Well written piece about shorting China; the author is wrong about being late to the game, however. Here’s one reason why. As for all that other stuff going on, Mark Steyn nails it; name one concrete act you absolutely know a candidate will actually do in 2017. QED. Jason Riley also talks common sense. And if you had any doubt that it’s getting really weird out there…
Deutsche Bank AG’s ability to pay the coupons on its 4.6 billion euros ($5 billion) of additional Tier 1 bonds hinges on an accounting metric that is separate from the standard results investors focus on.
The limiting factor for the bank’s capacity to make coupon payments — which aren’t mandatory, unlike interest payments on senior debt — are its “available distributable items,” a category defined in Germany’s commercial code. The starting point for the calculation is the lender’s net income, but not the headline net income the bank reports on earnings day. In this case the term refers to the unconsolidated result of the group’s German parent company, and it’s calculated according to German accounting principles, not international rules. The main difference between the accounting regimes is that the German commercial code is more focused on creditors’ interests than those of shareholders, resulting in a more conservative valuation of assets. International rules, by contrast, mark asset values to market prices, making the results more volatile. In 2014, Deutsche Bank reported German-code net income of 1.263 billion euros, compared with net income of 1.691 billion euros according to International Financial Reporting Standards, or IFRS. Added to that starting point are profits carried forward from previous years and distributable reserves. This allows companies in principle to pay dividends or coupons even when they report an annual loss, assuming they have enough reserves set aside. Deutsche Bank’s additional distributable items based on that category totaled 6.332 billion euros in 2014. This sum is then subject to deductions, starting with losses carried forward and funds that are blocked from distribution under Germany’s commercial code. Those blocked items include the value of self-developed intangible assets, such as intellectual property; unrealized gains on assets held for pension liabilities; and deferred tax assets, the biggest item in Deutsche Bank’s case. The lender had 5.483 billion euros of blocked amounts in 2014, 3.561 billion euros of which were deferred tax assets. All told, Deutsche Bank’s available distributable items totaled 2 billion euros in 2014. The company said on Monday that it expected to have 4.3 billion euros available next year.
“In 2016, our payment capacity is expected to be approximately 1 billion euros, more than sufficient to service an AT1 coupon of approximately 350 million euros on April 30, 2016,” Chief Financial Officer Marcus Schenck said on Feb. 8. “In 2017, we anticipate that our AT1 payment capacity will be approximately 4.3 billion euros before the effect of this year’s operating results, driven in part by the disposal of our 19.99 percent stake in Hua Xia Bank, which we anticipate in mid-year 2016, in addition to our existing reserves.”
Bank accounting needs relative simplicity and transparency, not this gibberish. What on earth are these banks and regulators thinking?
From 1750 to the present, human activities put about 580 billion metric tons, or gigatons, of carbon into the atmosphere — which converts into more than 2,000 gigatons of carbon dioxide (which has a larger molecular weight). We’re currently emitting about 10 gigatons of carbon per year — a number that is still expected to rise further in the future. The study therefore considers whether we will emit somewhere around another 700 gigatons in this century (which, with 70 years at 10 gigatons per year, could happen easily), reaching a total cumulative emissions of 1,280 gigatons — or whether we will go much further than that, reaching total cumulative levels as high as 5,120 gigatons.
In 10,000 years, if we totally let it rip, the planet could ultimately be an astonishing 7 degrees Celsius warmer on average and future seas 170 feet higher than they are now.
Okay kiddies, go ask your little friends to pick the correct percentage: is horrible CO2 50% of air, 40%, 30%, 20%, 10% or 1%? Answer: none of the above.
One of the most important features in the design of a CoCo is the definition of the trigger (ie the point at which the loss absorption mechanism is activated). A CoCo can have one or more triggers. In case of multiple triggers, the loss absorption mechanism is activated when any trigger is breached.
Triggers can be based on a mechanical rule or supervisors’ discretion. In the former case, the loss absorption mechanism is activated when the capital of the CoCo-issuing bank falls below a pre-specified fraction of its risk-weighted assets. The capital measure, in turn, can be based on book values or market values.
Book-value triggers, also known as accounting-value triggers, are typically set contractually in terms of the book value of Common Equity Tier 1 (CET1) capital as a ratio of risk-weighted assets (RWA). The effectiveness of book-value triggers depends crucially on the frequency at which the above ratios are calculated and publicly disclosed, as well as the rigour and consistency of internal risk models, which can vary significantly across banks and time. As a result, book-value triggers may not be activated in a timely fashion.
Market-value triggers could address the shortcoming of inconsistent accounting valuations. These triggers are set at a minimum ratio of the bank’s stock market capitalisation to its assets. As a result, they can reduce the scope for balance sheet manipulation and regulatory forbearance. However, market-value triggers may be difficult to price and could create incentives for stock price manipulation. The pricing of conversion-to-equity CoCos with a market-value trigger could suffer from a multiple equilibria problem.
More specifically, since CoCos must be priced jointly with common equity, a dilutive CoCo conversion rate could make it possible for more than one pair of CoCo prices and equity prices to exist for any given combination of bank asset values and non-CoCo debt levels. Furthermore, under certain circumstances, holders of CE CoCos may have an incentive to short-sell the underlying common stock in order to generate a self-fulfilling death spiral
There are more than $80 billion of these things outstanding, whatever they are. Further, regarding Deutsche Bank: “The cost of protecting the company’s subordinated debt from default for five years using credit-default swaps has more than doubled since the end of 2015, rising to 420 basis points, a four-year high, from 187.” Not good. Note that the last BIS paragraph above sounds a lot like Bear Stearns, Lehman, AIG, etc.
NYRB of all places:
I was stunned by the sight of 2,000 centrifuges in two cascade halls and an ultramodern control room. Although I and other nonproliferation experts had long believed that North Korea possessed a parallel uranium-enrichment program–and there was ample evidence for such a belief –– I was amazed by its scale and sophistication. Instead of finding a few dozen first-generation centrifuges, we saw rows of advanced centrifuges, apparently fully operational. Our hosts told us that construction of the centrifuge facility began in April 2009 and was completed a few days before our arrival. That is not credible, however, given the requirements for specialty materials, as well as the difficulty of making the centrifuge cascades work smoothly.
Exactly how North Korea gathered both the materials needed and the plans to build such a facility is not clear. Some of the scientists who operate the Yongbyon facility were originally trained in Russia but the present generation appears to have been trained in North Korea. The construction of the first reactor began in 1980. The choice of its fuel—natural, unenriched uranium–was dictated by the limitations of the country: at the time there was no enriched uranium and no supply of heavy water. Using open-source information, the North Koreans copied the design of the first British plutonium producing reactors, which had been built in the 1960s with the intent of producing weapons-grade plutonium. These reactors, called Magnox reactors, were long ago abandoned in Britain but they continue to function in North Korea today. Magnox is an alloy of magnesium with a small amount of aluminum that is used to clad the fuel elements, which are made of unenriched uranium.
All reactors need a “moderator” to slow the neutrons produced in fission. In the Magnox reactors graphite was used. It should be noted that reactors that use unenriched uranium for fuel are ideal for manufacturing plutonium. That is because this uranium is over 99 percent uranium 238 and the plutonium producing process begins when a uranium 238 nucleus absorbs neutron. The Arak reactor in Iran, which was to be moderated by heavy water, was also designed to use natural uranium fuel. Unlike reactors that are used primarily to generate electricity, these Magnox reactors are designed so that the fuel elements can be changed every few months—allowing the plutonium to be extracted. Leaving the fuel elements in too long produces unwanted isotopes, which make the extracted plutonium less suitable for weapons.
It is known that, beginning in the early 1990s, the Pakistani proliferator A.Q. Khan exchanged centrifuge technology for North Korean missiles, in a deal that likely involved the Pakistani government. The exchange was facilitated by the use of Pakistani military aircraft. Around 2000, some twenty-four Pakistani centrifuges were delivered to North Korea. These were presumably of the old type and do not explain how, by 2010, the North Koreans had an ultramodern facility with thousands of advanced centrifuges in operation. Constructing such a centrifuge requires highly specialized materials such as maraging steels (low-carbon steels made from alloys of several metals). Where did these come from?
Iran, which has more advanced centrifuges than the early Pakistan centrifuges, has been suggested, though it’s unclear what the quid pro quo would have been. That the North Korean centrifuges seen by Hecker and his colleagues appeared to be more advanced than the ones in general use in Iran may be explained by the fact that both the Iranians and the North Koreans received from Pakistan the same or similar versions of an older centrifuge design. Both reverse-engineered this design and both used this information to produce upgraded versions. We know that most of the enrichment done in Iran until now used versions of the older centrifuge design, with the newer ones not yet fully deployed. We do not know what stages were followed in North Korea, since Hecker was shown only the facility with the newer centrifuges.
Hecker estimates that North Korea currently has enough fissile material for eighteen bombs, with the capacity to produce six or seven a year. So far the North Koreans have tested four devices, the first three of which certainly used plutonium.
Gosh, North Korea and Iran again. Apparently the longest range ICBM’s of NK can reach the West Coast now, and the UN does the same blah-blah with another Strongly Worded Communiqué. It’s been nine years since the Israel-US raid on the facility in Syria that got its nuclear materials from NK (see here and here). Obviously the facility was to assist Iran’s nuke program, and the ICBM is likely a joint venture too. Gee, what a good idea to give them $150 billion to fool around with. This is yet another thing that is going to end very badly.
Ali was born in 1995 and joined the Islamic State in 2008, at the age of 13, he told me. He was trained as an assassin and given his first mission two years later. He and three friends were sent to kill four Iraqi police officers in Mosul. The group tracked the men down, executed them with shots to the back of their heads and buried them where they fell. Ali said he had killed eight or nine men in battle, not including the five he’d beheaded.
I asked him to tell me about the peshmerga soldier whose head he cut off. In a soft, compliant voice, he told me he had pushed the Kurdish soldier belly-first onto the ground in front of him. He placed his knee in the man’s back and then severed the neck with a bayonet. Did Ali have a message for the families of the peshmerga he’d beheaded? He went quiet for a second, and then his face screwed up very tightly and he began to sob.
If all of that is true, then Ali had indeed been a dangerous terrorist, and the world is safer with him behind bars. But he had also been a child soldier, a vulnerable boy coerced into becoming a terrorist. I interviewed many other fighters like him, some just 14 years old when the Islamic State came to their villages and compelled them at gunpoint to join.
The Islamic State commits despicable acts of cruelty, but the men who carry out these crimes are not the two-dimensional caricatures they’re painted to be. They are human beings, many indoctrinated at the most impressionable age and coerced into service.
A few weeks after the interviews, I saw a photo taken after a battle between the Kurds and the Islamic State near Sinjar, Iraq. In the lower left-hand corner is the body of a militant, his head just out of the frame, blood pooling by his left shoulder. His name is Abdul Aziz Faraj Yusuf, age 16. I’ve seen a lot of photos of dead Islamic State fighters, but as I reread the boy’s age, I felt something different. Gone was the sense of retaliatory satisfaction. This was a dead child. I wasn’t angry anymore. I was heartbroken.
Poor apostates Ali and Abdul.
these ninety-four naturally occurring elements are not evenly distributed and they have very obvious military applications. For example, the F-35 Joint Strike Fighter is like a flying periodic table, containing 920 pounds of beryllium, gallium, lithium and tantalum, not to mention the titanium used for a quarter of the airframe. The strategic problem is that the US relies on imports for about 75 per cent of its rare earth metals. China controls about 40 per cent of rare earth metal production, though places such as Afghanistan are also generously endowed.
China’s financial sector will have loans and other financial assets of $30 trillion at the end of this year, up from $9 trillion seven years ago, said Charlene Chu, an analyst in Hong Kong for Autonomous Research. “The world has never seen credit growth of this magnitude over a such short time,” she said in an email. “We believe it has directly or indirectly impacted nearly every asset price in the world, which is why the market is so jittery about the idea that credit problems in China could unravel.”
Headline figures for bad loans in China most likely do not capture the size of the problem, analysts say. In her analysis, Ms. Chu estimates that at the end of 2016, as much as 22 percent of the Chinese financial system’s loans and assets will be “nonperforming,” a banking industry term used to describe when a borrower has fallen behind on payments or is stressed in ways that make full repayment unlikely. In dollar terms, that works out to $6.6 trillion of troubled loans and assets.
After a previous credit boom in the 1990s, the Chinese government provided financial support to help clean up the country’s banks. But the cost of similar interventions today could be dauntingly high given the size of the latest credit boom. And more immediately, rising bad debts could crimp lending to strong companies, undermining economic growth in the process. “My sense is that the Chinese policy makers seem like a deer in the headlights,” Mr. Balding said. “They really don’t know what to do.”
Consider the case of China’s mammoth steel industry. It grew from about 70 million tons of production in the early 1990s to 825 million tons in 2014. Beijing’s tsunami of cheap credit enabled China’s state-owned steel companies to build new capacity at an even more fevered pace than the breakneck growth of annual production. Consequently, annual crude steel capacity now stands at nearly 1.2 billion tons, and nearly all of that capacity — about 65% of the world total — was built in the last ten years. Needless to say, it’s a sheer impossibility to expand efficiently the heaviest of heavy industries by 17X in a quarter century.
825 million tons? When we were at Citibank, lending to coal mining and steel companies 40 years ago, US steel industry production, per AISI, was around 100 million tons per year, and it still is. By comparison, 825 million tons seems just nuts. We know a lot about this, and 825 is off the charts, absent a war larger than WWII.
So China has not just a financial problem, it has a huge excess capacity problem, and both are in need of restructuring. But, as PWC notes, China doesn’t have a restructuring industry. In the years after Penn Central and W.T. Grant, a large financial/legal/operational industry arose in the US, focused on corporate restructurings in and out of bankruptcy. (We worked for a time with one of the industry pioneers.) It is very difficult to see how China will effect large financial and industrial restructurings without the legal, operational and financial infrastructure to do so. So that “deer in the headlights” comment above seems about right to us. Stay tuned.
Economic growth is slowing as the Chinese economy cools off. Oil and commodity prices are plummeting. The U.S. Federal Reserve is beginning to increase interest rates at the same time that Europe and China are engaging in looser monetary policies. And the Bank of Japan just introduced negative interest rates to stimulate growth. A byproduct of this macroenvironment is significant changes in currency exchange rates (FX); namely the strengthening of the U.S. dollar versus key global currencies.
Consider what has happened in the last 18 months. The Russian ruble has lost more than half its value versus the U.S. dollar, and the Brazilian real isn’t far behind. Canada is feeling the hangover of the global commodity bust with a 30% decline, and the euro and British pound have weakened 20%. The upshot is that aircraft, parts and aviation fuel are generally priced in U.S. dollars. So how is this FX volatility impacting aerospace suppliers?
For U.S. suppliers, the news is mostly negative. Prices for equipment and services have effectively increased for customers outside the U.S., and most costs are born in dollars. The immediate impact has been in the aftermarket, where maintenance, repair and overhaul demand in Europe and Latin America declined over the last 18 months as airlines struggled with a weak revenue environment and higher costs for aircraft parts and services. Business aircraft manufacturers are also affected, as some of the key markets for large-cabin aircraft are beset with currency weakness. A Gulfstream G650 order by a Russian oligarch 18 months ago for 2.2 billion rubles now costs 4.9 billion rubles. It’s no wonder that production rates of large business jets are now falling.
In contrast, there is some positive news for European suppliers—particularly those that price in U.S. dollars with significant cost elements in euros. At Dassault, for example, each one cent weakening in the euro/U.S. dollar rate can add €8-10 million ($8.7-11 million) to the bottom line. For Airbus, which prices 70% of its revenue in U.S. dollars, the same figure is €100 million. Results are even more significant for companies with labor-intensive activities such as aerostructures or aircraft maintenance. To what extent this tailwind contributes to the bottom line, of course, depends on a company’s currency-hedging policies.
What about the elephant in the room: the potential impact on the huge backlog of air transport aircraft? Here, the story gets fascinating—particularly when combining higher local aircraft prices with 60-70% lower fuel prices. Consider an airline such as Lion Air, which placed a massive $21.7 billion order (list prices) for 29 Boeing 737-900s and 201 737 MAXs in 2011. Since then, the Indonesian rupiah has weakened 40% at the same time that economic growth in Southeast Asia has declined. The 180 trillion rupiah deal now costs 295 trillion rupiah. If these conditions don’t change, it will be just a matter of time before airlines such as Lion, Gol (Brazil) or even European carriers begin to cancel or defer orders when progress payments are due in a few years’ time.
Why hasn’t there been a larger FX impact on the air transport aircraft backlog? In part this may be due to the financial breathing room for many airlines created by plummeting fuel prices. With aviation fuel priced in U.S. dollars, U.S. airlines have posted record profits, although in other countries weaker currencies offset fuel-cost reductions. All eyes are focused on the volatile nature of fuel prices, while the shifts in FX are generally more gradual.
FWIW, we’ll be surprised if the Fed raises rates in the current deflationary cycle, but then again, we’ve been surprised before.
The New York Stock Exchange wants to abolish one of its controversial rules, Rule 48, last used during volatile trading in August. The rule allows market makers to delay opening a stock when markets are volatile and was widely criticized and blamed for exacerbating big swings on August 24, when the S&P 500 and Dow industrials plunged shortly after the open. The exchange plans to file proposed revisions with the Securities and Exchange Commission to “enhance and simplify” Rule 15 and Rule 123D, which would eliminate the need for Rule 48, according to an NYSE spokesperson. A revised Rule 15 would require market makers to publish pre-opening indications if prices change 5% or more. On extremely volatile days, defined by a 2% price change in E-mini S&P 500 futures as of 9:00 a.m. Eastern, market makers would be required to publish pre-opening indications when prices move 10% or more. A revised rule 123D would allow market makers to open securities electronically unless there is a price change of 4% from the last sale or if the opening trade would be more than 100,000 shares. On volatile days the percentage requirement would be doubled.
So it’s not just the universities.
The situation grew more tense after billionaire investor George Soros predicted at the World Economic Forum gathering in Davos, Switzerland, recently that “a hard landing is practically unavoidable” for China’s economy. He said he is betting against commodity-producing countries and Asian currencies as a result.
Days later, a commentary appeared in China’s state-run Xinhua News Agency warning that “radical speculators” trying to short sell, or bet against, the Chinese currency would “suffer huge losses” as the Chinese monetary authority takes “effective measures to stabilize the value of the yuan.”
Hayman Capital began betting against the yuan last year after studying China’s banking system and being stunned at its rapid expansion of debt. The firm’s analysis suggested that past-due loans, which currently stand at about 2% of the total, would rise sharply and eventually require an injection by the central government of trillions of dollars of yuan to recapitalize the banks. An expansion of the Chinese central bank’s balance sheet would lead its currency to weaken, just as the dollar depreciated when the Federal Reserve bailed out U.S. banks during the financial crisis.
Well, if even the hedge funds have figured it out, it’s all over but for the shouting. Folks, you can’t quickly go from $7 trillion to $30 trillion in debt (in a $6-10 trillion GDP economy) to build empty cities, and think that won’t have consequences.
Gotta love that Comedy Gold bit above about the radical speculators who will suffer huge losses. That’s Chanos 3 Commie talk. We suppose they could send out hit squads, but that’s about it. It’s difficult to short bonds, and shorting financial stocks is no picnic when there’s such potential governmental monkey business, so betting against the yuan would appear to be a sound strategy.
A 19-strong group of young men attacked staff at a centre for refugee children in Sweden with makeshift weapons, forcing them to barricade themselves inside a room. The men in their care rioted at the accommodation centre in Emmaboda, south-east Sweden, on Wednesday night and staff members were only freed when police arrived. The incident follows the stabbing of Swedish aid worker, Alexandra Mezher, 22, who died as she tried to break up a fight at a shelter for unaccompanied child refugees in the country. In the latest incident, the Swedish newspaper Expressen, quoting Ingela Crona from the local police in Kalmar, reported that a violent riot broke out at the centre. ‘They broke loose, and a total of 19 people banded together and did this,’ she told the newspaper, which reported that the men were carrying makeshift weapons. The violence started after staff refused a request for a resident at the refugee centre to buy sweets
A police chief commented on another matter: ‘We do not wish to point fingers to a specific group, but we are talking about boys without a parent or guardian’. Tick Tick Tick
The Bank of Japan has adopted negative interest rates in an unprecedented move that highlights pervasive weakness in the economy. In its first benchmark rate move in five years, the BoJ has adopted a level of -0.1 per cent, from 0.1 per cent previously. The BoJ moved just hours after releasing a slew of insipid data
Insipid? Bonus fun: Sweden, Switzerland, Germany and others have negative interest rates. And from Memory Lane, looking back to the time when Japan was set to take over the world, and the grounds of the Imperial Palace were worth more than all of South America.
This language seems a little overwrought. We were going to repost this from a decade ago. China’s GDP is 6x what it was back then, or a significant fraction of that, taking into account Chanos 1. Oh yeah, back in the day of that earlier piece, Google had barely been invented and there was no such thing as an iPhone. No doubt the readjustment in China is going to be very tough, but none of us really knows how it will turn out.
China is ramping up efforts to halt a flood of money leaving the country in response to an economic slowdown, moves that risk undermining Beijing’s ambition to elevate the yuan’s profile on the world stage. Its latest steps involve curbing the ability of foreign companies in China to repatriate earnings, shrinking the pool of Chinese yuan available for banks in Hong Kong to make loans, and banning yuan-based funds for overseas investments, people with direct knowledge of the matter said.
The measures, most of which haven’t been publicly disclosed, follow efforts by China’s central bank to discourage investors from betting against the yuan and to crack down on overseas money transfers. “They’re sparing no effort to prevent capital outflows,” said a senior Chinese banking executive close to the central bank. “All the measures are the most aggressive I’ve seen in recent history.”
The central bank on Monday started to impose reserve requirements on Hong Kong-based yuan deposits parked by offshore banks at a Bank of China Ltd. unit, said the people familiar with the matter. The new rule effectively reduces the amount of yuan funds in Hong Kong’s banking system by about 150 billion yuan ($23 billion), estimates China economist Larry Hu at Macquarie Securities, a Sydney-based investment bank. Yuan deposits total about 1 trillion yuan in Hong Kong. “The central bank is squeezing liquidity in Hong Kong so it will be more expensive to wager against the yuan offshore,” Mr. Hu said.
That’s not all that China is doing in Hong Kong.
Via Foreign Policy:
Corruption is a long festering canker on both the work and popular reputation of China’s Communist Party, and one that Chinese President Xi Jinping’s predecessors also sought to combat. But Xi has undertaken the task with unprecedented zeal and acumen. Scything through the Chinese Communist Party’s cadre ranks, Xi’s deputies — most prominent among them the Politburo Standing Committee member Wang Qishan and the Central Commission for Discipline Inspection (CCDI) which he commands — have felled officials of both high and low rank, or as Xi himself put it in a memorable phrase, both “tigers and flies.”
To date, tens of thousands have been swept out of office. Whether their fortunes have suffered primarily because of their corrupt acts — or rather, as many both inside and outside of China argue — as a direct or indirect result of Xi’s consolidation of power remains, nearly three years into Xi’s tenure, an open and hotly debated question.
Of the 1,460 felled, the vast majority are officials at the local and provincial level. Officials can be sorted among the fields of mining, petroleum, law and law enforcement, media, military, real estate, and rail. But there are also sizeable groups in the fields of higher education (78) and public security (36, including former oil czar and head of internal security Zhou Yongkang and the recently sentenced vice-minister for security Li Dongsheng). One hundred seventy-five of those in the database worked for state-owned enterprises.
Two hundred thirty-two individuals have been sentenced under criminal law; of those, 198 have been condemned to at least ten years’ imprisonment. Fifty of those have been sentenced for life (or handed a suspended death sentence, which generally becomes a life sentence), and eight are slated for execution.
BTW, you better get those GDP numbers right, or else.