The world’s largest Nickel trader is a gentleman called Xiang Guangda, known in the market as ‘Big Shot’. It turns out that in April, Big Shot went short Nickel at $25,000 to the tune of 150,000 tonnes. The price of Nickel then rocketed to $100,000 and he was sitting on an $11 billion loss.
Obviously, this situation is dire for everyone involved, particularly him. So what did he do? He said “I’m not paying”. He even rang the Chief Executive of the The London Metals Exchange and told him he wasn’t paying. That courtesy call should have resulted in demand for payment and subsequently bankruptcy proceedings. That is not what happened.
The Metals Exchange responded by suspending trades, cancelling lots of completed trades, and in a deal with him and his bankers, decided to disrupt the market in Nickel until the price fell back down and reduced his losses. He eventually lost $1 billion instead of $11 billion.
Among all that were other market participants, on the other side of his short. They were sitting on $11 billion of gains, which they were denied because the entity operating the LME favoured a big market participant over smaller ones. Many of those smaller traders are now suing. I hope they win and it signals the end of the London Metals Exchange forever as it very well should.
I like this story because it highlights the level of corruption in the existing financial system. We saw the bias towards ‘too big to fail’ in 2008 and now it’s here again. However regulated the market, when it comes to giant operators or trade sizes, the rules do not seem to apply.
The contrast with the cryptocurrency sector could not be starker. We have lost the biggest DeFi lender in Celcius, who entered Chapter 11 this week. We lost the biggest VC firm in 3 Arrows Capital, who’ve already filed for bankruptcy. Finally, BlockFi sold to FTX for a 99% loss on their most recent valuation. Quite right too — the rules are you pay, or go broke.
The LME were founded in 1877, it’s reputation has been destroyed in the past few months though and they will be in court for the next decade fighting these claims. If any entity should go to the wall as a result of this, it’s them. Big Shot played his cards, and let’s be honest, he earned his nickname.
Let’s look again at the reason the SEC gave for denying a bitcoin ETF.
“Ongoing concerns about market manipulation and a lack of investor protections”
The strong dollar
Perhaps the strangest consequence of the current market is its effect on the US Dollar. The American economy, or indeed the state of their finances, wouldn’t entice anyone to buy dollars but it cannot stop going up.
Across the globe, people need dollars since most international trade is conducted through it. As interest rates rise the pressure to pay off USD debts rises too.
The most profound effect is in the smaller economies. In Ghana for example the currency has lost 25% of its value since last year. When you consider that nearly all international trade in that country is conducted in USD it’s becoming quite serious. This effect is mirrored across Africa and to a smaller degree across the rest of the world.
In Thailand the government is considering sharp increases in interest rates after their currency lost 8% against the dollar this year. The battle to sustain purchasing power has only one tool and that is higher interest rates. The same is true in India which has a huge reliance on imported energy that is mostly funded with dollars.
Countries and corporations outside the US have borrowed $14 trillion in dollar denominated loans which is 7x the level of 2000. $4 trillion is owed by poorer countries.
As the dollar rises the pressure to pay off this debt rises too and the demand for dollars goes up and up. Sri Lanka has already declared bankruptcy having failed to repay $7 billion in foreign loans. Hard to think there aren’t more dominoes to fall before we turn the corner.
The rising stars of Asia won’t want this to keep happening though. The USD wrecking ball will wreck itself in the end. Objective number one across Asia is to get off the USD and they will.
Shot with chaser
That it needs to be said. When the football clubs issue statements saying “The Manager has the complete backing of the Board” it’s often shortly followed by their sacking.
Perhaps this is a procedural statement and the Governor says it every month but it’s certainly odd. The performance of the Japanese Yen suggests that all is not well. The Yen is now at its lowest point for over 20 years in what did look like a steady and managed decline and now looks like something rather worse.
Despite reassuring us all, he went on to highlight “very high uncertainty” over the economic outlook and pledged readiness to “ramp up stimulus” if it were needed.
How much more stimulus could there be? The BOJ already owns 80% of all Japanese ETFs and 10% of its stock market. Their bond holdings are even more breathtaking.
Like the governor says; situation normal. To be fair to him, he now owns most of the Japanese economy so is in a pretty good position to tell us how it’s going.
Then, as if by magic, his colleagues published this the following day.
Is a 46.3% increase in prices stable? Maybe.
Hot and hotter
Speaking of Japan. The value of household land in Australia as a percentage of GDP has reached pre-collapse Japanese levels at the end of 2021. Roughly 330%.
Back in the late 1980s, the land in Tokyo where the Imperial Palace sits was said to be worth more than California. It was a spurious measure but it did show that property prices in Japan were out of control.
The chart is a spurious measure too, non-comparable across different economies with different dynamics but it indicates the same thing. House prices in Australia are over the top.
A 30 year decline followed in Japan. Couldn’t happen here though because [please insert your property bias here].
Inflation in Europe is at 8%, the German economy is teetering on the brink of disaster and the ECB has launched a new webpage “dedicated entirely to banking supervision and climate change”.
Many times before I have pointed out the ECB has one sole mandate, price stability. The continual pursuit of green issues reflects their near total politicisation as an organisation.
The site itself is a bizarre justification of their actions.
“Climate change is a source of financial risk”
How many of the banks the ECB supervises have spreadsheets with a special formula for temperature changes affecting the value of client assets? None of them.
When Elon Musk bid for twitter (before he pulled the plug) did he say to his investment bankers, “don’t forget to adjust the bid price for climate change”. No, he didn’t.
The new website also publishes the results of the ECBs “Climate Change Stress Tests”
“Euro area banks must urgently step up efforts to measure and manage climate risk, closing the current data gaps and adopting good practices that are already present in the sector,” said Andrea Enria, Chair of the ECB’s Supervisory Board.”
It turned out that 60% of banks do not yet have a climate stress testing framework. Almost none of the banks include climate risk in their credit models. Surely there is a message to the ECB there. The experts at credit risk do not include climate risk because it doesn’t improve the model.
The idea of banking is to lend money and then get paid back. Generally they are very good at it and if they are choosing to exclude certain exogenous factors from their models then it’s probably because they aren’t relevant.
All the banks involved (which was nearly every bank in Europe) have received specific feedback from the ECB. Going forward where they are found to be non-compliant there will be an impact on their capital reserve requirements.
We can look forward to all sorts of unintended consequences here, like “we are unable to finance your desalination plant because cell 56K of our spreadsheet says there might be a drought”.