and its purpose is to identify gold additional to that supplied via Hong Kong to the SGE. Included in the bottom line, but not separately itemised, is fabricated gold trade with China (both ways), as well as the balance of all imports and exports accruing to Hong Kong.

The bottom line, "Additional supply from HK" should be added to SGE deliveries and changes in SGE vaulted gold to create known demand for China and Hong Kong.

SGE vaulted gold
The increase in SGE vaulted gold in recent years can only be estimated. However, it was reported in earlier SGE Annual Reports to amount to 519.55 tonnes in 2008, 582.6 tonnes in 2009, and 841.8 tonnes in 2010. There have been no reported vault figures since.

The closest and most logical relationship for vaulted gold is with actual deliveries. After all, public demand is likely to be split between clients maintaining gold accounts at member banks, and clients taking physical possession. The ratios of delivered to vaulted gold were remarkably stable at 1.05, 1.03, and 0.99 for 2008, 2009 and 2010 respectively. On this basis it seems reasonable to assume that vaulted gold has continued to increase at approximately the same amount as delivered gold on a one-to-one basis. The estimated annual increase in vaulted gold is shown in the table below.

The benefits of vault storage, ranging from security from theft to the ability to use it as collateral, seem certain to encourage gold account holders to continue to accumulate vaulted metal rather than take personal possession.

Supply

Supply consists of scrap, domestically mined and imported gold

Scrap
Scrap is almost entirely gold bars, originally delivered from the SGE's vaults into public hands, and subsequently sold and resubmitted for refining. Consequently scrap supplies tend to increase when gold can be profitably sold by individuals in a rising market, and they decrease on falling prices. There is very little old jewellery scrap and industrial recycling is not relatively significant. Official scrap figures are only available for 2009-2011: 244.5, 256.3 and 405.8 tonnes respectively. I shall therefore assume scrap supplies for 2012 at 430 tonnes and 2013 at 350 tonnes, reflecting gold price movements during those two years.

Scrap is refined entirely by Chinese refiners, and as stated in the discussion concerning mine supply below, the absence of SGE standard kilo bars in Hong Kong is strong evidence that they are withheld from circulation. It is therefore reasonable to assume that scrap should be regarded as vaulted, probably held separately on behalf of the government or its agencies.

Mine supply
China mines more gold than any other nation and it is generally assumed mine supply is sold through the SGE. That is what one would expect, and it is worth noting that a number of mines are members of the SGE and do indeed trade on it. They act as both buyers and sellers, which suggests they frequently use the market for hedging purposes, if nothing else.

Typically, a mine will produce doré which has to be assessed and paid for before it is forwarded to a refinery. Only when it is refined and cast into standard bars can gold be delivered to the market. Broadly, one of the following procedures between doré and the sale of gold bars will occur:

• The refiner acts on commission from the mine, and the mine sells the finished product on the market. This is inefficient management of cash-flow, though footnotes in the accounts of some mine companies suggest this happens.

• The refiner buys doré from the mine, refines it and sells it through the SGE. This is inefficient for the refiner, which has to find the capital to buy the doré.

• A commercial bank, being a member of the SGE, finances the mine from doré to the sale of deliverable gold, paying the mine up-front. This is the way the global mining industry often works.

• The government, which ultimately directs the mines, refiners and the SGE, buys the mine output at pre-agreed prices and may or may not put the transaction through the market.

I believe the government acquires all mine output, because it is consistent with the geopolitical strategy outlined at the beginning of this article. Furthermore, two of my contacts, one a Swiss refiner with facilities in Hong Kong and the other a vault operator in Hong Kong, tell me they have never seen a Chinese-refined one kilo bar. Admittedly, most one kilo bars in existence bear the stamp of Swiss and other foreign refiners, but nonetheless there must be over two million Chinese-refined kilo bars in existence. Either Chinese customs are completely successful in stopping all ex-vault Chinese-refined one kilo bars leaving the Mainland, or the government takes all domestically refined production for itself, with the exception perhaps of some 100 and 50 gram bars. Logic suggests the latter is true rather than the former.

Since the SGE is effectively a department of the PBOC, it must be at the government's discretion if domestic mine production is put through the market by the PBOC. Whether or not Chinese mine supply is put through the market is impossible to establish from the available statistics, and is unimportant: no bars end up in circulation because they all remain vaulted. It is material however to the overall supply and demand picture, because global mine supply last year drops to about 2,490 tonnes assuming Chinese production is not available to the market.

Geopolitics suggests that China acquires most, if not all of its own mine and scrap production, which accumulates in the vaulting system. This throws the emphasis back on the figures for vaulted gold, which I have estimated at one-for-one with delivered gold due to gold account holder demand. To this estimate we should now add both Chinese scrap and mine supply. This would explain why vaulted gold is no longer reported, and it would underwrite my estimates of vaulted gold from 2011 onwards.

Further comments on vaulted gold
From the above it can be seen there are three elements to vaulted gold: gold held on behalf of accountholders with the commercial banks, scrap gold and mine supply. The absence of Chinese one kilo bars in circulation leads us to suppose scrap and mine supply accumulate, inflating SGE vault figures, but a moment's reflection shows this is too simplistic. If it was included in total vaulted gold, then the quantity of gold held by accountholders with the commercial banks, as reported in 2009-11, would have fallen substantially to compensate. This cannot have been the case, as the number of accountholders increased substantially over the period, as did interest in gold investment.

Therefore, scrap and mined gold must be allocated into other vaults not included in the SGE network, and these vaults can only be under the control of the government. It will have been from these vaults that China's sudden increase in monetary gold of 444 tonnes in the first quarter of 2009 was drawn, which explains why the total recorded in SGE vaults was obviously unaffected. So for the purpose of determining the quantity of vaulted gold, scrap and mined gold must be added to the gold recorded in SGE vaults.

Though it is beyond the scope of this analysis, the existence of government vaults not in the SGE network should be noted, and given cumulative mine production over the last thirty years, scrap supply and possibly other purchases of gold from abroad, the bullion stocks in these government vaults are likely to be very substantial.

Western gold flows to China

We are now in a position to estimate Chinese demand and supply factors in a global context. The result is summarised in the table below.

Chinese demand before 2013 had arrived at a plateau, admittedly higher than generally realised, before expanding dramatically following last April's price drop. Taking the WGC's figures for the Rest of the World gives us new global demand figures, which throw up a shortfall amounting to 9,461 tonnes since the Lehman crisis, satisfied from existing above-ground stocks.

This figure, though shocking to those unaware of these stock flows, could well be conservative, because we have only been able to address SGE deliveries, vaulted gold and Hong Kong net flows. Missing from our calculations is Chinese government purchases in London, demand from the ultra-rich not routed through the SGE, and gold held by Chinese nationals abroad. It is also likely that demand from the Chinese diaspora in SE Asia and Asian is also underestimated by western analysts.

There are assumptions in this analysis that should be clear to all. But if it only serves to expose the futility of attempts in western capital markets to manage the gold price, the exercise has been worthwhile. For much of 2013 commentators routinely stated that Asian demand was satisfied from ETF redemptions. But as can be seen, ETF sales totalling 881 tonnes covered only one quarter of the west's shortfall against China, the rest coming mostly from central bank vaults. Anecdotal evidence from Switzerland is that the four major refiners have been working round-the-clock turning LBMA 400 ounce bars into one kilo 9999 bars for China. They are even working with gold bars that are battered and dusty, which suggests the west is not only digging into deep storage to satisfy Chinese demand at current prices, but digging a hole for itself as well.

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Harsh… but fair…

 

 

 

Source: Cagle

via Zero Hedge http://ift.tt/1h0dkOx Tyler Durden

A few weeks ago, when the US announced the first set of sanctions against Russia, we jokingly commented that among the possible retaliations would be a Russian explusion of that global US permastaple, McDonalds. As it turns out, yet another “joke” may be on its way to becoming the truth.

The reason: overnight, newly Russian citizens in the Crimea discovered that they will have to live without Big Macs for a while after McDonald’s suspended operations on the Crimean Peninsula after it was annexed by Russia. In response, infamous Russian nationalist member of parliament, Vladimir Zhirinovsky, has demanded that every McDonald’s restaurant in Russia should be closed and the business evicted from the country.

Japan Times has more on the first part of the story:

The omnipresent U.S. fast-food chain said in a statement, posted on its Ukrainian website and taped to the front doors of its shuttered restaurants, that the decision was taken “for manufacturing reasons beyond the company’s control.”

 

The news hit 21-year-old Lilia especially hard because she had been happily employed at McDonald’s until Thursday and had no suspicion that she was about to be out of work.

 

“They told us that we would be closing because Kiev was no longer sending us any ingredients,” she said as a blond girl next to her pulled at the restaurant’s locked door in vain.

 

Yet the move out of Crimea by the world’s biggest hamburger maker reflects a much broader uncertainty among Western firms about their positions in Russia following the Kremlin’s military intervention in Ukraine.

 

McDonald’s insisted that it wants to reopen the stores “as soon as there is an opportunity.”

So, the official version is that Kiev was no longer in the pink slime processed meat delivery business when it comes to newly annexed territories? Perhaps JPM was also not in the money transfer business for all companies east of the Volga river, because Kiev wouldn’t supply the cables?

Joking aside, Russia was not only quick to see through the real reason for the shutdown, but did what it has done all along in the relentless Tit-for-Tat when it comes to the future of Ukraine: it re-escalate. From Telegraph:

The fast food chain became embroiled in the fall out of the worst diplomatic crisis in years when it closed its three Crimean chains.

 

McDonald’s announced the temporary closure of its outlets in Simferopol, Yalta and Sevastopol, due to what the company called “operation reasons beyond McDonald’s control.”

 

The company offered its Crimean staff jobs at any other outlet in mainland Ukraine and has promised to reopen the restaurants as soon as possible. But as far as some of the more hawkish elements in Moscow are concerned, the damage has been done.

 

“McDonalds closed their outlets in Crimea. Very well. We’ll close the rest. I’ve given instructions to all city divisions of the Liberal Democratic Party to hold pickets at every McDonalds,” Mr Zhirinovsky said on Friday.

 

“It’s muck, why poison our citizens,” Mr Zhirinovsky added in the outburst.

Well… he is right, as “court jesters” usually are.

While Mr Zhirinovsky is widely viewed as the court jester of Russian politics, his trademark outbursts are occasionally used as trial balloons for schemes that do eventually become policy.

 

If this is one of those cases, other iconic American food brands may also have to watch out.

 

Mr Zhirinovsky suggested that after closing every McDonald’s restaurant in the country, he would move on down a hit list of brands.

And after the Bolshoi Mak is gone? “Then we’ll deal with Pepsi” Zhirinovsky said.

Russia aside, considering America’s own problem with runaway, pardon the pun, obesity and spiraling healthcare costs, isn’t it time Kiev also halted sending ingredients to US-based McDonalds restaurants?

via Zero Hedge http://ift.tt/1ibsug3 Tyler Durden