Commit suicide......Via Zerohedge. The Copper rehypothecation issue is something I have been covering for two years.
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FT on aluminum. Once again the large banks are manipulating the market and distorting price signals with derivatives. It will work until it doesn't and then the taxpayer will have to bail out those TBTF. I have quoted FT's stories about copper in China on this isue as well.
From FT.
"Import figures may appear confusing to investors. For example, China’s imports of copper and copper products rose 19.5% y/y and 5.9% m/m in July, to 366.5kt; this implies that refined copper imports should have been around 264kt in July, up 36% y/y. These are very strong readings. However, investors should be wary of linking import data to China’s real demand, as the vast majority of imports are based on one-year term contracts rather than spot buying. Our understanding is that many imports are not destined for end-consumers. Instead, larger imports lead to larger stockpiles, though this could be absorbed by the market when strong demand returns." In line with what I have been telling my students since 2010. The FT article:
"Here, for example, are the thoughts of Brian Reynolds, chief market strategist at Rosenblatt Securities, regarding what’s going on: A little more than a year ago we picked up on a trend that we termed the “sub-priming” of commodities. Wall Street has been increasingly been doing structured finance deals wrapped around commodities, and this has added a bid for them while also making them vulnerable to downdrafts. We know that many equity investors think (or at least hoped) that, after the disastrous record of wrapping pipeline and telecom assets in the 1990’s and sub-prime housing in the last decade, financial market reforms such as Dodd-Frank would have eliminated structured finance as a macro driver. When Dodd-Frank was proposed it envisioned standardized derivatives being placed on exchanges and clearinghouse. We felt it would encourage more non-standardized, exotic, and opaque structures to be created, and in the two years since it was enacted that’s what seems to have happened. As he concludes: In the case of a downdraft, it leaves people with unwanted long positions in a declining market, prompting even more sales. This has happened to gold a few times in the last year and anecdotally we get the sense that there such support in the $95 and $80 dollar areas for oil. A breaking of those areas might prompt further sales from structured finance participants." Brent posted this link in the comment section of my last post, but I think it is worth a dedicated post.
Once source is sanguine about the risks: "Arguably, any arbitrage losses on metal that is brought into China, if financing deals are wound up, is perhaps more akin to an interest rate than a trading loss, i.e. an additional cost for the facility to that already paid to the financial institution." However, as I read through the half dozen or so related posts its seems like it is the kind of thing that is going to work fine until it doesn't and then it will go horribly wrong. Or as Mishkin might say, expect significant nonlinear effects on the downside. FT Article.
"According to Wikipedia, compulsive hoarding is a disorder characterized by the excessive acquisition and inability or unwillingness to discard large quantities of objects that would seemingly qualify as useless or without value. We’d like to make the case that China is suffering from this disorder and that we’re at the stage where a psychopharmacological intervention needs to be organised by China’s friends and family. If not China’s hoarding tendencies could destroy the world as we know it." Explains why I was wrong on my 2010 "short copper" admonition. Does this mean one should be looking to short copper? Not neccesarily. "Slowly, the truth on whether the global copper market is really tight is coming out. It illustrates just how large an involvement the financial institutions have become to the copper industry. It shows, too, that by throwing money at a market, prices can be driven higher. In the process, however, the delicate balance between supply and the industry’s requirements for a basic material used to produce a range of essential products is destroyed. In short, copper is becoming a financial asset in place of its historic role as an industrial metal. I have told my students that I see the next counterparty financial crisis coming from the commodity makets (or Japan CDS). I thought it would be because a large commercial blew itself up (Exxon, BH Bilton). Maybe copper will be the new way that banks find to pull the pin. Try not to be standing close by. |
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