June 21, 2013
- Stupid loans to unqualified buyers: China’s own “subprime” crisis comes home to roost
- No more benefit of the doubt: Guenthner on the stock market’s new reality
- After gold’s drop, another rush for physical metal… plus, the country that banned metals shipments
- Lowering the boom on Bitcoin — again. The 5 susses out two possible reasons…
- The war on U.S. asparagus farmers… the dog that caught its tail… the cat that “contributes nothing”… and more!
Plug the term “the next subprime crisis” into Google and you get 6,070,000 hits.
Most of those links have to do with student loans. And indeed, this summer is the very moment we’ve suggested the crisis will begin make itself felt.
But another “next subprime crisis” is of more immediate concern this morning.
“Stocks, Bonds Extend Slide as China Adds to Market Fears of Fed Stimulus Pullback,” says the headline at The Washington Post.
Well… as we said yesterday, we’re skeptical the Fed will “pull back” in a meaningful way.
Nor are we convinced the Fed is the reason the Dow has coughed up nearly 600 points in the last 48 hours. After running up 25% from mid-November through late May, it was due for a rest. The Fed is less a catalyst than a convenient excuse. As Vancouver favorite Barry Ritholtz wrote this morning, “You can always find an explanation for what just happened that gives you a warm fuzzy and makes you emotionally comfortable.”
Which brings us to the Post’s mention of China. We don’t think it’s the reason the market is slumping any more than the Fed is the reason… but we also don’t want to ignore it.
Inside China’s Shadow Banking: The Next Subprime Crisis is the title of a new book by Joe Zhang, a former investment banker at UBS in Hong Kong.
“A huge shadow banking operation has emerged in China in recent years,” says The New York Times, “with smaller banks and trust companies borrowing from bigger state-run banks and then turning around and re-lending that money at high interest rates to private companies and property developers, usually those that have trouble borrowing.”
Yep… that sounds a like a sure recipe for trouble.
“The rapid growth of shadow banking,” author Zhang tells The Wall Street Journal, “reflects on the failure of the much bigger formal banking system.
“For six decades, financial repression in China takes the form of regulated interest rates being significantly below inflation. That leads to rapid credit growth. Banks are forced to increase loans rapidly year after year. But sensible lending opportunities are not growing that fast. Therefore, banks are forced to lower lending standards, leading to growth of their own subprime lending. Of course, low interest rates send false signals about the viability of loans.”
This month, the trouble has come to a low boil.
“In recent weeks,” explains our macro strategist Dan Amoss, “Chinese banks have demanded higher interest rates to lend to each other. When one bank fears another bank might have exposure to dodgy trust companies, it will require a higher interest rate to compensate for risk. The three-month Shanghai Interbank Offered Rate (SHIBOR), the rate banks charge each other for three-month loans, has spiked from 4% to nearly 6%:
“This situation,” Dan says ominously, “is eerily similar to Citigroup’s implosion in the 2008 crisis, when its exposure to structured investment vehicles (SIVs) left other lenders with the impression that they shouldn’t loan overnight money to Citi. The Fed had to step in and lend to Citi against its shaky collateral, because other banks wouldn’t loan at rates it could afford.
“Ultimately, the Chinese central bank will step in and flood the system with liquidity, alleviating the cash crunch. But in the near term, as the government seeks to purge speculation from the system, the stress in China’s financial system will grow.”
In today’s 5 Min. Forecast PRO, Dan spotlights a way to short China’s entire financial system in a single NYSE-listed stock. You say you don’t have PRO access? You can remedy that here.
Major U.S. stock indexes opened up this morning, and soon reversed.
It’s a “quadruple witching” day — one of four days a year in which stock options, stock futures, index options and index futures all expire.
The Dow rests precariously at 14,700. The Nasdaq is down 1%. Treasury yields continue to rise, the 10-year now at 2.5% on the nose.
“The broad market’s uptrend has lost the benefit of the doubt,” writes Greg Guenthner this morning. “Could we see more downside action? Absolutely. The market could chop its way lower the rest of the summer.
“As you slog through the next several weeks of market action, you need to avoid the circus of speculation surrounding Fed policies and other media-assigned ‘reasons’ for the correction. Anyone trying to trade the news will get badly burned as the market feels its way through the summer.
“If you’re trading, you probably had a few stops trigger yesterday. Sell and prepare for your next move. If you’re a longer-term investor, you should hang on tight for now.”
Precious metals are regaining their footing. At last check, the bid on gold was $1,293. Silver is only three pennies away from reaching the $20 level.
Gold’s latest drop is once again goosing demand for physical metal in North America.
Traffic picked up yesterday at Patrick Heller’s coin dealership in Michigan — but not to the same extent as when gold tumbled from the $1,500s into the $1,300s. “We will see a moderate pace in sales,” he tells Kitco, “but I don’t think it will be anything like April.”
Golden State Mint president Jim Pavlakos is seeing bigger demand for silver. “Silver is the better deal right now,” he said. “The drop in gold and silver overnight caused the [gold/silver] ratio to widen to 65.”
This ratio — literally the gold price divided by the silver price — now sits at nearly a three-year high.
“I think we will continue to see this kind of activity,” Pavlakos adds, “as the ratio remains high.”
The French government has dealt a blow to the precious metals trade. In late May, it enacted a ban on sending gold, silver or cash through the mail, La Poste.
According to BullionStreet, “The legislation was published on Legifrance, the French government entity responsible for publishing legal texts online. It was not announced by the government and not covered in the media. There were no communications and nobody in the government justified or explained this decision.”
Hmmn… this kind of development jibes with our Zero Hour scenario. Out of curiosity — and because your editor’s French is beyond rusty — we dropped the law’s text into Google translate to verify what we were dealing with. For what it’s worth, here’s what it spit back out:
“The insertion of bank notes, coins and precious metals is prohibited in mailings, including the insured items, registered items and items subject to formalities certifying deposition and distribution.”
Alrighty, then. “Western governments will continue to stem wealth flight and make it increasingly difficult for citizens to buy and hold precious metals,” reads a missive from Asset Strategies International. “Citizens vote against bank mismanagement and fiscal government irresponsibility with their pocketbooks. All governments know that.
“We regard the shipping ban as more insidious than an outright assault on ownership or even confiscation, as it is kept so under the radar few will protest. The door is open for creeping restrictions in what could be a stealth war on precious metals ownership worldwide.”
“You can bet Bitcoin will be next,” Wired reader Sammy Jenkins predicted in the comments section exactly 24 days ago.
“If Bitcoins become a good way to avoid government surveillance of your financial transactions,” another Wired reader, wiredog, quotes The Daily Beast’s Megan McArdle, “then governments will find a way to choke off those entry points so that Bitcoins become very illiquid, indeed.”
These readers were discussing an article on last month’s crackdown on Liberty Reserve, a Costa Rica-based digital currency service billing itself as the “oldest, safest and most popular payment processor, serving millions all around the world.”
“The service,” Wired writes, “was allegedly favored by cybercriminals and mules who participated in a recent $45 million coordinated bank heist that involved laundering cash that was drained from two Middle Eastern banks via ATMs around the world.”
The founder, Arthur Budovsky, along with six employees, was indicted in the United States in what investigators call the largest international money-laundering case ever prosecuted.
We bring this up a month later in light of recent developments coming from the Bitcoin block…
“The world’s best-known Bitcoin exchange,” Wired writes by way of update, “stopped paying out customers in U.S. dollars on June 20.”
For the next two weeks, Mt. Gox is suspending all U.S. dollar withdrawals… making the Bitcoin illiquidity prediction passed on by “wiredog” last month stick out in our minds.
The issue? According to Mt. Gox’s Thomas Glucksmann-Smith, it has to do with “processing the sheer volume through our banks in Japan, which is causing a delay,” he relayed through email.
“But,” Wired notes, “the Japanese company has fallen afoul of regulators and is clearly under pressure in the U.S.”
If you recall, it was only a month ago that the Department of Homeland Security froze a Wells Fargo account that Mt. Gox had been using to transfer U.S. dollars.
Two theories abound in the Bitcoin blogosphere: government conspiracy against the crypto-currency… or we truly are witnessing an unprecedented global rush into Bitcoin.
Time will tell….
The war on drugs has claimed an unexpected casualty — U.S. asparagus farmers.
According to Latin Trade, “Year-round sunshine, sophisticated irrigation systems and United States trade preferences have helped Peru become the world’s biggest exporter of asparagus.”
Those trade preferences include subsidies to Peruvian asparagus farmers to grow asparagus instead of coca. The policy has crippled American asparagus growers.
This oddity has somehow escaped our attention until now. But it’s been ongoing for nearly a decade. It was even covered in detail in the 2008 documentary: Asparagus! Stalking the American Life.
“Sixty-two percent%,” writes NowIKnow.com, “That’s how much the value of American asparagus farms, collectively, lost from 1999-2009.” According the Agriculture Department, the value of U.S. asparagus farms in 1999 was more than $233 million. A decade later, less than $90 million.
But do the subsidies even accomplish what they’re supposed to? In 2004, The New York Times estimated subsidies to Peru totaled $60 million per year. Meanwhile, auditors who prepared a report for Congress in 2001 “[did] not believe that Peruvian asparagus production provides an alternative economic opportunity for coca producers and workers — the stated purpose of the act.”
“Just about anyone with an IQ that involves three digits,” writes a disgusted reader, “understands the government tweaks, manipulates and/or fudges the numbers they report.
“So it amazes me that these same people base their investments on what a member of this same government might say once every two months. Yes, I understand the Federal Reserve is supposed to be an independent bank, but that is as big a myth as the inflation rate being 0.7%, or whatever number some politician needs it to be that morning.
“I wonder if these same people would have increased their purchases and driven the market 2% higher if the Federal Reserve had stated they were going to continue their current policies for another three years. Odd, isn’t it, that when the Fed makes a statement that leads to a market contraction, it produces the results that must exist for them to continue or increase their activity.
“Some might say the old dog has finally caught its tail.”
“Many thanks for your prompt explanation to me in The 5,” writes an appreciative reader who peppered us with questions about our “Zero Hour” scenario.
“Thanks to that clarification, I stayed in ZSL [a ‘double-inverse’ silver ETF] a few more days and made a tidy sum. That’s why I always read The 5 first.”
The 5: Yikes… Leveraged ETFs are the nitroglycerin of retail investing, but we’re glad it worked out all the same!
“I’d say he’s got that right,” a reader writes after our item yesterday about the cat running for mayor of a city in Mexico. Specifically, he’s referring to his owner’s comment: “He sleeps almost all day and does nothing, and that fits the profile of a politician.”
“That,” the reader says, “and eating other people’s food and living off the efforts of others and contributing nothing. But you knew that.”
The 5: Balderdash. Name one politician capable of catching mice…
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
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