Rehypothecation 101: China style

[Terpentin]

from ZH

http://www.zerohedge.com/news/how-chinas...ld-economy

Quote:One of the key stories of 2011 was the revelation, courtesy of MF Global, that no asset in the financial system is "as is", and instead is merely a copy of a copy of a copy- rehypothecated up to an infinite number of times (if domiciled in the UK) for one simple reason: there are not enough money-good, credible assets in existence, even if there are more than enough 'secured' liabilities that claim said assets as collateral. And while the status quo is marching on, the Ponzi is rising, and new liabilities are created, all is well; however, the second the system experiences a violent deleveraging and the liabilities have to be matched to their respective assets as they are unwound, all hell breaks loose once the reality sets in that each asset has been diluted exponentially.

Naturally, among such assets are not only paper representations of securities, mostly stock and bond certificates held by the DTC's Cede & Co., but physical assets, such as bars of gold held by paper ETFs such as GLD and SLV. In fact, the speculation that the physical precious metals in circulation have been massively diluted has been a major topic of debate among the precious metal communities, and is the reason for the success of such physical-based gold and silver investment vehicles as those of Eric Sprott. Of course, the "other side" has been quite adamant that this is in no way realistic and every ounce of precious metals is accounted for. While that remains to be disproven in the next, and final, central-planner driven market crash, we now know that it is not only precious metals that are on the vaporization chopping block: when it comes to China, such simple assets as simple steel held in inventories, apparently do not exist

Quote:This means that in an economy in which the creation of liabilities, and pledging of assets took place at a furious pace in the past 5 years, nobody really knows just what the real state of credit creation truly was. What is 100% certain is that as a result of this revelation, the GDP number of the country, which is and always has been a derivative of credit formation and expansion (and heaven forbid contraction), is massively overrepresenting what it is in reality, and that the Chinese economy has been expanding at a far slower pace if defined not only by the creation of liabilities, but by matched assets. Most importantly, it means that every single Renminbi in circulation is impaired as a country-wide liquidation event would see huge losses by every creditor class. It also would mean, naturally, zero residual value left for the equity.

The Chinese reluctance to reign in the Japan protestors seems justified in light of this.
They are desperately in need of distraction, just like the US/EU...not good.

Quote:We now know that this has been happening in China with the most critical component of its economic growth miracle: steel. We will soon discover that all other assets: stocks, bonds, commodities (including gold and silver) and finally cash (think deposits) have been comparably rehypothecated and criminally commingled. The end result will be the most epic bank run in world history, which incidentally is precisely what the central banks are attempting desperately to delay as much as possible by generating excess inflation to "inflate" away the debt, leading to rematching of finite assets and virtually infinite liabilities. Alas, in a world in which credit-money liabilities are in the quadrillions, and in which the real assets are in the tens of trillions, only hyperinflation can seal the deal.

tic toc as Avian would say...

[Zero Point]

Excellent post Terp.
I was just saying to someone the other day, that we now just accept production figures from China, a country that gave us Potemkin rice paddies and melted a nations cookware to inflate steel production figures.
The idea that they have somehow "won" a financial war with the west is laughable.

[Scuffalufacus]

(09-18-2012 01:10 AM)Zero Point Wrote:  Excellent post Terp.
I was just saying to someone the other day, that we now just accept production figures from China, a country that gave us Potemkin rice paddies and melted a nations cookware to inflate steel production figures.
The idea that they have somehow "won" a financial war with the west is laughable.

Great posts all. Terp, your OP might be the post of the year.

So what's the trigger point?

[Terpentin]

If I only knew Scuff.

I guess the "extend and pretend" can go on forever as long as nobody dares to call the bluff. Until now I expected the Chinese to call the US´ bluff, but apparently they have nothing up their sleeve as well...funny how that goes.

[Jessica6]

(09-18-2012 01:10 AM)Zero Point Wrote:  Excellent post Terp.
I was just saying to someone the other day, that we now just accept production figures from China, a country that gave us Potemkin rice paddies and melted a nations cookware to inflate steel production figures.
The idea that they have somehow "won" a financial war with the west is laughable.

The Chinese are way too corrupt for that to ever be possible. Or corrupt in too low-level a way - bribes and skimming off of construction projects by officials to buy ferarris, bling or launder into foreign real estate.

If you want to know where China is really headed, watch the Vancouver housing market. Which is going down... http://www.greaterfool.ca Keep in mind the blogger thinks the impact of 'hot Asian money' is over-rated but it's a good place to see the raw numbers.

Edit to add: Jim Chanos (who came to fame for his short Enron call) is the one to follow on China as well. Macau casino revenues are probably another good area to watch the real state of Chinese finances.

[Scuffalufacus]

(09-18-2012 07:41 AM)Terpentin Wrote:  If I only knew Scuff.

I guess the "extend and pretend" can go on forever as long as nobody dares to call the bluff. Until now I expected the Chinese to call the US´ bluff, but apparently they have nothing up their sleeve as well...funny how that goes.

They're doing a hell of a job of cutting the legs off the dollar though.... I think any one of a handful of things going on now, will be the catalyst. JMO

[aVian]

when vast quantities of material that was supposed to be backing contracts is non-existent...huge contracts and financing goes belly up

so how do we distract a corrupt country...create a dispute...this could get serious over the next 30 days folks...remember if you don't hold it YOU DON'T OWN IT

[Zero Point]

(09-18-2012 07:41 AM)Jessica6 Wrote:  

(09-18-2012 01:10 AM)Zero Point Wrote:  Excellent post Terp.
I was just saying to someone the other day, that we now just accept production figures from China, a country that gave us Potemkin rice paddies and melted a nations cookware to inflate steel production figures.
The idea that they have somehow "won" a financial war with the west is laughable.

The Chinese are way too corrupt for that to ever be possible. Or corrupt in too low-level a way - bribes and skimming off of construction projects by officials to buy ferarris, bling or launder into foreign real estate.

If you want to know where China is really headed, watch the Vancouver housing market. Which is going down... http://www.greaterfool.ca Keep in mind the blogger thinks the impact of 'hot Asian money' is over-rated but it's a good place to see the raw numbers.

Edit to add: Jim Chanos (who came to fame for his short Enron call) is the one to follow on China as well. Macau casino revenues are probably another good area to watch the real state of Chinese finances.

Very interesting figures there!
Looks similar to where Australia is at to be honest.
People think we're at the bottom and are holding out.
Not realising the bottom is a way off yet....

---

(09-18-2012 07:23 AM)Scuffalufacus Wrote:  

(09-18-2012 01:10 AM)Zero Point Wrote:  Excellent post Terp.
I was just saying to someone the other day, that we now just accept production figures from China, a country that gave us Potemkin rice paddies and melted a nations cookware to inflate steel production figures.
The idea that they have somehow "won" a financial war with the west is laughable.

Great posts all. Terp, your OP might be the post of the year.

So what's the trigger point?

That's the question of the year Scuff....

[Da Ghost]

This house of cards will fall eventually.

I always thought "recovery" would be the trigger, with growth leading to increased interest rates and collapse of the OTC interest rate derivatives markets. However, now, I can see where demand for higher bond yields could lead to the same scenario (higher interest rates) even in the absence of growth (and "over-heating"). So, I now believe the crash could come sooner rather than later.

That having been said, I am still no Nostradamus. Maybe, the question should not be when will this all go down, but what should we be doing right now.

[Psychonaut]

(09-18-2012 08:39 AM)Da Ghost Wrote:  This house of cards will fall eventually.

I always thought "recovery" would be the trigger, with growth leading to increased interest rates and collapse of the OTC interest rate derivatives markets. However, now, I can see where demand for higher bond yields could lead to the same scenario (higher interest rates) even in the absence of growth (and "over-heating"). So, I now believe the crash could come sooner rather than later.

That having been said, I am still no Nostradamus. Maybe, the question should not be when will this all go down, but what should we be doing right now.

As in live today in a way that mitigates the effect of the mathematically inevitable.