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China’s Managed Decline Ain’t Ever To Be Grand(e), It’s (euro)Dollars

Some wanted to call it China’s Bear Stearns, and over time it may end up being seen that way. And that would be the right way to see it. What Bear’s…

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This article was originally published by Alhambra Investment Market Research

Some wanted to call it China’s Bear Stearns, and over time it may end up being seen that way. And that would be the right way to see it. What Bear’s March 2008 demise had represented was the watershed event for the eurodollar system, the final straw which finally broke the camel’s back. In the same way, CNY’s was broken by this other. 

First, though, Ben Bernanke had made the terrible mistake of thinking his “bailout” of the old Wall Street name would end the crisis. Instead, it began the new monetary era.

What followed from that inflection point wasn’t just the worst planet-spanning financial crisis since the Great Depression. Having little to do with US subprime mortgages, the global reserve monetary system which had supported cooperation and legitimate prosperity throughout much of the world behind eurodollar globalization was cracked like Humpty Dumpty.

All Greenspan’s Horses and all Bernanke’s QE’s could never have gotten it back together again. Instead, all the world’s financial media failed to print poor Humpty’s obituary. 

But in the early days of this monetary regime change it had been assumed the chaos and nagging depressionary effects would only limit prospects across the developed world. Emerging markets were widely believed indestructible and bulletproof even after the events of 2008 and early 2009. Mohammed El Erian’s “new normal” only applied to those places commonly believed directly impacted.

Some would even claim this was the opportunity for particularly China. They could use the crisis to rewrite the rules (goodbye King Dollar!) for a new Chinese Century. Europe and North America would be left behind as Asia and Latin America moved onward without them.

Except, no. There had never been a genuine opening for something to replace the eurodollar (not dollar) standard. Bear Stearns had delivered its fatal wound, but since no one realized how the global system actually worked (yes, I fully realize what I’m saying here) there was nothing plausibly available to take over from it. Just one wasted QE after another.

This meant the entire global economy – and all in it – would have to suffer the deflationary, growth-destroying fallout at some point.

It began to dawn in markets (not stocks) around the time of Euro$ #2 (2011-12). Europe might have been caught directly at the center of that crisis’ crosshairs, but the longer run damage being done was just as potent and lasting as in these other parts in question. Including China.

For their part, the Chinese had reacted predictably to the original dollar shortage in that fateful summer following Bear. It all may have seemed a localized problem of subprime mortgages before then, yet not long afterward the eurodollar breakdown truly went global. By mid-July 2008, even the PBOC got sucked into the swirling vortex just as policymakers at the Fed (and elsewhere) were thinking it was nearly over.

The Communists in China responded as any good standing Keynesians, which, by truth, they’d been taught to be – “loose” monetary policy and a healthy (massive) dose of fiscal spending. As in, waste.

For a temporary recession, who could argue against? This is what the standard textbook says should be done when faced with a transitory shortfall in “aggregate demand.” Though worse elsewhere, still a serious setback for the Chinese.

Euro$ #2, though; maybe China wasn’t so bulletproof, after all. It wasn’t just a hypothetical question pondered at various staff levels at whichever economic or financial authority.

Shock #1: Xi instead of Li.

Shock #2: Shanghai Chaori Solar.

Xi Jinping came to replace Hu in late 2012, and throughout 2013 his “reform” agenda was greeted by Western cheers. The new Communist leader was strengthening, we were told, China’s migration toward the brotherhood of neo-liberal states. All the while, well, Document #9.

This all coalesced into what’s been called Document No. 9; an anodyne name given to what doesn’t really have an official title. It was simply the ninth paper to be published by the Party’s General Office in April 2013, but it was an unappreciated doozy which mapped out the direction China has eventually followed under Xi Jinping.

Chaori would become a quasi-household name that year once trading in its bonds were halted signaling how a default event for them was pretty much inevitable. While distracted via the wrong interpretation of “taper tantrum” on this side of the Pacific, the markets in China were embroiled in a confusing ocean of sudden chaos during the hottest months of 2013 (the Summer of SHIBOR).

If one might have wondered why Reflation #2 ended up being so short and amazingly condensed, finished off after only a few months by early September 2013 in eurodollar futures, Chaori would’ve been a good place to start looking for global answers. Its somewhat meandering story, and ultimately its fate, were looked on as part of Xi’s commitment to a more market-oriented approached when in fact it was really would be China’s Bear.

A monumental breakdown and regime change far more significant than the minor trivia about a small company’s missed coupon payment. As their “Bear”, this didn’t mean, however, the start of a panic or crisis, rather something far worse. It was the moment when the eurodollar finally caught up to China.


Defaults weren’t “allowed” over there before, not during the nominally capitalist phase of Socialism with Chinese Characteristics. This had actually been one of the West’s most fervent complaints, how the Communists weren’t playing “fairly” when artificially propping up or subsidizing anyone remotely connected to a local government minister.

To then, in 2013, send signals the game had changed it was believed the changing game was political rather than economic; it was economic before it became political. Xi had realized, or at least had begun to seriously suspect after Euro$ #2, the game which changed was the entire global economic arrangement.

If the economy worldwide wasn’t going to be the same after the US Bear Stearns, and it wasn’t, this would almost inevitably mean the same for China. The road to the 19th Party Congress (2017) began with Chaori, and Li Keqiang was given (by Xi who hadn’t yet fully consolidated his powerbase) only the one more chance (2016’s One Final Keynes!) to pull the Chinese off of it.

That one little default really had been a watershed if not in the ways corrupted Western imaginations stuffed with QE’s could have imagined. The brave new world post-Chaori in China has been the Chinese adapting to the same post-Bear everywhere else. By letting this one firm go down, the Communists were throwing in the towel on China’s several decades of its capitalism phase.

Ever since, officials there (and here) have given many different slogans and thrown around various names, but the only label which comes anywhere close to accurately describing the situation is: managed decline. That – more than anything – is what Chaori had meant, announcing the transition to those able to interpret properly, and why over time it has been near exactly like Bear Stearns.

Now Evergrande.

Before this latest one, however, defaults had become more commonplace. Again, this consistent with managed decline rather than neo-liberalism. As I keep writing, China is not going to ride to the world’s reflationary rescue because there’s no point if the global economy remains in the same post-Bear broken state.

Here’s an example of official policy in action from July this year:

China’s corporate bond defaults have hit a record high this year, highlighting tightening credit conditions and a growing reluctance by regional governments to bail out troubled state-owned firms.

Except, again, no; not a “growing” reluctance at all. This is no new development catching authorities offguard. 

The Chinese economy, like the global economy, is in terrible shape. It hadn’t recovered from the last one, the Great “Recession”, and there’s every reason to believe we will all simply repeat the futility after this latest one (the “COVID” “recession”). As I have been writing since October 2017’s 19th Congress, the Chinese have been working tirelessly to batten down the hatches rather than waste their time bothering to piece together “rescues.”

Decline is near certain, whether it can be sufficiently managed is the actual challenge which remains. 

Evergrande is a much bigger one, no doubt, but in some ways it has already been part of the “plan.” Authorities over in China will do whatever they must to maintain calm and order in the short run – the “managed” part of managed decline – if only to keep the Chinese people (and Western “observers”) from realizing what’s truly at stake, which is a hell of a lot more than potential short-term market disruption.

Evergrande, therefore, isn’t really their “Lehman” because they’ve been working it out, generally speaking, for already seven and a half years since Chaori. To many especially here outside China, Evergrande will come as a shock if only because they never realized what early 2014 had already proposed

Evergrande, therefore, comes as a shock in the context of 2021’s “growth scare.” So much of the “growth” Economists and central bankers have been counting on was supposed to be Chinese. Suddenly seeing those chances through the lens of this property developer, and how its fate looks a lot like Chaori, what little of “recovery” possibility gets dimmed that much more; Evergrande ain’t something new, merely the biggest so far making what it really represents (not inflation) that much harder to ignore.

The world cannot be the same as it was before Bear. Either one.


Slowing Down, Yes, But To What?

A couple of Economists have caused some noise by reviewing consumer confidence estimates in the United States, associating big declines in them with imminent…

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A couple of Economists have caused some noise by reviewing consumer confidence estimates in the United States, associating big declines in them with imminent recession, and then pointing out such substantial drops in both of the major consumer sentiment surveys just recently. If valid, their correlations would seem to suggest a US contraction.

We’re meant to take these seriously for one of those academics, David Blanchflower of Dartmouth, had once “set interest rates at the BOE during the 2008 financial crisis.” Hardly a good place to start winning converts.

He and his co-author Alex Bryson of UCL are pretty adamant:

The economic situation in 2021 is exceptional, however, since unprecedented direct government intervention in the labor market through furlough-type arrangements has enabled employment rates to recover quickly from the huge downturn in 2020. However, downward movements in consumer expectations in the last six months suggest the economy in the United States is entering recession now.

The Conference Board’s more optimistic measure has indeed become far less lofty very quickly. And while the University of Michigan’s sentiment index never rebounded near as much, it has likewise fallen backward when it should be surging in recovery. The latter’s newly released preliminary assessment for October 2021, increasingly free from delta COVID’s influences on governments, wasn’t good; slightly lower after a slight gain in September.

Scraping along the bottom:

Whether this means recession or not may be beside the point. What is the point is how even academic Economists can’t help but notice how the US and global Economy is not in any shape like what’s been said all year and predicted for the rest. I seem to recall the term “red hot” being thrown around by unassailable luminaries as if a certainty.

The economy certainly had accelerated earlier but not for economic reasons; the non-economic interference of global fiscal policies, especially those of the US federal government.

Typically, academics see such intervention as thoroughly positive not just in the short run more so believing these programs dependably contribute much to the intermediate and longer-term trajectory – even as experience consistently shows they never do.

Since April or May, a global slowdown at first denied has slowly become practically undeniable as more and more the weak data comes back and sticks around. This is also true of “inflation”, the other side of transitory, the downslide of the camel humps in whichever consumer, producer, or now trade price index.

The third of the BLS’s series after first the CPI then next PPI is import prices, along with export prices. Even the latter, export prices, which have been more impressive than the far less impressive import index (though it might seem from mainstream commentary it would be the other way around), these indices are more clearly bending.

Toward what? Recession?

Not necessarily. Given consumer confidence as well as more substantial indications like real yields (TIPS; see: below), it may be a more reasonable question to ask whether or not the global economy ever actually got out of the last one.

If that’s really the case, then for all Uncle Sam’s efforts all it did was fool people into believing inflation and recovery (which many, maybe the vast majority still believe) when in fact those weren’t really happening. That technically makes this current weak spot at least a slowdown, but more appropriate one toward an economy merely reverting to its actual economic state increasingly unbound by non-economic interventions.

The growing response to the downshift is somewhat interesting; “everyone” is beginning to sense and admit the weakness, but they won’t let go of the inflation. Therefore, more and more the term stagflation is being thrown around regardless of the recession question – because people have been led to believe inflation is something it is not.

As I noted recently, however, if this really is serious and enduring weakness, a reversion back to the non-recovery state, the type of “flation” has already been decided.

The Economist considers this as higher potential for “stagflation”, a term popularized during and about the Great Inflation of the 1970’s. It also made a comeback around 2010 and 2011 – not that anyone remembers now. Quite simply, without the money for inflation what’s left is just the stagnation; which very succinctly and accurately describes the decade which followed 2010 and 2011.

Is this time really different? So far, the stagnation is proceeding almost as if right on schedule; the non-central bank schedule.

No need to call it stag-deflation because that’s just redundant. In other words, as the renewal of stagnation grows larger on the horizon, settling the label’s other half is already being taken care of.

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China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

One week ago we discussed why the "worst case" scenario for China’s…

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China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

One week ago we discussed why the "worst case" scenario for China's property crisis is gradually emerging; to this we can now add that China's worst case energy crisis scenario is also about to be unleashed as cold weather swept into much of the country and power plants scrambled to stock up on coal, sending prices of the fuel to record highs.

Electricity demand to heat homes and offices is expected to soar this week as strong cold winds move down from northern China, according to Reuters with forecasters predicting average temperatures in some central and eastern regions could fall by as much as 16 degrees Celsius in the next 2-3 days.

Shortages of coal, high fuel prices and booming post-pandemic industrial demand have sparked widespread power shortages in the world's second-largest economy. Rationing has already been in place in at least 17 of mainland China's more than 30 regions since September, forcing some factories to suspend production and further disrupting already broken supply chains.

On Friday, the most-active January Zhengzhou thermal coal futures closed at a record high of 2,226 per tonne early. The contract has risen almost 200% year to date.

China's three northeastern provinces of Jilin, Heilongjiang and Liaoning - also among the worst hit by the power shortages last month - as well as several regions in northern China including Inner Mongolia and Gansu have started winter heating, which is mainly fuelled by coal, to cope with the colder-than-normal weather.

Meanwhile, even though Beijing has taken a slew of measures to contain coal price rises including raising domestic coal output and cutting power to power-hungry industries and some factories during periods of peak demand, so far all measures have failed with coal surging by 40% in just the past three days. Beijing has also repeatedly assured users that energy supplies will be secured for the winter heating season, and went so far as to order energy firms to "secure supplies at all costs." Well, the energy firms heard it, because on that day, thermal coal closed at 1,436 yuan. Two weeks later it is some 800 yuan higher.

Unfortunately for Beijing, the power shortages are expected to continue into early next year, with analysts and traders forecasting a 12% drop in industrial power consumption in the fourth quarter as coal supplies fall short and local governments give priority to residential users.

Earlier this week, we reported that China undertook its boldest step in a decades-long power sector reform when it allowed coal-fired power prices to fluctuate by up to 20% from base levels from Oct. 15, enabling power plants to pass on more of the high costs of generation to commercial and industrial end-users. read more

Steel, aluminium, cement and chemical producers are expected to face higher and more volatile power costs under the new policy, pressuring profit margins.

Meanwhile, the latest Chinese "data" on Thursday showed factory-gate inflation in September hit a record high; but since thermal coal is the one commodity that correlates the closest to PPI, absent a sharp drop in coal prices in the next few weeks, expect the next PPI print to be far higher. Meanwhile as the power crisis leads to further shutdowns in domestic production, some banks - such as Nomura - have gone so far to predict that China's GDP is set to shrink in coming quarters.

China, which laughably aims to be "carbon neutral" by 2060 even as its president announced he will skip the COP26 UN Climate Change Conference in Glasgow, has been "trying" to reduce its reliance on polluting coal power in favor of cleaner wind, solar and hydro. But coal remains the source for some 70% of China's electricity needs.

Of course, China is not the only nation struggling with power supplies, which has led to fuel shortages and blackouts in many European countries. and threatens to send US heating bills up as much as 50% this winter. he crisis has highlighted the difficulty in cutting the global economy's dependency on fossil fuels as world leaders seek to revive efforts to tackle climate change at talks next month in Glasgow.

China will strive to achieve carbon peaks by 2030, Vice Premier Han Zheng said in a video message at the Russian Energy Week International Forum, according to state-run news agency Xinhua late on Thursday. He also said that China and Russia are important forces leading the energy transition and they should cooperate and ensure smooth progress of major oil and gas pipeline and nuclear power projects.

Translation: Russia better save that nat gas and not ship it to Europe as China will soon be needed even BCF Russia an provide. As for China


Tyler Durden Fri, 10/15/2021 - 22:50
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Aluminum Shortages Next As “Magnesium Supply Dries Up”

Aluminum Shortages Next As "Magnesium Supply Dries Up"

This week, the largest US producer of aluminum billet used to make automobiles and…

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Aluminum Shortages Next As "Magnesium Supply Dries Up"

This week, the largest US producer of aluminum billet used to make automobiles and building supplies told customers and business associates that output capacity might be curtailed in 2022 due to a lack of magnesium supply.

"In the last several weeks, magnesium availability has dried up, and we have not been able to purchase our required magnesium units for all of 2022," Matalco Inc. President Tom Horter said in the letter obtained by S&P Global Platts

Difficult-to-source supplies of raw materials and soaring energy prices are adding to the headwinds, Horter said in the letter. 

"The purpose of this note is to provide this advanced warning that, if the scarcity continues, and especially if it becomes worse, Matalco may need to curtail production in 2022, resulting in allocations to our customers," he said. 

Horter said his company will source as much magnesium as possible and other raw materials, such as silicon, to maintain its planned production output for 2022. The warning comes as he told customers they should have contingency plans if supplies tighten. 

Aluminum billet cannot be produced without magnesium, which is a strengthening agent and allows it to be strong enough to be used in structural applications, such as automobile frames, engine blocks, and body panels. 

"We will provide an update in a couple of weeks," Horter said. "In the meantime, you may want to consider letting your customer base know of this silicon and magnesium availability crisis and also let them know that other products or inputs needed for making billet or slab may also reach a crisis point."

Horter added other challenges such as the cost of energy, labor, and shipping are increasingly mounting. 

Alcoa is another major US aluminum producer that also warned about shortages of magnesium and silicon. Without these two ingredients, both manufacturers cannot produce aluminum billet products. A reduction in US output would tighten global supply even further. 

The macro backdrop of the aluminum industry is a complicated one. First, a military coup in Guinea last month stoked concerns over the supply of bauxite, a sedimentary rock with high aluminum content. Then the closure of energy-intensive smelters in Asia and Europe have tightened global supplies and forced LME prices to record highs. 

The latest surge in industrial metals will continue to pressure inflation higher. 

So much for the Federal Reserve's "transitory" narrative. Higher costs will push up prices for new cars and other products made of aluminum.

Tyler Durden Fri, 10/15/2021 - 22:10
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