Metals & Markets: Is the Chinese Version of the Lehman Credit Crunch Imminent?

China credit crisisOn the latest SD Weekly Metals & Markets Wrap we cover:

  • China’s credit crunch and contagion fears- is the Chinese version of the Lehman Brothers collapse imminent?
  • US 30 day T-bills auction at zero interest – Raw fear!
  • Gold demonstrating classic safety trade Friday
  • Doc’s retail market report
  • SD Lead Bullion™ flies off the shelf

The SD Weekly Metals & Markets With The Doc & Eric Dubin is below:

While world economic leaders jockey for geopolitical position at this year’s World Economic Forum in Davos, Switzerland global credit and equity markets are starting to send ominous signals.  Standard equities investors had a rough ride this week, with Friday’s 2.09% dive in the S&P 500 slicing through the 50 day moving average like a hot knife through butter.  That move pretty much erases the entire gains made since last December, when Uncle Ben announced the Fed’s tapering plans.  From China to Argentina and other emerging markets, the smell of credit contagion is in the air.


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Fund manager Dave Kranzler published an insightful piece this morning:  “Something Ominous May Be Coming At Us.”  He rightfully points out the warning sign flashed when earlier this week US 30 day Treasury Bills were auctioned off at a zero percent rate.  Negative rates were last seen during the 2008 credit crisis.  Meanwhile, emerging market credit default swaps are on the rise.  Serious fear is expressed when big money is only concerned with finding a safe port in the storm, and this week’s T-Bill auction clearly reveals extreme fear.  Dave speculates:

The source that is lighting the fuse is emerging market problems, reflected in the currency devaluations by Argentina and Venezuela.  But the currencies of other important emerging market economies have been plunging against the dollar as well.  The cost of derivatives “insurance” on the sovereign debt of these countries has suddenly increased at a rate that would make Obamacare insurance providers blush. What the currency plunge/derivatives blow-out implies is that sovereign bond defaults are on the horizon.  This is not just confined to “emerging” economic countries.  Spain, Portugal, Italy and France are on the ropes financially and economically as well, despite the official European story-line that Europe is in “recovery.”

Dave’s analysis is spot-on.  But I suspect his radar has pinged a black swan that’s only stretching its wings at the moment, and probably ready to fly within the next couple of months.

It’s been a pick-your-back-swan sort of week.  Some investors are also freaking out about the prospects for a default on “Credit Equals Gold #1,” a trust product marketed by Industrial and Commercial Bank of China (ICBC).  There are roughly 700 investors in the trust, and it’s scheduled to pay out on Jan. 31st.  The trust raised funds from wealthy investors and institutions in 2010 and subsequently made loans to a Chinese coal company.  The coal market has been weak and…  Well, you get the picture.

As of late Thursday evening ICBC changed their tune and said they would take some sort of “responsibility” for the problem and “…won’t ignore the issue of it’s reputation.”  That’s Chinese for screw moral hazard, this bomb is too big to go off.  Ultimately I believe they will come to some sort of backdoor bailout, most likely forcing investors to take a token hit, but not enough to create credit market contagion.




Despite the fact that silver took a beating Friday, both gold and silver should perform well in the weeks and months ahead.  Both eventually performed well as hard asset stores of value following the 2008 credit crisis, albeit with a lag and with official sector suppression too.  If all heck breaks loose in the near-term, precious metals might drop but their function as a store of value in turbulent times has not been repealed, much to the chagrin of Uncle Ben and his Yellen minions on Planet Janet.

Have a great weekend,

Eric Dubin

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