Claiming to own X quantity of gold is one thing, and reporting how many times the gold has been pledged as collateral is another.
When introducing a new concept, it is best to start with the definition of the words to be used. In this case, the discussion of rehypothecation and how it places the world at risk with the fun and games played in the stock market.Rehypothecation:Rehypothecation occurs when your broker, to whom you have hypothecated — or pledged — securities as collateral for a margin loan, pledges those same securities to a bank or other lender to secure a loan to cover the firm's exposure to potential margin account losses.When you open a margin account, you typically sign a general account agreement with your broker, in which you authorize your broker to rehypothecate.Now, let’s put this into easy to understand language. Let’s say that you have ten dollars. You take it to the bank to let them “borrow” it, while paying you interest. What you have done, in reality, is given them your money to use as they see fit, while giving you a small percentage of the gains that they will earn. A bank would loan the money to a home buyer or perhaps a small business. At the very least, they can lend all the money in excess of their requirement to hold some cash as reserves–say 10% for ease of math.They now have nine dollars to invest. Their last resort is to offer it to another bank for that bank to “hold”, because that bank doesn’t have enough money to meet its required reserves. Seems simple enough, right?Welcome to the games bankers play to make money. Now that this simple format is in place, let’s move to where the serious dangers lie.Precious Metals:During World War II, many foreign countries feared that their gold reserves, which at the time backed their paper money, might be taken by an enemy and in 1939, the good old USA was a very neutral country, like Switzerland, only there was a much better deterrent than the Alps– the Atlantic Ocean. So, many countries–England, France, and others–sent us their gold bars to be stored alongside ours in Fort Knox. Later, after the war was over, we convinced them that it was fine to leave it there and in fact, with the Cold War starting other countries joined in, including Germany.Now, what good is a pile of gold sitting in a fort going to do? It costs a lot to protect it, and the US was paying a small sum in interest, while getting a smaller sum back in “protection fees”. So, the Federal Reserve had a wonderful idea, at least in their minds.Since we have this gold, let’s issue paper on that gold as though it was ours, after all it is sitting in Fort Knox, and earn a bit of money on the side. So long as the Cold War lasted, the gold certainly wasn’t going anywhere. Here is where the trouble began. It was pretty small potatoes for a good while, until we went off the gold standard in 1971 during the Nixon Administration. What good is having a precious metal to back fiat currency, when a promise is just as good? Enter the danger zone.Now, the gold in Fort Knox isn’t doing anything. So, what to do? Well, each bar of gold has a unique mark on it to say who owns it. The Cold War is still raging, so no one is going to ask for it back anytime soon. Let’s melt down some of that gold, just a small percentage of it, and sell it off as bullion. Gold is high and the foreign countries won’t ask for it all, so let’s skim a bit here and there. No one will know, and we can make money.Then debts started to accrue, so they got brazen and started melting bars and reselling bars as their own gold, because they don’t want to use their own gold, when German gold is just the same, except for that little mark. Erase the mark and put your own on it and sell it as yours, using your gold as the “backer” in case Germany asks for some of it back.Well, it wasn’t long until greed set in. Those gold bars that were sold to say, China or Japan, were resold to Austria or Iraq. Much like the bundling and reselling of home loans in the 1990’s, soon the German melted gold was in seven different countries with seven different marks, but no German mark upon them remained. This still wasn’t the breaking point though, after all there is still plenty of Gold in Fort Knox to cover what is owed to them.I don’t know who’s idea it was, but it was a bad idea. They decided that they could sell paper promises of gold being held in the vaults. The last number I saw was 140%. Which means that if they have 100 pounds of gold, they can sell paper as though they have 140 pounds of gold. Now, they can also sell that gold outright as well. So, it's possible that they could sell 140 pounds of paper gold and sell a portion of the physical gold. too.Confused yet? Here is where we stand today. No one knows how much gold is really in Fort Knox. We only know what they say is in Fort Knox. The same is likely true for the Federal Reserve and possibly the major banks; after all, if the Fed starts demanding to know what’s in those banks, they might have to show theirs too. So, let’s say that the economy starts to really go south around the world. As you know from the news, Germany asked to see their gold at Fort Knox and were denied, so they asked for their gold back. Smart move on Germany’s part in my mind. Answer from the Fed, we will get it to you sometime in the near future. This wasn’t challenged by Germany.Why? Rehypothecation. Germany knows that they have been doing the same thing with gold that we have. It’s been sold to multiple people at the same time, under the theory that not everyone will want it at the same time, so we can just move it around as needed.This game of musical golden chairs works fine, until the musical economy stops. When countries start to rack up debt and desire to sell their own gold to pay the bill, and they can’t get it, they get nervous. Now, if the economy is going south and the price of gold is heading up because of fear, those people holding paper gold in the form of futures or just deposit promises begin to sell off for profit or out of financial need. So long as it’s a trickle, no problem, but if it becomes a torrent….Remember the 140% rule? Well, what if the Federal Reserve only kept 60% of the 100% that the paper gold was written on? Now there is an 80% shortage. Someone is about to have their musical golden chair pulled out from under them. They will get paid, BUT that payment will come as fiat currency. As the golden parachute deflates, how good is fiat currency? This is why there are so many on the fringe demanding to see the gold reserves and others are saying gold will hit $5,000 an ounce or higher. It is theoretically possible that for each gold promise, that it is backed by 1/5 or less of physical gold. No one knows, because no one can audit the physical gold.China is getting ready to release their gold reserves. That is, they will do like the Fed and say how much they have. We cannot call them on their real reserves, because then they can do the same to us. Now, if all the gold is still in Fort Knox and the Federal Reserve, then the US can call for a real accounting and show ours as well.However, if we don’t and China does, and calls for the US to do the same, then a lot of fear enters the market. There is a reason that people say "never own paper metals." This is that reason. You might get the value of that gold, but it will be in fiat currency and if things are crumbling then fiat promises become flat losses.
I propose turning Fort Knox into a profitable tourist attraction. If gold is just a foolish relic, then charge $50 a person to wander around "our" gold. It's not like anyone can slip a heavy bar into their purse or pocket without being detected. Put it behind bulletproof glass if you want. What's the risk?
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We’ve written quite a bit over the past two months about capital outflows from China. Last week for instance, we documented how the country saw its fourth consecutive quarter of outflows in Q1, bringing the 12 month running total to some $300 billion. Why, beyond the obvious, is this a problem for China? Because pressure is mounting to devalue the yuan as the currency’s peg to the recently strong dollar is becoming costly for the country’s export-driven economy.
Here’s Soc Gen’s Albert Edwards on the subject:
In the current deflationary environment the Chinese authorities simply can no longer tolerate the continued appreciation of their real exchange rate caused by the dollar link.
And from Barclays:
Amid slowing inflation and rising outflows, the costs of limiting CNY weakness are growing – including the unintended effect of placing more stress on CNY market liquidity and interest rates, rendering liquidity easing efforts less effective.
And here is how we summed up the situation last month:
China is suddenly finding itself in an unprecedented position: it is losing the global currency war, and in a “zero-sum trade” world, in which global commerce and trade is slowly (at first) declining, and in which everyone is desperate to preserve or grow their piece of the pie through currency devaluation, China has almost no options.
At issue is the fact that expectations about the direction of the yuan may be contributing to capital outflows and any indication on the part of Beijing that devaluation is in the cards could exacerbate the problem. Now, data from SAFE suggests nearly $24 billion left China in March alone. Here’s more, via Bloomberg:
Here’s another Chinese puzzle. Economic growth, while slowing, is still 7 percent and the stock market is on a tear. Yet money is leaving the country.
That’s a turnaround for an economy that’s been a magnet for foreign capital during the boom years of the past decade. Why the outflow? A property bust, squeezed corporate profits and the end of a multi-year currency upswing are giving investors fewer reasons to pile in. At the same time, President Xi Jinping’s crackdown on corruption gives more reasons for the nation’s rich to squirrel some of their wealth abroad.
All of this is happening as China moves ahead with initiatives making it easier to move money in and out of the country. While far from levels seen most recently in countries such as Russia, the trickle of cash now exiting China raises a warning flag for what could happen during any domestic financial crisis, as China works to deleverage its economy.
“We have both a booming stock market and capital outflows, which is counterintuitive,” said Jean-Charles Sambor, Asia-Pacific Director at the Institute of International Finance in Singapore. “The downside risk would be to have broad-based outflows if the macro story deteriorates further or the stock exchange collapses, which would create a confidence crisis.”
One measure released by SAFE on Thursday showed that a net $23.8 billion left the country in March, the most in at least a year. Foreign-exchange reserves slid the most on record in the last three months, fueling speculation the central bank was forced to sell some of its dollar holdings to support China’s currency, the yuan. In the final quarter of last year, the capital account posted its widest deficit since at least 1998.
And here’s Goldman with more on the March outflow:
SAFE data shows that banks net sold $58bn in FX to Chinese non-banks in March (up from $10bn in February). This is the largest such FX net sale since the data began in 2001…
The $58bn net sale in FX covers settlement of previously-entered forward contracts due during the month as well as outright spot transactions. If we instead look at the sum of outright spot transactions and freshly-entered (but unsettled) forward contracts, the scale of net FX sales was even larger at $70bn.
Data on the monthly change in the position for FX purchases for the whole banking system (the PBOC plus commercial banks) released by the PBOC earlier showed a smaller FX outflow of $25bn…
Both the SAFE and PBOC data do suggest a pickup in FX outflow in March. This seems consistent with market views that the PBOC heavily intervened around mid-March to engineer a visible CNY appreciation, ahead of the subsequent rapid reduction in domestic interbank interest rates.
Looking ahead, while we may continue to see significant capital outflow in coming months, we believe the PBOC will remain committed to maintaining a broadly stable USDCNY exchange rate, including by open market FX operations as needed.
Bloomberg goes on to note that an unravelling of the country’s world-beating equity rally could lead to further outflows as could rising rates in the US and the above-mentioned devaluation fears:
If yields on Treasuries spike higher as the Fed tightens — as has sometimes happened in the past — the U.S. could lure money from developing economies like China.
Then there’s the currency risk. In the case — unlikely for now — that the yuan is allowed to weaken substantially to boost exports, that could trigger the unraveling of carry trades estimated at $1 trillion.
To be sure, not all of the departing capital is speculative, or so-called hot money. Much of it is actually a sign of China’s increased economic development, such as outward investment as companies expand their global footprint.
As a reminder, here’s a look at “hot money” outflows via Barclays…
…and here’s a look at the bigger picture via JPM:
Summing up, China faces accelerating capital outflows, a looming economic downturn, and an epic stock market bubble, and ironically, efforts to combat the latter two problems are very likely to exacerbate the former. Or, as one strategist told Bloomberg: “China is nowhere near a crisis, but like the parable about the frog in a pot, the water is getting closer to a boil.”
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On April 18, 2015, Inder Comar, Esq. was invited to speak at the Kuala Lumpur Foundation to Criminalise War’s International Forum on Peace and Justice. He presented on the Saleh v. Bush case and its implications for international justice alongside…
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This month a number of commentators grew quite alarmed by disturbing data coming from the National Association of Credit Management (NACM) showing that the US economy may be facing a credit crunch as businesses find it very hard to get loans…
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You all remember that NATO/AFRICOM coalition of the willing, “led” by King Sarko the First, then President of France, with US President Barack Obama “leading from behind” and a former Secretary of State, now presidential candidate with a campaign chest of $2.5 billion, coining a gloating “We came, we saw, he died”.
Well, this fabulous collection of humanitarian imperialists is still on the loose, now killing — by proxy — across the waters of the Mediterranean, aka Club Med, aka Mare Nostrum, after they destroyed a viable state — Libya — under the pretext of preventing a “genocide”.
Asked about it today, as he recently pontificated in relation to the Armenian genocide, that pathetic excuse for UN Secretary-General, Ban-Ki Moon, would say the potential massacre in Libya might — and the operative word is “might” — not even qualify as an “atrocity crime.”The six-month humanitarian bombing of Libya engineered to prevent a highly hypothetical “atrocity crime” ended up “liberating” at least 10 times more people from their lives than the previous skirmishes between Col. Gaddafi’s troops and weaponized “rebels”, most of them hardcore Islamist militias, now free to wreak jihadi havoc from eastern Libya to northern Syria.
Humanitarian imperialism practitioners duly created a “liberated” wasteland — which they called “victory” — trespassed by weaponized militias; installed a pervasive chaos trespassing a great deal of the Maghreb and Western Africa; and unleashed a massive humanitarian crisis.
Stranded in MENA
Humanitarian imperialism as applied to what the Pentagon loves to define as MENA (Middle East-Northern Africa) — from Libya to Iraq, Syria and now Yemen, as well as sub-proxy wars in Mali, Somalia and Sudan — has led to the largest refugee disaster since the Second World War. No less than 57 million people have been turned into refugees by 2014.
A crucial subplot is that according to the International Organization on Migration (IOM), the number of refugees dying as they tried to reach Fortress Europe rose by more than 500 percent between 2011 and 2014.
This means humanitarian imperialism, as applied by the Pentagon/NATO/AFRICOM, handed the waters of the Club Med to the real winners: a vast human trafficking racket that includes smugglers, corrupt police and even “terra-rists”.
Across Europe, only Italy — to its credit — is really outraged, and willing to accept at least a fraction, a few really, of the wretched African boat people. After all, the privileged exit point is “liberated” Libya and the privileged entry point is Italy’s Sicily. France, Germany, the UK and Sweden follow Italy with much more modest attempts.
This aphasiac EU/NATO wall of silence is due to the fact that Europe now is mostly about anti-immigration political parties running amok. After all would-be immigrants are perfect scapegoats. As fearful “nationalists” define them, they flatten wages; they live off welfare; they are mostly criminals; they reproduce like rabbits; they destroy the “national identity; and of course there are so many “terra-rists” among them who want to submit Europe to the chador and Sharia law.
This fearful, austerity-ravaged EU subjugated by NATO’s military diktats cannot possibly muster the will to build a common, decent policy to confront the tragedy of a Club Med putrified by a tsunami of African bodies. A great deal of the EU in fact suspended Operation Mare Nostrum — opting to control/police the borders of Fortress Europe instead of acting on humanitarian principles.
Call the drone cavalry
A modest proposal would involve bombing smuggling boats in their hideaways before they are filled up with their tragic human cargo; under UN protection, establish in the “liberated” Libyan coastline humanitarian stations able to process those eligible for political asylum in the EU; facilitate their air or naval travel to the nations ready to receive them; or — using American methodology — drone the “enemy” to smithereens, as in the smugglers and their financiers. After all US drones are expert in the matter, operating under Obama’s infamous “kill list” and totally oblivious to international law.
That, though, will never happen. As Nick Turse demonstrates in a new, path-breaking book, Libya was merely AFRICOM’s first war (then transferred to NATO, as I examined here); the Pentagon has much nastier plans in its evolving pivoting to Africa.
Meanwhile, those fabulously wealthy oil and gas rackets in the Persian Gulf — the same ones buying every ostentatious sign of luxury between Paris and London — are busy “creating” the bulk of the largest refugee crisis since World War II: in Syria, a privileged theatre of their proxy war against Iran.And the House of Saud oil hacienda — with the Empire of Chaos “leading from behind” but providing the bombs, the fighter jets, the intel, and the escalation, via nine US warships dispatched to Yemeni waters — is also busy prosecuting its bombastic “Decisive Storm” over the poorest Arab nation, setting the scene for yet another chapter of the rolling refugee crisis.
NATO remains busy training Kiev’s goons; demonizing Russia generates much more PR than dealing with Africans.
In Afghanistan, the Taliban have already announced their new spring offensive starts this Friday; NATO, whose collective behind was royally spanked by a few thousand Taliban with fake Kalashnikovs, won’t be even “leading from behind”.
And at the bottom of the Mare Nostrum lies, in full putrefied regalia, the EU/NATO’s civilized corpse.
Pepe Escobar‘s latest book is Empire of Chaos.
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Well, the Nasdaq finally did it. It has climbed all the way back to where it was at the peak of the dotcom bubble. Back in March 2000, the Nasdaq set an all-time record high of 5,048.62. On Thursday, after all these years, that all-time record was finally eclipsed. The Nasdaq closed at 5056.06, and Wall Street greatly rejoiced. So if you invested in the Nasdaq at the peak of the dotcom bubble, you are just finally breaking even 15 years later. Unfortunately, the truth is that stocks have not been soaring because the U.S. economy is fundamentally strong. Just like the last two times, what we are witnessing is an irrational financial bubble. Sometimes these irrational bubbles can last for a surprisingly long time, but in the end they always burst. And even now there are signs of economic trouble bubbling to the surface all around us.
The following are 11 signs that we are entering the next phase of the global economic crisis…
#1 It is being projected that half of all fracking companies in the United States will be “dead or sold” by the end of this year.
#2 The rig count just continues to fall as the U.S. oil industry implodes. Incredibly, the number of rigs in operation in the United States has fallen for 19 weeks in a row.
#3 McDonald’s has announced that it will be closing 700 “poor performing” restaurants in 2015. Why would McDonald’s be doing this if the economy was actually getting better?
Greece warned it will go bankrupt next week after failing to stump up enough cash to pay millions of public sector workers and its international debts.
Deputy finance minister Dimitras Mardas set alarm bells ringing yesterday when he declared the country had been ‘running on empty’ since February.
With a debt repayment deadline looming on May 1, Greece faces the deeply damaging prospect of having to snub its own employees to make a €200m payment to the International Monetary Fund.
#5 Coal accounts for approximately 40 percent of all electrical generation on the entire planet. When the price of coal starts to drop, that is a sign that economic activity is slowing down. Just prior to the last financial crisis in 2008, the price of coal shot up dramatically and then crashed really hard. Well, guess what? The price of coal has been crashing again, and it is already lower than it was at any point during the last recession.
#6 The price of iron ore has been crashing as well. It is down 35 percent in the last nine months, and David Stockman believes that this is because of a major deflationary crisis that is brewing in China…
There is no better measure of the true contraction underway in China than the price of iron ore. The Wall Street stock peddlers will tell you not to be troubled by the 70% plunge from the 2012 highs and the 35% drop just in the last nine months. According to them, its all the fault of the big global miners who went overboard opening up massive new iron ore pits and mining infrastructure.
#7 At this point, China accounts for more total global trade than anyone else in the world. That is why it is so alarming that Chinese imports and exports are both absolutely collapsing…
China’s monthly trade data shows exports fell in March from a year ago by 14.6% in yuan terms, compared to expectations for a rise of more than 8%.
Imports meanwhile fell 12.3% in yuan terms compared to forecasts for a fall of more than 11%.
#8 The number of publicly traded companies in the United States that filed for bankruptcy during the first quarter of 2015 was more than double the number that filed for bankruptcy during the first quarter of 2014.
#9 New home sales in the United States just declined at their fastest pace in almost two years.
#10 U.S. manufacturing data has been shockingly weak lately…
On the heels of weak PMIs from Europe and Asia, Markit’s US Manufacturing PMI plunged to 54.2 in April (from 55.7). Against expectations of a rise to 55.6, this is the biggest miss on record. Of course, this is ‘post-weather’ so talking-heads will need to find another excuse as New Orders declined for the first time since Nov 2014.
#11 When priced according to “the average blue-collar hourly wage“, U.S. stocks are the most expensive that they have ever been in history right now. To say that this financial bubble is overdue to burst is a massive understatement.
For a long time, I have been pointing to 2015 as a major “turning point” for the global financial system, and I still feel that way.
But for the first four months of this year, things have been surprisingly quiet – at least on the surface.
So what is going on?
Well, I believe that what we are experiencing right now is the proverbial “calm before the storm”. There is all sorts of turmoil brewing just beneath the surface, but for the moment things seem like they are running along just fine to most people. Unfortunately, this period of quiet is not going to last much longer.
And those that are “in the know” are already moving their money in anticipation of what is coming. For example, consider the words of Snapchat founder and CEO Evan Spiegel…
Fed has created abnormal market conditions by printing money and keeping interest rates low. Investors are looking for growth anywhere they can find it and tech companies are good targets – at these values, however, all tech stocks are expensive – even looking at 5+ years of revenue growth down the road. This means that most value-driven investors have left the market and the remaining 5-10%+ increase in market value will be driven by momentum investors. At some point there won’t be any momentum investors left buying at higher prices, and the market begins to tumble. May be 10-20% correction or something more significant, especially in tech stocks.
It may not happen next week, or even next month, but big financial trouble is coming.
And when it finally arrives, it is going to shock the world, even though anyone with any sense can see the coming crisis approaching from a mile away.
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If there is a single book that could inspire and inform a global mobilization movement to divest from fossil fuels, it is Unprecedented.
In 2014, a CNN host described what’s missing from our national conversation about climate change: “An emotional…
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