vrijdag 18 januari 2019

Small Caps Soar To Best Start Since 1987 As China Adds Record Liquidity,

Wondering why stocks are soaring?


Simple really, Global Central Bank balance sheets are soaring again...


And China just injected a record 1.16 trillion yuan into the financial system...


Yeah, trillion with it. Sigh. Which lifted Chinese stocks handily...


European stocks soared...


It seems the algos did not get the message the first time as Trade headlines pumped and dumped... and then they ripped...


Trannies are best this week...


Trannies are also the best performer of the US majors YTD, but the Russell 2000 is off to its best start to a year since 1987...


But Canada is better, up 7% YTD the best start since 1980...


The S&P is up 4 weeks in a row, just like it was to start 2018...


"Most Shorted" stocks continue to squeeze higher (up 14% YTD!)...


"Most Shorted" Stocks are up (squeezed) 13 of the last 14 days...


But, as Bloomberg noted, bearishness remains stubbornly high, judging by the SPDR S&P 500 ETF. At 5.4% as of a couple of days ago, short interest is roughly double the two-year average (with most of that span of time covering a steady grind higher)...


Fannie and Freddie exploded higher on headlines that Treasury is considering how to exit conservatorship...


Tesla tumbled, catching down tot its bonds reality once again...


This was one of its biggest drops in history...


Credit Spreads collapsed again after decoupling initially from VIX...


Treasury yields surged across the curve this week with the belly underperforming (7Y +10bps)...


With 10Y yield at 2019 highs. Investors should perhaps be careful what they wish for from stocks as the markets' implied expectations for 2019 rate hikes has shifted back into hawk territory, now expecting 3.5bps of tightening...


The dollar surged this week, its first weekly gain in 5 weeks, bouncing off significant support at around 1180...


Yuan tumbled on the week, biggest weekly drop in 3 months (accelerating as the dollar surged this afternoon on trade talks headlines)...


Cryptos were down across the board in a very choppy week...


Despite dollar strength crude and copper surged on the week with PMs weak...


WTI neared $45 but  serious resistance...


Silver's demise at the same time as Oil's surging seems to have found historical support working again...


Finally, US equity markets are right back where they were at the end of the year, the year 2017!


And with a big h/t top, we note that "More How fascinating to have seen on the same day a ripping production report on the back of the auto sector coinciding with consumer auto buying intentions falling to a five-year low"...


So if you bought the market today on the heels of great industrial production data, don't hold your breath...


Spot The Odd One Out...

Michael Snyder; Global Debt Tops 244 Trillion Dollars As "Nearly Half The World Lives On Less Than $5.50 A Day"

The borrower is the servant of the lender, and one of the primary ways that the elite keep the rest of us subjugated is through the $244,000,000,000,000 mountain of global debt that has been accumulated. Every single day, the benefits of our labor are going to enrich somebody else. A portion of the taxes that are deducted from your paycheck is used to pay interest on government debt. A portion of the profits that your company makes probably goes to servicing some form of business debt. And most Americans are continuously making payments on their mortgages, their auto loans, their credit card balances and their student loan debts. But most people never stop to think about who is becoming exceedingly wealthy on the other end of these transactions. Needless to say, it isn’t the 46 percent of the global population that is living on less than $5.50 a day. The world has never seen anything like this mountain of debt ever before, and one of the central themes of The Economic Collapse Blog is that all of this debt will ultimately destroy our society.
# According to the Institute of International Finance, the total amount of global debt is now “more than three times the size of the global economy”. The world’s debt pile is hovering near a record at $244 trillion, which is more than three times the size of the global economy, according to an analysis by the Institute of International Finance. The global debt-to-GDP ratio exceeded 318 percent in the third quarter of last year, despite a stronger pace of economic growth, according to a report by the Washington-based IIF released on Tuesday. But it isn’t as if all of this spending has lifted billions of people out of poverty. In fact, 46 percent of the population of the world is “living on less than $5.50 a day” according to the World Bank. Over 1.9 billion people, or 26.2 percent of the world’s population, were living on less than $3.20 per day in 2015. Close to 46 percent of the world’s population was living on less than $5.50 a day. Global inequality continues to grow worse with each passing year, and that is because the global financial system is literally designed to funnel as much wealth to the very top of the pyramid as possible.
# Of course things could be very different. We don’t actually need to have a debt-based system which systematically makes the rich even richer. One of the big secrets that nobody is supposed to talk about is the fact that governments don’t actually have to borrow money. For example, the U.S. government could start issuing debt-free “United States notes” tomorrow, and this actually happened for a very brief period of time under President John F. Kennedy in the 1960s just before he was assassinated. It is highly immoral for us to be borrowing trillions of dollars that we expect future generations to repay, and that is why I have been a huge proponent of shutting down the debt-based Federal Reserve system and ending the debt-based currency known as “Federal Reserve notes”. But these days, only a small minority of the population seems to care. We are literally debt slaves, and most Americans have seemingly embraced their enslavement. I really like what Devvy Kidd had to say about this in her latest article. The average American is a debt slave already at birth. And by the time he dies, his debt will have increased exponentially, thus passing on an even bigger debt and greater enslavement to the next generation. This is a vicious circle that has gone on for just over 100 years. A very small elite has become incredibly wealthy and the masses have become enslaved by private and government debt. For the majority of people, it will be impossible to extricate themselves from this massive debt stone around their neck. Instead they will add to the debt by taking on more debt.
# Wake up! At least the “yellow vests” in France are willing to take a stand against the systematic tyranny that is raging all around them. In America today, most people don’t really care about much of anything unless it somehow intrudes on the bubble of mindless entertainment that most Americans have constantly surrounded themselves with. And guess who produces all of that mindless entertainment? It is produced by giant media corporations that are owned by the same global elitists that control our giant mountain of debt. The system of our enslavement is far more sophisticated than it was in previous eras of human history, but it is still deeply insidious. There is one more thing that I would like to mention today. On many previous occasions, I have discussed how the elite have transformed Wall Street into the largest casino on the entire planet, and it is true that some people have made a lot of money in that casino. But so many others have been deeply burned and have lost everything. Here is just one example. I had quit day-trading back in November but was still using a swing trading system that damn near never lost (really), until I got completely run over last week. Literally every move I made was wrong, and I managed to completely wipe out my entire gambling account.
I want to be clear, we’re not broke or anything near it (still get to claim millionaire status), but holy crap did I decimate my account something stupid. So, I’m here to tell you that the scary stories you hear from elders who quit trading? They’re true. Trading is a losing game. It’s just gambling. Most people who claim to be winners just ignore their losses and pretend everything is ok. To be sure, some people really can make a living at it, and good for them. But the odds are massively against you. The system is designed to take your money while you’re stressed, guessing, nervous, angry, depressed, or most of all, desperate. The game is literally rigged against us, and we need to realize what we are up against. Tinkering around with the current system is not going to fix anything. We need to ditch this current system and start again from scratch, but it will probably take a horrific collapse before most people start to understand this....

Hedge Funds Suffer Massive $22.5 Billion In Q4 Outflows

While there were countless argument offered to explain December's near-record market drubbing, we said on several occasions last month that the simplest reason for last month's plunge was also the simplest one: faced with a mountain of redemption requests, hedge funds were forced to sell their holdings into a market that had never been more illiquid, which meant hitting each and every bid and culminating with the brief, December 24th bear market. We now have confirmation, because according to Hedge Fund Research, investors fled hedge funds as markets plunged in the fourth quarter (or is that markets plunged as investors fled hedge funds), pulling a massive $22.5 billion, the most in more than two years. The exodus added to the total withdrawals of $34 billion in 2018, or about 1% of hedge fund industry assets, the largest quarterly outflow since Q4 2016 when investors redeemed about $70 billion...


Large fund outflows were concentrated in several firms which closed and returned capital to investors, with approximately two dozen firms experiencing net asset outflows of greater than $500 million for the quarter. Despite the overall negative trends on flows and performance, but reflecting the trend of larger hedge fund relative outperformance, approximately one dozen firms received net asset inflows of greater than $500 million for the quarter. Flows by firm size also showed net outflows across all firm sizes, with firms managing greater than $5 billion experiencing outflows of $15.6 billion. Mid-sized firms managing between $1 and 5 billion saw outflows of $2.8 billion for the quarter, while firms managing less than $1 billion saw outflows of $4.1 billion. "Hedge fund outflows in 4Q were driven by several factors, most notably investor reaction to steep losses in traditional asset investments and the sharp spike in equity market volatility leading to redemptions" stated Kenneth J. Heinz, President of HFR. The spike in redemptions came as hedge funds suffered their worst performance since 2011 in a year marked by two corrections, a bear market, and a spike in year-end volatility...


Additionally, as Bloomberg notes, several big names exited the industry last year, including T. Boone Pickens, Leon Cooperman and Philippe Jabre, while virtually everyone else struggled to generate any alpha (with a few exceptions ). "Outflows also included several large fund closures," said HFR President Kenneth Heinz in the quarterly report, including instances of family office conversions and orderly, manager-initiated returns of investor capital. Broken down by strategy, equity hedge funds suffered the biggest outflows, with investors pulling $16.8 billion in the quarter and a total of about $23 billion for the year, according to HFR. Hedge funds in this group fell 5.9% on an asset-weighted basis in 2018, the worst performers of all strategies tracked by HFR. Confirming that the redemptions were liquidity and not performance driven, even the year’s top performing macro managers, up 1.6%, ended 2018 with outflows of $12.3 billion. There was a silver lining: event-driven (ED) funds brought in $6.4 billion in the quarter, the only strategy to see inflows, and $6.9 billion for the year, although performance weakness decreased total ED capital to $819 billion from the prior quarter. ED sub-strategy flows were driven by Distressed/Restructuring and Special Situations funds, which experienced inflows of $6.5 billion and $1.4 billion, respectively. Fixed income-based Relative Value Arbitrage (RVA) strategies led industry performance in 2018, as the HFRI Relative Value Index (Asset Weighted) added +0.5 percent for the year, while the HFRI Relative Value (Total) Index posted a narrow decline of -0.2 percent for 2018. In 4Q18, RVA strategies experienced outflows of $5.4 billion, decreasing total RVA capital to $835 billion from the prior quarter. "Trends in Macro, CTA, and RVA/Credit Multi-Strategies, and stronger relative outperformance of larger funds were all favorable throughout the intense market dislocations of December and 4Q. While the overall investor flows and performance trends were negative, it is likely that discriminating institutional investors which experienced or observed areas of strong performance through the most difficult equity and commodity trading environment in a decade will factor these positive dynamics into portfolio allocations for 2019." With volatility set to return with a vengeance once this algo-driven bear market rally ends, 2019 promises to be just as challenging for the 2 and 20 crowd....

Fannie, Freddie Soar On Report They May Be Released From Government Control

Reviving an age-old debate whether the insolvent, bailed-out zombies GSEs, Fannie and Freddie will emerge from conservatorship, the shares of Fannie Mae and Freddie Mac soared Friday amid reports that the Trump Administration is working on proposal that would likely recommend that the mortgage-finance giants be released from government control as part of a broader plan for U.S. housing finance.
# According to Bloomberg, Joseph Otting, acting director of the Federal Housing Finance Agency, commented on the administration’s plans at an internal gathering to introduce himself to staff and “establish open lines of communication,” an FHFA spokesperson said in a statement. The statement by Otting, who is serving as interim FHFA director in addition to heading the Office of the Comptroller of the Currency, corroborates earlier reports that the administration is working on a plan. Still, the FHFA spokesperson didn’t offer details on what might be included in any proposal, such as whether Treasury would call for releasing the companies without Congress passing legislation...


As a result, shares of Fannie rose more than 31% to $2.36 and Freddie surged nearly 25% to $2.26 just after noon. The jump was the biggest since November 30, 2016, when then-Treasury Secretary nominee Steven Mnuchin first said getting the companies out of the government’s grip was a priority...


The report will be welcome news to both casual retail investors and activist hedge fund involved with the two companies, which have been under U.S. control since the 2008 financial crisis, as a result of optimism that President Donald Trump’s appointees at the Treasury Department and FHFA will allow them to reap a windfall by ending the conservatorship. Any potential release from conservatorship of the two bailed out mortgage giants would come at a time when many investors are convinced the US is headed into a recession, which the cynics would say likely means that Fannie and Freddie would be "unbailed out" just in time for them them be rescued by taxpayers all over again when the next financial crisis strikes some time over the next 12-24 months....

Human Investors Refuse To Believe This Algo Rally

According to Nomura's calculations, CTAs were about to cover their recent S&P short positions and turn increasingly longer the higher the market rose. And sure enough, the US stock market has only risen higher, with the latest two upside catalysts being the positive WSJ headline related to US-China trade talks on Thursday and today's Bloomberg report that China would seek to reduce its trade surplus with the US. As a result, Nomura’s Masanari Takada writes, the bank's quant models suggest CTAs continued short-covering on major stock index futures like the S&P500 or Russell 2000 and adds, somewhat redundantly, that "US equity markets seem to have enjoyed such mechanical purchasing pressure by algo investors." Additionally, there has been some modest improvement in recent economic data (at least that which is released) and the US economic surprise index (which is missing a lot of recent components) which Nomura views as one of the most important indicators in gauging the sustainability of the current market rally, improved to -3 yesterday (although it tipped back down to -6.90 after today's big miss in the UMich Sentiment) which more importantly was followed by a gradual increase in overall exposure to US equity markets by hedge funds...


Indeed, this stacked waterfall effect of investors following other bullish investors into risk assets, which some call simply FOMO, is what Nomura defines as the "histeresis effect" on hedge fund behavior, and is as follows:
* Trend-followers' systemic buying pushes US stocks up
* Other hedge fund start to buy the market, chasing CTAs buying programs
* As buying pressure gets "overheated", upward momentum of the market becomes unstable
* US market sharply drops as such crowded long become rapidly liquidated.
This is shown schematically in the chart below...


And yet with stocks surging to new one-month highs, as the brief Christmas Eve S&P500 bear market has been cut in more than half, what Nomura is carefully monitoring at this moment is whether its gauge of US equity market sentiment is leveling off slightly after having rapidly improved over the past few days. What is surprising, according to the Japanese bank, is that a recovery in sentiment into positive territory (risk-seeking phase) "appears so close yet so far away." Specifically, unlike CTAs and other systematic funds, many US equity investors - especially macro hedge funds and risk parity funds - remain hesitant to impatiently begin following an equity market rally that is not sufficiently justified in the context of fundamentals. Going back to the "histeresis example", Takada notes that we experienced a similar situation in which algo investors, mainly in trend-following programs, led the significant upturn of the market last January, March and September.
# What happened next is that other investors, including major hedge funds, rushed to jump in the stock market uptrend, such “crowded” buying pressures caused an over-heating of momentum and overall market positioning became very unstable with outsized reactions to insignificant headlines and small volatility shocks before subsequently experiencing sharp drops. So going back to the question we asked in the headline, why do investors, or rather human investors, refuse to buy into this rally, the reason according to Nomura is that most investors, except algo players, now seem to be wary of the future “pitfalls” of such a machine-led stock rebound because of past experiences, are maintaining a conservative approach at present. What this means, somewhat ironically, is that while everyone was blaming the algos for the December meltdown, even though nobody has "accused" the algos of creating the ongoing meltup, investors and traders know very well that the move higher is not organic, but is purely the result of systematic, algo and various other quant traders forcibly buying as a result of key technical market levels being hit. Unfortunately for the few humans left trading stocks, this is not a buying signal, which likely means that just like in January of 2018 when retail investors finally capitulation and rushed into stocks just ahead of the February 2018 correction, so this time too it is likely that the algos will keep buying until everyone else jumps into the pool, at which point the market will once again take the elevator down.

Market Gains "Just Too Easy"

With stocks set for their 4th weekly gain in a row, despite tumbling earnings expectations and macro data...


Questions remain as to what (or who) is behind this extreme rebound...


But, as former fund manager and FX trader Richard Breslow notes, a number of those plunge-protecting central banks are set to meet over the next couple of weeks leading up to the FOMC. None of them are expected to do anything with rates. Still, how they portray their dovish holds will be interesting. I hope they don’t try to sound more upbeat than is warranted (Fed) simply because the stock markets have bounced. Or to appease the hawks (ECB). That really would make it too easy for equity traders.
# It’s January and, say what they will, not all meetings are live. Nor should they be, absent a crisis. Nevertheless, asset prices look a lot different than a couple of weeks ago when possible rate cuts took their place on the dais. In the aftermath, there have been some wonderfully tradable opportunities. Oddly enough, the meeting with the greatest potential to be a market event is the ECB. Will they change their balance of risks assessment without new staff projections? Either way, traders may jump to bigger conclusions than are warranted. Also, given the latest love affair with emerging markets, just how dovish the Malaysian and South Korean decisions read will matter. And while there isn’t a PBOC meeting, there are enough A-list numbers to set the tone. I realize the topic of the hour is the equity pop and whether the much anticipated breakouts are real or will end up being false. As far as U.S. stocks are concerned, surmounting the well-advertised resistance levels on a report about tariff relief that was quickly denied doesn’t negate the price action but does call into question the move’s credibility.
# Unless you believe, quite reasonably, that the way the market was trading, it was meant to happen anyway. Ideally, if this is going to continue, we would test lower at some point and hold. That’s how great-looking charts get created. These markets, however, have a habit of trying to take off without solidifying a base, forcing traders to chase their benchmarks. And then they correct. Try not to get too focused on the S&P 500. Unless you are already involved in this jaw-dropping move. Other global indexes are trading well, just not quite to the same extent. Look there for confirmation one way or the other. They are mostly all close so you probably won’t have long to wait...


Of equal importance in the grand scheme of things are 10-year Treasury yields which do look like they have formed a base from which to take a look at what’s above. Where they are, near 2.77%, is the first significant challenge, and a new high for the year. If they gain momentum from here, a lot of extant forecasts will have to be reconsidered. U.K. gilt yields look like they caught a lot of people short as they too have been marching methodically higher. Today’s high at 1.38% matters and looks like it was a bridge too far...


In a world where we are told there is no inflation, the Bloomberg Commodity Index has been trading like a champ. In classic January fashion it made the YTD low on the first trading day and hasn’t looked back. A nice 6% move with no pain and a lot of gain. Both WTI and copper have done the easy work and now it becomes really interesting. What happens from right here will do a lot to influence narratives about the global economy...


Three weeks into the year and the trading landscape has been evolving quickly. Mostly, it’s fair to say, toward the optimistic. Or maybe the bears are just all twisted around with badly located positions. Forget narratives and intuition. The flows have been telling you everything you need to have known. Or at least the Fed has....

UMich Confidence Collapses As "Hope" Crashes Most Since 2012

Echoing Bloomberg's sentiment indicator, University of Michigan's survey shows Americans' confidence collapsed heading into January with 'expectations' plunging to Oct 2016 lows. The University of Michigan’s preliminary January sentiment index fell to 90.7 from the prior month, missing all estimates in a Bloomberg survey of economists. The measures of current conditionsand expectations both declined to the lowest since President Donald Trump's election in 2016...


Current conditions tumbled but the 'expectations' plunge is the biggest drop in 'hope' since Dec 2012...


Buying Conditions plunged also...


“The decline was primarily focused on prospects for the domestic economy,” Richard Curtin, director of the University of Michigan consumer survey, said in a statement. “The loss was due to a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies”....

Gold Is Up Lately, Why Does It Feel So Disappointing?

Since the start of December, gold has outperformed stocks by a nice margin...


So why does this feel like such a let-down? Because the stars were aligned for a much bigger move. The structure of the late 2018 futures market had speculators historically short, which normally portends a big price increase. January is also the seasonally best time for gold and silver, since that’s when Asians stock up on jewelry to give at Spring weddings. Meanwhile, gold and silver mining stocks had had a brutal 2018 and were poised for at the very least a nice bounce once tax loss selling ended in late December. This was, in short, a set-up resembling early 2016, when precious metals jumped and mining stocks soared. The following chart shows the HUI gold mining stocks index more than doubling in the first ten months of that year...


But instead, we get this tepid move up in precious metals and an actual decline in mining stocks...


It’s still early in what could yet be a strong first half (before seasonality turns negative and everyone starts saying “sell in May and go away”). And the deeper fundamentals, soaring debt, an ever-more-dovish Fed, insane politics, remain wildly positive for precious metals. So patience is still in order....

Ronan Manly; Separating Truth From Fiction In China’s Golden Game Of Poker

This month the Chinese central bank reported that in December 2018, its gold reserve holdings increased by 10 tonnes, the first claimed increase in Chinese monetary gold holdings since October 2016. Based on previous patterns reporting patterns, a two year hiatus in reporting gold holdings is not unprecedented for the Chinese central bank and its reporting agency SAFE. What is strange, however, is that after an extended absence of reporting, the Chinese are coming back to the table with not a lot to show for it. It is extremely difficult to believe that the Chinese central bank has not been accumulating gold throughout the last two years. Having said that, the claimed 10 tonne gold addition in December is worthy of analysis in regards to its timing and what it may signal. It is also important to keep in mind that there is huge and justified skepticism about the true size of the Chinese State’s monetary gold holdings held through the People’s Bank of China (PBoC), and to this we can probably now add skepticism about the real accumulation pattern of PBoC gold.
# A 10 tonne teaser; News of December’s central bank gold purchase was initially published on the web site of China’s State Administration of Foreign Exchange (SAFE) in it’s December 2018 ‘Official Reserve Assets’ report. Note that SAFE reserve asset updates don’t actually state the quantity of gold the PBoC holds but instead report a US dollar figure valued at the corresponding month-end US dollar gold price. So for example, the PBoC’s gold holdings were valued at US$ 72.122 billion at the end of November, which at a month-end November gold price of US$ 1217.55 was 1842.5 tonnes, while the stated gold valuation at the end of December was US$ 76.331 billion, which at an end of December LBMA gold price of US$ 1281.65 was 1852.5 tonnes, a 10 tonne increase. Also note that it was not a case of SAFE not reporting China’s gold holdings between November 2016 and November 2018, SAFE does report reserve asset valuations each month. It’s just that SAFE reserve asset reporting for each month during those 2 years claimed unchanged PBoC gold holdings.
# Accumulation; Since the early 2000s, Chinese official gold holdings have nearly quintupled, rising from 394 tonnes of gold in late 2001 to the current claimed holdings of 1852 tonnes today. But notably, during that time spanning more than 17 years, the Chinese central bank has only publicly revealed its gold holdings on four separate occasions, as well as a fifth short period between July 2015 and October 2016 when it reported monthly increases in gold holdings in all months between those dates (July 2015 to October 2016). The five Chinese gold reserve increase announcements / ranges and their dates are as follows:
* Quarter 4 2001: Gold holdings rose from 394 to 500 tonnes,  an addition of 104 tonnes
* Quarter 4 2002: From 500 to 600 tonnes, addition of 100 tonnes
* April 2009: From 600 to 1,054 tonnes, addition of 454 tonnes
* July 2015: From 1,054 to 1,658 tonnes, addition of 604 tonnes
* Between July 2015 and October 2016: From 1658 to 1842 tonnes, addition of 184 tonnes.
# Chinese official (central bank) gold reserves, 2000 – December 2018....


From October 2016 until December 2018, SAFE and the PBoC went quiet, claiming in the SAFE monthly reserve updates that China’s monetary gold reserves had remained static at 1842 tonnes throughout all of that period. Which brings us up to date to December 2018, when the Chinese State now claims to have added another 10 tonnes of gold to its reserve holdings.
# Precendents and Modus Operandi; This sporadic update policy by SAFE and the PBoC, while frustrating from a transparency perspective, is still useful in providing a few milestones and precedents into how the Chinese state previously handled gold holdings updates, and also as to how it said it was active in the gold market between these holdings revelation dates. Taking the two previous occasions when China revealed gold holdings additions after a prolonged absence, April 2009 and July 2015, on both of these occasions the quantity of gold added was significant, 454 tonnes and 604 tonnes respectively, or 1058 tonnes in total. The gold buying activity of the PBoC from 2003 to 2009 and from 2009 to 2015, on its own admission, also puts into question the accuracy of the December 2018 update, making it extremely difficult to believe that the PBoC just went out and bought 10 tonnes of gold in December, while doing no gold buying at all during November 2016 to November 2018.
# Add to this the 184 tonnes of gold the PBoC says it bought between July 2015 and October 2016, this would mean that the Chinese state bought 1242 tonnes of gold over a 14 year period but then suddenly stopped in October 2016, only to resume again in December 2018 with a smallish 10 tonne purchase. The commentaries provided by SAFE and PBoC at the time of their April 2009 and July 2015 gold holdings updates provide some insight into how the Chinese state buys gold, via constant accumulation. In April 2009, Hu Xiaolian, the then head of SAFE said that the 454 tonnes of gold that had been added to the PBoC reserves from 2003 to early 2009 “had been purchased from domestic production”. With domestic gold production in those years between only 200-300 tonnes per annum (as per the chart below), the PBoC could not have been just buying very large chunks of a few years gold production to reach this 454 tonne target. It would have to have been accumulating.
# Chinese domestic gold production, 2001 – 2016...


Likewise, when in July 2015, SAFE announced the first update to Chinese gold holdings since 2009, the PBoC stated at the time that the “major channels of accumulation” for that 604 additional tonnes of gold was from a variety of sources including domestic gold production, secondary domestic scrap sources, purchases in international markets, and other transacting in the domestic market. An addition of a substantial 454 tonnes of gold from early 2003 to April 2009, an even larger 604 tonnes of gold from April 2009 to July 2015, and then 184 tonnes added from July 2015 and October 2016. But no gold added by the Chinese central bank from November 2016 to November 2018. It just doesn’t add up and is not beliveable. Contrast this to the Russian central bank which over the same time period bought 223 tonnes of gold in 2017, a then record for the Bank of Russia. It then ramped up the gold purchases even further in 2018, adding 264.3 tonnes of gold to its reserves between January to November 2018.
# Overall the PBoC wants us to believe that between November 2016 and November 2018, a period in which the Russian state bought 518.4 tonnes of gold (including 31.1 tonnes in November 2016), the Chinese state bought no gold at all. It defies belief and consigns the Chinese official reporting to the dustbin. Even the PBoC’s statement at the time of its July 2015 gold holdings update contradicts the data put out by SAFE this month. Because in July 2015, the PboC said: “On the basis of our assessment of the value of gold assets and our analysis of price changes, and on the premise of not creating disturbances in the market, we steadily accumulated gold reserves through a number of international and domestic channels”...


Not that anyone much at all believes the official data about Chinese strategic gold reserves. Recall that BullionStar ran a Twitter survey last September asking “How much gold does the Chinese central bank (PBoC) really hold?” and provided four optional answers:
* 1842 tonnes as it claimed at the time
* more than 1842 tonnes but less than 4000 tonnes
* more than 4000 tonnes
* less gold than it claims less than 1842 tonnes
A respectable 2337 respondents answered the survey, with a full 91% of respondents (2127 votes) not believing the official figure put out by the Chinese central bank, and only 9% of respondents (210 votes) thinking that the PBoC has the 1842 tonnes of gold it claimed to have at the time in September. A sizeable 40% of respondents (935 votes) thought the PboC holds more than 4000 tonnes of gold. Another 15% (351 people) thought that the Chinese central bank had more than 1842 tonnes of gold but less than 4000 tonnes. 55% (1286 respondents) thought that the PBoC has more gold than it claims to have. There were also 36% (841 people) among the Twitter poll respondents who thought that the PBoC has less gold than it claims, showing skepticism on the downside. But the takeaway here is that less than 10% of a cross-section of more than 2300 twitter users believed the official Chinese gold holdings figures.
# Even Bloomberg Intelligence wrote in April 2015 that: “The People’s Bank of Chine may have tripled holdings of bullion since it last updated then in April 2009, to 3510 metric tons, says Bloomberg Intelligence, based on trade data, domestic output and China Gold Association figures.” So the question is, why do the Chinese continue with the charade of rarely reporting gold holdings and then with numbers which pretty much no one believes?
* Bloomberg Intelligence estimated in April 2015 that China had over 3500 tonnes of gold
* Bloomberg Intelligence estimated in April 2015 that China had over 3500 tonnes of gold...

Bloomberg Intelligence estimated in April 2015 that China had over 3500 tonnes of gold

Even the statements that regularly come from Chinese officials connected to the Chinese government, monetary authorities, and gold industry refer to buying targets for Chinese state gold that are far larger than the PBoC data reveals. The probable answer here is that the Chinese state / PBoC want to continue to buy physical gold without the wider market knowing, and without this demand leaking into gold price discovery. For example, in February 2010, during the mysterious IMF on-market gold sales (which were actually off market and secretive), China Daily news reported that a top official from the China Gold Association (CGA) speaking anonymously had said that: “Contrary to much speculation China may not buy the IMF remaining 191.3 tons of gold which is up for sale as it does not want to upset the market. It is not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility” In March 2013, the deputy governor of the PBoC, Yi Gang, also commented on how the Chinese state had to be discrete about official purchases so as not to upset the gold market: “We will always keep gold in mind as an option in reserve assets and investments. We will also take into consideration a stable gold market. If the Chinese government were to buy too much gold, gold prices would surge, a scenario that will hurt Chinese consumers. We can only invest about 1-2 percent of the foreign exchange reserves into gold because the market is too small.” And then the July 2015 statement from the PBoC itself that: “On the premise of not creating disturbances in the market, we steadily accumulated gold reserves“...
# Conclusion; We will have to wait until the next SAFE reserve asset report in early February to see whether the PBoC decides to announce any gold purchases for January. If so, it could mark the beginning of a trend of regular monthly reporting by the Chinese state. If not, then the 10 tonnes gold purchase in December 2018 will go down as a strange anomaly, perhaps as a warning shot to economic adversaries such as the US that it can at any time announce gold reserve updates which could impact foreign exchange markets. But how much gold might the Chinese central bank really be buying each year, beyond the selective and fabricated numbers? Based on pronouncements and hints from top Chinese officials, the answer may be somewhere in the region of 500 tonnes per year range. In a study in 2012, Zhang Bingnan, Vice-President of the China Gold Association discussed the optimal size of Chinese State gold reserves and their growth rate, saying that: “Forecasting the optimal gold reserve capacity in the next 20 years. The conclusion is: by 2020, China’s gold optimal reserves should be 5,787 tonnes (6,750 tonnes. [by] 2030 should be 8,995 tonnes) 10,532 tonnes.”
# In July 2014, Song Xin, President of the China Gold Association, said that the PBoC should initially aim for a target of 4,000 tonnes of gold: “We must raise our official gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US.” Accumulating 500 tonnes of gold per year as these senior Chinese officials suggest would meet the 4000 – 6000 tonne accumulation targets. Only holding 1852 tonnes of gold as the PBoC maintains and buying no gold between November 2016 and November 2018 would not. Just like a good poker player only shows what they they want to show, mixes up their hand, and is sometimes a poker chameleon, the Chinese central bank has a strength of hand and patience to show what it wants while staying in the game....

Yanis Varoufakis; Run Down The Brexit Clock

The terrifying prospect of a no-deal Brexit on March 29 remains in play after the British Parliament emphatically rejected Prime Minister Theresa May’s withdrawal agreement with the EU. Although it is tempting to reset the clock and give negotiations more time, that instinct must be resisted. The overwhelming defeat that Britain’s Parliament inflicted upon Prime Minister Theresa May’s Brexit plan was fresh confirmation that there is no substitute for democracy. Members of Parliament deserve congratulations for keeping their cool in the face of a made-up deadline. That deadline is the reason why Brexit is proving so hard and potentially so damaging. To resolve Brexit, that artificial deadline must be removed altogether, not merely re-set. Leaving the European Union is painful by design. The process any member state must follow to exit the EU is governed by Article 50 of the bloc’s Lisbon Treaty, which, ironically, was authored by a British diplomat keen to deter exits from the EU. That is why Article 50 sets a two-year negotiation period ending with an ominous deadline: If negotiations have not produced a divorce agreement within the prescribed period, March 29, 2019, in Britain’s case, the member state suddenly finds itself outside the EU, facing disproportionate hardships overnight. This rule undermines meaningful negotiations...


Negotiators focus on the end date and conclude that the other side has no incentive to reveal its hand before then. Whether the allotted negotiation period is two months, two years, or two decades, the result is the same: the stronger side (the European Commission in Brussels in this case) has an incentive to run down the clock and make no significant compromises before the eleventh hour. Moreover, this realization affects the behavior of other key players: Tory government ministers opposed to their prime minister, the leader of the Labour opposition, Jeremy Corbyn, members of Labour’s front bench who are opposed to Corbyn, and the German and French governments. Every significant political actor in this game has an incentive to sit back and let the clock tick down to the bitter end. With fewer than three months left, the prospect of Britain falling out of the EU without a deal is, understandably, terrifying.
# A natural response is to call for an extension of Article 50, to reset the clock and give negotiations more time. That instinct must be resisted. Any resetting of the clock would simply extend the paralysis, not speed up convergence toward a good agreement. Giving May another three months, or even three years, would do nothing to create incentives to reveal hidden preferences or to drop fictitious red lines. Indeed, the worst aspect of May’s deal, which Parliament emphatically and wisely rejected, was that it extended the transition process until 2022, with the UK committing to paying around $50 billion, and possibly more, to the EU in exchange for nothing more than unenforceable promises of some future mutually advantageous deal. Had Parliament voted in favor of May’s deal, it would have prolonged the current gridlock to a new cliff edge three years hence. The only plausible reason for resetting the Article 50 clock is the aspiration to hold a second referendum on whether to rescind Brexit altogether. But, unlike the first referendum, which could be framed as a yes-no leave-stay question, there are now multiple options to consider: May’s deal, a softer Brexit keeping Britain within the EU’s single market, a no-deal Brexit, remaining in the EU altogether, and so forth. Agreeing on the precise form of preferential voting between these options is no easier than agreeing on Brexit in the first place.
# To synthesize competing views into one coherent position, Britain needs more than a voting scheme: it needs a People’s Debate that the ticking clock makes impossible, even if re-set. The standstill and the phony negotiations will thus come to an end only if the made-up deadline is allowed to expire by a Parliament willing calmly to say “no” to unacceptable deals negotiated by May and the EU. Allowing the clock to run down is now a prerequisite for resolving the Brexit conundrum. What will happen if the impasse continues until March 29, without a formal extension of the Article 50 period? The threat from Brussels is that the EU will shrug its shoulders and allow a disorderly Brexit, with substantial disruption to trade, transport, and so forth. But it is much more likely that German business, along with the French and Dutch governments, would be up in arms against such a turn, and demand that the European Commission use its powers indefinitely to suspend any disruption in Europe’s ports and airports while meaningful negotiations begin for the first time since 2016. Once we are at, or close to March 29, heightened urgency will dissolve tactical procrastination. May’s deal will have bitten the dust, and Remainers will be closer to accepting that time is not on the side of a Brexit-annulling second referendum, perhaps turning their attention to the legitimate aim of a future referendum to re-join the EU.
# At that point, government and opposition will recognize that only two coherent options remain for the immediate future. The first is Norway Plus, which would mean Britain would remain for an indeterminate period in the EU single market (like Norway), and also in a customs union with the EU. The second is an immediate full exit, with Britain trading under World Trade Organization rules while Northern Ireland remains within a customs union with the EU to avoid a hard border with the Republic of Ireland. Narrowing it down to two options will enable Parliament to choose. Once MPs acknowledge that freedom of movement between the UK and the EU is a red herring, the most likely outcome is Norway Plus for an indeterminate, deadline-free period. Then and only then will Parliament and the people have the opportunity to debate the large-scale issues confronting Britain, not least the future of the UK-EU relationship. Norway Plus would, of course, leave everyone somewhat dissatisfied. But, unlike May’s deal or a hasty second referendum, at least it would minimize the discontent that any large segment of Britain’s society might experience in the medium term. And, because minimizing the discontent, along with a deadline-free horizon, are prerequisites for the people’s debate that Britain deserves, the overwhelming defeat of May’s deal may well be remembered as a vindication of democracy....