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Did China’s Bronze Swan Just Arrive? Copper Inventories Crash Most In History

August 31, 2017 Tyler Durden 0

Buyers withdrew more copper from the London Metal Exchange’s global warehouse network on Wednesday than at any time since daily records began in 1996, extending a 19-day drop.

As Bloomberg notes, while the net decline in percentage terms was also the biggest since the height of China’s raw-materials boom in 2006, some have warned against reading such moves as an end to a years-long supply glut. A tug of war between financial traders with opposing views of the market has led to sharp swings in metal moving in and out of storage in the past year.

However, stockpiles also slumped 8.2% on the Shanghai Futures Exchange, which is notable because last year we saw the London and Shanghai inventories see-sawing (up in London, down in Shanghai, and vice versa)…

A question that emerged is what China is spending all this newly created money on. One answer emerged overnight when Bloomberg reported that after tumbling in the first half of 2015, copper inventories at the Shanghai Futures Exchange had been steadily rising, and in the most recent week soared by 11% to an all time high of 305,106 tons.

 

At the same time reserves at the London Metals Exchange declined for 11 days to the lowest level in more than a year, in other words China is shifting idle inventory from Point A to Point B.

But, this most recent withdrawal surge (the largest in history) suggests a sudden failure of the long-running commodity “collateralization” transaction – or CCFD – regime implemented in China years ago, as described in this post and summarized in the chart below…

Copper, as China pundits may know, is the key shadow interest rate arbitrage tool, through the use of financing deals that use commodities with high value-to-density ratios such as gold, copper, nickel, which in turn are used as collateral against which USD-denominated China-domestic Letters of Credit are pleged, in what can often result in a seemingly infinite rehypothecation loop (see explanation below) between related onshore and offshore entities, allowing loop participants to pick up virtually risk-free arbitrage (i.e., profits), which however boosts China’s FX lending and leads to upward pressure on the CNY.

 

And sure enough, we have seen USDCNY surging in recent months… (even if the RMB basket against global currencies has stabilized)

 

 

An example of a typical, simplified, CCFD

 

In this section we present an example of how a typical Chinese Copper Financing Deal (CCFD) works, and then discuss how the various parties involved are affected if the deals are forced to unwind. Exhibit 3 is a ‘simplified’ example of a CCFD, including specific reference to how the process places upward pressure on the RMB/USD. We believe this is the predominant structure of CCFDs, with other forms of Chinese copper financing deals much less profitable and likely only a small proportion of total deal volumes.

 

To summarize, Goldman notes that these shadow banking vehicles – CCFDs – involve a long copper physical positions and a short futures position on the LME.

And so, the current crackdown on leverage in the system by Chinese authorities may be forcing unwinds of the CCFDs – thus putting upward pressure on Copper futures (unwinding short positions) and selling physical copper (which would mean procuring the physical metal before passing it on). These are exactly what we are seeing in the market currently.

So is this the bronze swan?

*  *  *

Barclays has also called the copper rally overhyped, while Bank of America Merrill Lynch said it’s the metal most at risk of a reversal, with the optimism of investors in financial futures disconnected from slow conditions in the physical market.

“When you look at the state of the refined copper market, you certainly question why prices have risen so significantly,” Snowdon said by phone from London.

And finally, bear in mind that the lagged response to China’s credit impulse is about to hit base metals…The rise and fall in China’s credit impulse that has been so highly correlated (on a lagged basis) with copper for the last eight years…

However, as one analyst noted,

“Getting short in any base metal is risky right now when you have this broad positive macro theme and increasing investor participation, particularly in China’s onshore market.”

 

“This is probably one to stand back from and wait for Chinese macro sentiment to turn.”

And finally, bringing the narrative back to American shores, DoubleLine’s Jeff Gundlach tweeted recently about the “Copper/Gold ratio soaring to the high of the year!”…

Adding

“Not good news for the “1.50% 10 year” crowd. Neither is 10 year Bund holding above 50 bp.”

If China’s legged credit impulse is about to have its peak effect on Copper (as we showed above) then perhaps, just perhaps, the real pain trade (given the surging shorts in T-Bonds), is a 1.50% 10Y yield after all… driven by a plunge in copper prices.

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Milo Returns To Berkeley, Will Spend “Whatever It Takes” On Security

August 31, 2017 Tyler Durden 0

Conservative provocateur Milo Yiannopoulos says he will spend “hundreds of thousands of dollars” on security during an upcoming event at the University of California-Berkeley.

Yiannopoulos being led away from a 2016 event that was cancelled by violent protesters.

In an interview with Campus Reform, Yiannopoulos said that he is “prepared to spend whatever it takes” to provide security for the “Free Speech Week” that is scheduled for the end of September, underscoring his sincerity with the six-figure commitment.

According to The Chronicle of Higher Education, the September 24 event at UC-Berkeley’s Sproul Plaza is slated to feature a lineup of popular conservative firebrands, including Yiannopoulos, Ann Coulter, and former White House strategist Stephen Bannon.

Despite the university’s recent pledge to hold a “free speech year” and crack down on those who use violence to shut down speakers, however, the administration has come under increasing pressure to derail the upcoming event.

Earlier this week, for instance, Berkeley Mayor Jesse Arreguin asked Chancellor Carol Christ to reevaluate her commitment to allowing the conservative speakers on campus.

“I’m very concerned about Milo Yiannopoulos and Ann Coulter and some of these other right-wing speakers coming to the Berkeley campus,” Arreguin told The San Francisco Chronicle.

 

“It’s just a target for black bloc to come out and commit mayhem on the Berkeley campus and have it potentially spill out on the street.”

Other local lawmakers also echoed the remarks of the Berkeley mayor, citing security concerns as the primary danger of allowing Yiannopoulos and others to hold the event on a university campus.

“We don’t want the moral, psychological and fiscal expense of having these agents of hate coming to our town,” Berkeley City Councilman Ben Bartlett told The Los Angeles Times.

 

“We know the contest of ideas is at the very heart of freedom, but at the same time when the ideas are certain to cause bloodshed I’m inclined to err on the side of protecting the population, and I say that with a heavy heart.”

Councilwoman Cheryl Davila likewise told the publication that she does not “appreciate that there are racists coming to UC Berkeley to spew hate.”

A UC-Berkeley spokesperson told Campus Reform in an email that the speakers for the upcoming event are being hosted by independent student organizations, and that the school therefore does not have “the legal right or desire to interfere with or cancel their invitations based on the perspectives and beliefs of the speakers.”

“Where we do have discretion is around everything that has to do with the safety of our communities,” the spokesperson said.

 

“That priority, along with our commitment to Free Speech, remains at the center of our planning and preparations for future events.”

Yiannopoulos, for his part, is well aware of the severity of the threat posed by Antifa and other leftist groups, having been driven from Berkeley’s campus by violent rioters last time he was scheduled to speak at the school earlier this year.

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How BofA Learned To “Stop Fighting Central Banks” And Love Shorting The Euro

August 31, 2017 Tyler Durden 0

In a new report that may come as music to the ears of Mario Draghi, who has been valiantly hoping to show the European economy recovering while keeping the EURUSD below the “red line” of 1.20, BofA FX strategist Athanasios Vamvakidis is out with a new …

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Looming Gas Shortage: “Imports Can’t Make Up For This”

August 31, 2017 Nick Cunningham 0

The East Coast will start feeling the effects of Hurricane Harvey as the gasoline supplied from the Gulf Coast starts to dry up. One of the most important pipelines that ships refined products to the Eastern Seaboard shut down on Thursday, which means that the U.S. Southeast, Mid-Atlantic, and Northeast could see supply disruptions and price increases. The Colonial Pipeline carries gasoline, diesel and jet fuel from several refineries in Houston, Port Arthur and Lake Charles, along the Texas and Louisiana Coast, up through the U.S. Southeast to…

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Thursday Humor? How The Media Controls Your Mind

August 31, 2017 Tyler Durden 0

Authored by Carey Wedler via TheAntiMedia.org,
Even as trust in the mainstream media wanes, Americans continue to fall victim to established narratives, waxing hysterical over everything from nuclear war and natural disasters to race wars and disease. …

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An Energy Independent North America Needs NAFTA

August 31, 2017 Peter Tertzakian 0

NAFTA talks continue. Goods like milk, lumber and auto parts are all under the negotiators’ microscopes. Oil is clearly visible too. Last year, the bilateral trade of energy (including natural gas, oil and power) between the U.S. and Canada was about U.S $55 billion, with oil being 80 percent of the total. Its dollar amount dwarfs other industries, but negotiators may need to view this vital commodity using a different lens. Beyond size, the upstream oil business between America and Canada reveals big shifts in dollar and volume trade over…

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Democrats Furious After Trump Announces 90% Cut To Obamacare Marketing Funds

August 31, 2017 Tyler Durden 0

It appears as though President Trump has just given the Democrats yet another reason to shift the blame for Obamacare’s epic failure to his administration, as ridiculous as that may be.  According to The Hill, the Department of Health and Human Services has just announced that they’ll be slashing the Obamacare advertising budget by 90% for the 2018 plan year, from $100 million down to $10mm. 

Department of Health and Human Services officials said on a call with reporters that funding for advertising and other outreach for ObamaCare enrollment will be cut from $100 million last year to $10 million this year.

 

An HHS official argued the administration is seeing “diminishing returns” from ObamaCare spending.

 

The administration will still be spending some money on signing people up for the law, despite its opposition to ObamaCare.

 

Officials also announced they are cutting funding for “navigators,” which are outside organizations that help sign people up. Funding will be proportional to how navigators have fared in hitting their enrollment target the previous year. If a group signed up 70 percent of their target, they will get 70 percent of the funding.

Obama

Of course, what this really means is that when enrollments start to decline, Nancy Pelosi and Chuck Schumer will have the perfect excuse lined up for immediate distribution via their own personal propaganda machines, CNN, MSNBC, etc., as to why this is all Trump’s fault.

And, right on cue, Schumer has just released the following statement:

Sen. Schumer: “The Trump administration is deliberately attempting to sabotage our health care system.” pic.twitter.com/YjTOqOYQ9J

— Liam Martin (@LiamWBZ) August 31, 2017

You know, because prices surging by 30% every single year couldn’t possibly have any impact on demand, right?

But, lest you forget, Nancy and Chuck have that angle covered too.  You see, as the Wall Street Journal pointed out recently, 2018 Obamacare price increases are also Trump’s fault because his threats to remove the individual mandate and/or cut federal subsidies have thoroughly confused the insurance companies and forced them to raise rates.

Major health insurers in some states are seeking increases as high as 30% or more for premiums on 2018 Affordable Care Act plans, according to new federal data that provide the broadest view so far of the turmoil across exchanges as companies try to anticipate Trump administration policies.

 

Insurers are also concerned about whether the Trump administration will enforce the requirement for most people to have insurance coverage, which industry officials say helps hold down rates by prodding young, healthy people to sign up for plans.

 

In Montana, Health Care Service linked 17 percentage points of its 23% rate increase request to concerns about the cost-sharing payments and enforcement of the mandate that requires everyone to purchase insurance. Kurt Kossen, a senior vice president at Health Care Service, said the company’s rate requests are driven by causes including growing health costs and “uncertainty and the associated risks that exist within this marketplace, including uncertainty around issues like the continued funding of [cost-sharing payments] and mechanisms that encourage broad and continuous coverage.”

 

The impact of potentially losing the cost-sharing payments was also clear in the rates requested by Blue Cross of Idaho, which average 28%. That would probably be in the lower teens if the payments were guaranteed, said Dave Jeppesen, a senior vice president. “It’s a big swing,” he said. “There’s a lot of risk associated with the uncertainty in Congress right now, and we are pricing appropriately for that risk.”

Of course, as we’ve noted multiple times over the past couple of years, Obamacare premium increases are hardly a new phenomenon.  In fact, data from the Department of Health and Human Services recently revealed that premiums across the country soared an average of 113% over the past 4 years, or nearly 30% per year.  Ironically, that 30% is the same hike that many insurers are seeking for 2018…some folks would call that a trend.

 

But, other folks don’t believe in things like math and adverse selection bias that results in deteriorating risk pools and higher costs for insurers…no, they prefer simple, provocative narratives that can be exploited for political gain while masking the real underlying problems of a failed policy that is ruining healthcare for millions of hard working Americans.

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How Long Can U.S. Refineries Remain Offline?

August 31, 2017 Gregory Brew 0

When Hurricane Harvey blew into Texas last weekend, it dumped more than 30 inches of rain, flooding Houston and large areas of southeastern Texas, while leaving thousands homeless or without power. The worst storm to hit the U.S. since 2004 and by some estimates the largest rain-storm in U.S. history, Harvey has had a profound impact on the nation’s largest oil-producing and oil-refining region. Refinery shutdowns, pipeline closures and other consequences of Harvey has sent the Gulf oil industry into a tailspin while throwing oil markets…

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Trump Ending Obama-Era “Dreamer” Program: Report

August 31, 2017 Tyler Durden 0

President Trump is expected on Friday to announce plans to end the Obama-era Deferred Action for Childhood Arrivals (DACA) program which gave a deportation reprieve to hundreds of thousands of young illegal immigrants also known as “dreamers”, Fox News reports. Under DACA, nearly 800,000 people brought to the country illegally as children received work permits and deferral from deportation.

Trump had originally promised to terminate DACA during his presidential campaign, but since taking office had left the door open to preserving parts of it. According to Fox, which cites a senior administration official, Trump will announce the program’s end but will allow so-called “dreamers” currently in the program to stay in the U.S. until their work permits expire – which, for some, could be as long as two years.

The program, which was instituted through an executive order signed by President Obama in 2012, has been facing a legal challenge from Texas and nine other states, which threatened court action to attempt to block it unless Trump rescinds DACA by Sept. 5.

However, on Thursday afternoon, White House officials on Thursday pushed back on the Fox News report, claiming no decision has been made. “A final decision on that front has not been made,” White House press secretary Sarah Huckabee Sanders said during today’s press briefing. “When we have a final decision, this is under review, there are a lot of components that need to be looked at.” She then told a reporter “No offense to your colleagues from Fox News, but I’m better informed than they are … it has not been finalized.”

“A final decision on that front has not been made, and when it is, we will certainly inform everybody in this room,” she said.

White House homeland security adviser Tom Bossert added that “the administration is still reviewing the policy,” and said the lawsuits “won’t affect the policy decision, but it will affect the timing of it. We certainly have to watch the lawsuits and how they matriculate through the courts and when the deadlines will be.”

According to The HIll, Trump and senior administration officials, including White House chief of staff John Kelly, have said they don’t believe DACA would hold up in court, while the DOJ has declined to say whether it would defend the program from the potential lawsuit.

Rumors have been circulating for weeks about how Trump plans to respond to the threat of court action, prompting Democrats, some Republicans and activists to mount a public defense of the program.

 

Rep. Carlos Curbelo (R-Fla.) introduced amendments Tuesday that would prevent public funds from being used to alter the memo that instituted DACA in 2012.

 

And California Attorney General Xavier Becerra (D) said Monday his office was considering mounting a defense of the program if the Justice Department refuses to act.

A plan to allow DACA to simply lapse already has buy-in from conservative groups that want the president to end the program. “Our position has been that President Trump should allow DACA to lapse,” Ira Mehlman from the Federation for American Immigration Reform told Fox News. “As people’s two-year deferments and work authorization expire they should not be renewed.”

Ironically, in an interview with ABC News earlier this year, Trump suggested he might not entirely do away with DACA. “They shouldn’t be very worried,” Trump said of the young people in the program. “I do have a big heart.”

Meanwhile, Democrats on Thursday expressed opposition to the move, referencing the president’s past comments. “If he ends DACA, Trump would betray #DREAMers he said he’d treat w/ ‘great heart.’ These incredible young people make our country stronger,” tweeted Virginia Sen. Tim Kaine, the 2016 Democratic vice presidential nominee.

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Libya Thwarts Suspected Oil Smugglers For Second Time This Week

August 31, 2017 Zainab Calcuttawala 0

A medium-sized oil tanker that was smuggling crude oil in the Mediterranean Sea was apprehended by the Libyan coastguard on Thursday, according to a new report by The New Arab.  The ship, called “Rex,” had ten crew members, all of whom have been captured by the coast guard. Colonal Abu Ajila Abdelbarri told reporters that the crew and boat had been under tight surveillance prior to their arrest in Libyan waters. The tanker flew the Tanzanian flag and carried 1.16 million liters of diesel. The crew contained five Turks, three Georgians…

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