Bank runs. Will Hutton
As events in Ukraine spiral out of control, it is possible that in the absence of a thawing of relations between Russia and the U.S., over the Ukraine, a new cold war could be about to emerge.
Particularly as the Ukraine, gets its gas from Russia, and currently owes the Russian Gas Giant – Gazprom over $2.2 BILLION in unpaid bills.
However, all this turbulence in eastern Ukraine, with Russian defenders of their cultural identity, that have stormed Local and Regional government offices, will possibly force Putin’s hand to defend these ethnic Russians which could draw in western forces to defend its supported government in the west of Ukraine.
For Ukraine whose currency has depreciated in value by 27%, since the troubles began, this could spell disaster for the country and its people. The gas bought from Russia was purchased at the highly advantageous gas prices that Gazprom gave to former CIS/Soviet states.
As Gazprom increased its prices to above market rates to Ukraine, to reflect the risk of failure to pay, and to recoup lost income, it is obvious that naturally Ukraine would be upset. Wouldn’t anyone if their energy bill went up 300%? And this has implications for Ukrainian industry, already not as well developed or efficient as their western counterparts.
Aleksey Miller – CEO of Gazprom, Russia’s biggest energy supplier, which in different circumstances would be a huge investment opportunity, suggested that Russia should abandon the Dollar and use the Euro for the international sale of GAS.
Even Christine Lagarde, Managing Director of the IMF, weighed in on the subject of Ukraine, by admitting in an interview on 2nd April, that the problems in Ukraine could affect the global economy.
Of course the Soviet state, went through its own internal challenges in the late 80s, as the commodities prices fell. Russian tanks and soldiers were embroiled in Afghanistan, and the Soviets spent more than they earned, the end result was the end of the Soviet Empire.
Are there parallels today for the U.S. empire? I suspect so – only their printing press has saved them. But will Chinese Gold cause the U.S. empire to collapse? We shall see…
As American and other nation’s troops are stationed in the Far East to – as Hilary Clinton put it – pivot Washington to the Far East, which drew the statement from a senior Chinese military figure, that “Chinese containment” was not possible.
As the raw materials of life have become more important, both Russia and China have used different strategies to achieve similar results.
Russia and the Global Metals Supply Chain
Both Russia and China have large land-masses, and the potential for commodities production. Russia is an important commodities giant. and Russian output is critical to the global supply chain for many items.
Russia is a major producer and exporter of oil, natural gas, ores, refined metals and industrial minerals. According to a recent analysis by the British firm Roskill, the extractive, energy and chemical sectors are vital to the Russian economy and accounted for an estimated 80% of Russian export revenues in 2013.
It’s important to recognise though, that Russia’s commodities are important on several levels. Russia is more than a major producer and exporter of energy and materials; Russia is an important player within Western supply and product chains. So, targeting Russian companies has the potential to provide blow back on Western businesses and economies.
For example: Nickel is much more than a 5 cent piece in people’s pockets. Nickel is critical to manufacturing stainless steel and a lot more. Nickel prices have pulled back in recent years as supplies have had to adapt to lower global demand, but picked up in recent weeks as commodites prices turned around, and Indonesia, imposed restrictions on exporting raw ore.
One of Russia’s big players, Norilsk Nickel, extracts ore in Russia but refines its product in Finland. Overall, Russia is the world’s second-largest producer of nickel, after China. But since China consumes most of its nickel domestically, this leaves Russia as the world’s key “swing” supplier. In 2013, Russia accounted for 26% of global nickel cathode exports, or around 13% of total world consumption of nickel. Without Russian nickel, the world’s steel industry would be quickly disrupted and prices on international markets would rise, possibly steeply.
Cobalt: Although Cobalt is found in many African countries, Russia is an important supplier. Cobalt, is used in steel and alloys increasingly with military applications as it is used to harden steel based alloys for armour piercing shells, and military vehicles as armour re-inforcement.
Russia accounts for about 6% of global mine output of ore and 3% of global refined output. Most Russian cobalt production is related to Norilsk operations in Finland, where cobalt comes out of nickel production. At 6% and 3%, as noted, Russian cobalt numbers are relatively low overall, but the point is that if Western sanctions somehow choke off Norilsk operations in Finland, we’ll see the impact on global availability of refined cobalt which would only add to military hardware costs.
Vanadium: Russia is the world’s third-largest producer of vanadium – providing about 10% of the world’s supply. Vanadium is critical to hardening steel and other alloys and is a key element for the future of utility-scale storage batteries. If vanadium supply takes a hit, all manner of metal and energy projects could be disrupted. Though a small miner – American Vanadium – is about to commence mining operations in the U.S..
Tungsten: Russia is the world’s second-largest producer of tungsten (behind China) and accounted for about 6% of global supply in 2013. Don’t be fooled by that low raw number, though, because about 70% of global tungsten is a Chinese play. So that Russian 6% “global” statistic is really about 20% of what’s available to the world outside of China. Tungsten is critical to building machine tools as well as manufacturing drill bits. In essence, tungsten is used for requirements that call for hard, dense metals with high melting points. Europe is a major tungsten importer from Russia, and much European industry will have to scramble to make up for any loss due to sanctions.
Titanium: Russia is a large supplier of aerospace-grade titanium to both the U.S. and Europe, accounting for about 12% of imports. Two important buyers are Boeing and Airbus, whose operations could be slowed by lack of titanium supply, certainly in the short term. I’m guessing you can see a trend here?
Rare Earth metals may also be included in this list of essential resources that modern economies cannot do without and that are sourced, at least in part in the former Soviet Empire.
Will Russia Look More to the East?
I could go on with other energy and materials that come out of Russia, but you get the point. Western politicians may feel like they have to “do something” about Russia annexing Crimea. but they have to be careful to not bite the hand that feeds them.
For our purposes, on the investment front, one potential result of Western sanctions will be to give Russian leadership even more incentive to look east, toward Chinese markets. China is a major consumer of many raw materials and refined products and would likely be able to buy and use Russian materials that no longer move west.
Different commodities will move in different ways, of course; some more than others…
Is China’s growth story about to unravel?
David Stockman writer for the Daily Reckoning, says: China is in the greatest construction boom and credit bubble in recorded history. An entire nation of 1.4 billion has gone mad building, borrowing, speculating, scheming, cheating, lying and stealing.
The source of this demented outbreak is not a flaw in Chinese culture or character – nor even the kind of raw greed and gluttony that afflicts all peoples in the late stages of a financial bubble.
Instead, the cause is a kind of monetary madness with an oriental face. Chairman Mao was not entirely mistaken when he proclaimed that political power flows from the end of a gun barrel – he did subjugate a nation of one billion people based on that principle. But it was Deng Xiao Ping’s discovery that saved Mao’s tyrannical communist party regime from the calamity of his foolish post-revolution economic experiments.
Just in the nick of time, as China reeled from the Great Leap Forward, the famine death of 40-60 million people – depending on whose figures you use, and the mass psychosis of the Cultural Revolution, Mr. Deng learned that power could be maintained and extended from the end of a printing press – just as Western Bankers did 200+ years ago. And that’s the heart of the so-called Chinese economic miracle. Its not about capitalism with a red accent, as the Wall Street and London gamblers have been braying for nearly two decades; its a monumental case of monetary and credit inflation that has no parallel.
Will Hutton who wrote “The Writing on the Wall.” (an ironic play on the Great Wall of China) suggested back in 2007, that the mixture of capitalism and political direction, would eventually lead to a collapse in China’s economy, when investments, and prices were centrally controlled, because the market mechanism of the free flow of information in markets – the price signal – and “Contract Law” is a requirement for all modern capitalist economies to function properly.
Perhaps our own politicians and Bankers would do well to remember that too, as they force Bullion Banks into manipulating currency prices by manipulation of interest rates, and precious metals prices, but I digress.
At the turn of the millennium, credit market debt outstanding in the US was about $27 trillion, and they’ve hardly been slouches in attempting to borrow their way to prosperity. Total credit market debt is now $59 trillion; so America has been burying itself in debt at nearly a 7% annual rate.
But America has been out-banked – to coin a phrase. In 2000, China had about $1 trillion of credit market debt outstanding, but after a blistering pace of “borrow and build” for 14 years it now carries nearly $25 trillion. BUT, this stupendous 25X growth of debt occurred in the context of an economic system designed and run by elderly party apparatchiks who learned their economics, when Chairman Mao was still alive. That said, the country sent highly educated senior communist figures around the world to study other cultures, and political and economic systems, so it is possible they have learned something since then.
However, it is probable, that there is no legitimate banking system in China – just giant state banking bureaucracies which are run by party operatives and a modus operandi of parcelling out quotas for national credit growth from the top, and then water-falling them down a vast chain of command to the counties, townships and villages.
There have never been any legitimate financial prices in China – all interest rates and Foreign Exchange rates have been pegged and regulated to the decimal point; nor has there ever been any honest accounting either – loans have been perpetual options to extend and pretend. Even the Yuan was pegged to the dollar at 8 to the dollar, until an agreement to enter the World Trade Agreement meant they had to freely float their currency by 2015, and China has allowed the Yuan to strengthen to circa RMB6.5:$1 – and is also behind their drive to collect as much gold as they can.
However, in two short decades, China has erected a monumental Ponzi economy that is economically rotten to the core. And, needless to say, there is no system of financial discipline based on contract law. China’s GDP has grown by $10 trillion dollars during this century alone — that is, there has been a boom across the land that makes the California gold rush appear pastoral by comparison. Yet in all that frenzied prospecting there have been almost no mistakes, busted camps, empty pans or even personal bankruptcies. When something has occasionally gone wrong with an “investment” the prospectors have gathered in noisy crowds on the streets and pounded their pans for relief – a courtesy that the regime has invariably granted.
Since 2000 China has 1.5 billion tons of steel capacity, but “sell-through” demand of less than half that amount and, on-going demand for sheet steel to go into cars and appliances and rebar into replacement construction meaning the other half is produced merely to go into surplus storage – once the current pyramid building binge finally expires.
The same is true for its cement industry, ship-building, solar and aluminum industries – to say nothing of 70 million empty luxury apartments and vast stretches of over-built highways, fast rail, airports, shopping malls and new cities.
Will this ultimately lead to a price and economic collapse? Probably, but WHEN?
In short, the flip-side of the China’s giant credit bubble is the most massive malinvestment of real economic resources – labor, raw materials and capital goods – ever known.
Effectively, the country-side pig sties have been piled high with copper inventories and the urban neighborhoods with glass, cement and steel erections that can’t possibly earn an economic return, but all of which has become “collateral” for even more “loans” under the Chinese Pyramid scheme.
China has been on a wild tear heading straight for the economic edge of the planet – that is, monetary “Terrain Unknown” – based on the circular principle of borrowing, building and borrowing. In essence, it is a giant re-hypothecation scheme where every man’s “debt” become the next man’s “asset”.
Thus, local government’s have meager incomes, but vastly bloated debts based on stupendously over-valued inventories of land. Coal mine entrepreneurs face collapsing prices and revenues, but soaring double digit interest rates on shadow banking loans collateralized by over-valued coal reserves. Shipyards have empty order books, but vast debts collateralized by soon to be idle construction bays. Speculators have collateralized massive stockpiles of copper and iron ore at prices that are already becoming ancient history.
Is this factored into China’s Plans for Empire, so that if – IF – a third world war begins, most of the materials will already have been purchased and produced, and once their currency is re-flated due to their large Gold holdings, they can buy what they need with the world’s strongest currency?
So China is on the cusp of the greatest margin call in history? Or the precipice of the biggest long term plan for global domination the world has ever seen?
Only the Chinese political class know the answer to that one.
But a Chinese market collapse would seriously affect all the world’s economies, and the Chinese have the biggest savings on the planet.
Cracks began showing in this edifice when a bank run began at Jiangsu Sheyang Rural Commerce Bank last month, as worried citizens clamoured for their money when a withdrawal for RMB200,000 (about $32,000) was refused at the Sheyang branch.
This was on the heels of the failure of several shadow banking institutions whereby several rural co-operatives and Farmer’s Credit Unions failed in recent months.
However, once asset values starting falling, these pyramids of debt will stand exposed to withering performance failures and melt-downs. Undoubtedly the regime will struggle to keep its printing press prosperity alive for another month or quarter, but the fractures are now gathering everywhere because the credit rampage has been too extreme and hideous. Maybe Zhejiang Xingrun Real Estate which went belly up last week was the final catalyst, but if not, there are thousands more to come. Like Mao’s gun barrel, the printing press has a “sell by” date, too.
Worryingly, a Chinese man was arrested for spreading rumours/information about these financial problems.
Of the more than US$562 million (RMB3.5 billion) that it owed to debtors, US$112 million was borrowed from 98 private parties with annual interest rates of up to 36%, according to recent revelations from Chinese media. Under that kind of pressure, the only surprise is that the default didn’t happen sooner. The company struggled to find capital for years; the chairman is suspected of borrowing up to US$38.6 million with “fake mortgages.”
But before Xingrun gets branded as China’s worst small, private homebuilder, it’s important to understand how it ended up in the mess in the first place, and what specific factors brought the operation down, or at least to the brink of collapse (local government officials insist it hasn’t officially defaulted yet).
Xingrun’s business in Fenghua, a county-level city that is part of Ningbo in a manufacturing belt on China’s east coast, ran into trouble through a renovation project starting in 2007, Chinese media pointed out. The company attempted, after securing government support and taking over for another distressed local property company, to build high-rise apartment blocks in a village called Changting. The project required the company to build homes for the original residents before the existing village could be torn down and the new buildings built. Construction was slated to start in the first half of 2012. Xingrun projected that it could pay off its debts within three years.
The project never got to the construction phase. In fact, the small village homes are still standing. Xingrun built the replacement homes for the villagers but there’s no sign of its main housing product, high-rises. Nothing has happened because the residents of the village have tangled the project and the company in a lawsuit that has stretched for years.
High risk is something no one seems willing to stomach these days – in stark contrast to just a year ago. That explains why Xingrun was unable to pay back its loans. But why has it come so close to keeling over now? Its troubles with the Changting project persisted for years but the company simply rolled over loans and borrowed at high rates from private lenders.
One problem for capital-strapped developers in the Ningbo area is that private lenders no longer want to lend to highly risky companies. In fact, they are calling in their loans. This is just one of the problems afflicting Xingrun. The value of property in some areas of Fenghua is decreasing and that trend has lowered confidence in developers’ ability to pay dizzyingly high interest rates.
Banks aren’t hot on lending to this kind of developer either. In the past, a developer such as Xingrun could ask the local branch of a commercial bank for more credit. The local branch would take that risk because loan officers there knew that, somewhere much higher up the chain, officials promoted the lending.
That support exists no longer. Now, when small developers beg local banks for credit, they will likely be turned away. Local bank managers are reportedly being told that they may lend to risky borrowers if they wish, but they will be held accountable.
High risk is something no one seems willing to stomach these days – in stark contrast to just a year ago.
Fenghua is a small town, and Xingrun’s reach beyond that area is limited. Analysts have come out strong in saying that such a default has little systemic risk. The bigger picture in the region, however, can’t be ignored.
Xingrun’s woes are still the woes of the local authorities. The default will add US$305 million (RMB1.9 billion) to Fenghua province’s non-performing loan portfolio, pushing up the rate of toxic assets to 5.27% and making it Zhejiang province’s most indebted government, according to calculations by The Economic Observer newspaper.
Add Fenghua’s problems to those of the The greater Ningbo Liberty Silver region. The area reportedly has at least six years of housing stock either sitting empty or under construction. The massive buildout will put small developers under great pressure to pay back loans, especially if private debtors are calling in high-interest loans. A slowdown in property prices won’t help either. Without a rescue from provincial-level banks, Fenghua won’t be the last local government stuck in a jam.
So what is The Coming Battle?
It will be between depositors (the people) and the Bankers when the next economic collapse occurs – far sooner than most people think. Crypto-Currencies, do not rely on Banks to transfer value between individuals, or between people and businesses, and will increasingly mean the Banks wield less power over the economy, and the state, but this means that many governments will want to outlaw them. However, if you feel you want to find out a little more on the subject at Review Outlaw.
And, you can get some free currency – HERE.
Of course if you have spare capital, putting some of it into precious metals with no counter party risk – that is – hold in your hands metal… would be considered sound advice, and if you want to know where you can buy these wonderful metals – try HERE.
Addendum: 12 April 2014
Since this piece was researched and written, the PBoC (People’s Bank of China) has agreed to provide RMB1,000,000,000,000 (1 Trillion – Renminbi/Yuan) about $153 Billion to provide increased infrastructure in rural communities, improving roads, agriculture and local amenities. So the end speculated on, won’t be happening soon; but someday the spending has to stop. (or not rise quite as much) to rein in inflation, which will probably now happen circa 2018-20.
The west too will probably make one last attempt to stave off the inevitable collapse, resulting in the final outburst of inflation. Bankers will be held to account by the people, and the result will not be pretty.
And the final analysis, will compare Precious Metals with the number of Dollars, Yen, Yuan, Pounds, and Euros in circulation.
Silver which is my favourite precious metal, is so oversold as to be the best buying opportunity for anyone with money to invest, and time to wait.
The above chart tells its own story. The MACD (Moving Average Convergence Divergence) shows when we can expect a turn in prices. When it’s high, the price turns down, and when it is low, the price turns up… You have been shown the future.
The below film, tells of The Coming Battle.
And here’s more evidence of what’s likely to follow.
“There are none so blind,
as those who will not see.”
What do YOU see?