by Jim Willie, via Silver Doctors:
The entire Western financial systemic, complete with USDollar-based foundation platforms, is breaking down. The breakdown is in full view, very noticeable, in almost every arena. What happened in 2008 with the Lehman Brothers failure event is currently underway with almost every single financial platform, structural entity, financial market, banking structure, and arena. In response to the Lehman killjob event, where JPMorgan and Goldman Sachs strangled the victim firm (by denying Lehman proceeds on countless asset sales), the entire Western financial system has been lashed together, tied together, and connected among its many member parts. The main parts are the big banks, which use derivative contracts to lash themselves together. They believe there is strength in numbers, which is true to some extent.
But the consequence turns out to be that all will fail at the same time in a cascade of insolvent marred by illiquidity while steeped in corruption and market rigging. The breakdown could be described as having begun in full force, in earnest power, at the start of this 2016 year. This is the year of systemic failure, or financial breakdown, and of revelations of important crimes for the last generation or more. The revelations are against the Western power centers for their grand criminal activities. The East, by favoring a Gold Standard, has put the West on notice for exposure, if not prosecution. The gold weapon has power in its arbiter role in commerce, banking, and economies. No nation will be spared from the urgent nasty effects of being forced to achieve trade balance.
Bill Holter issued red alert warning: this is your last chance! Extreme distress and disruption is coming to the united states economy, businesses, politics, society, and community affairs. Bill Holter is associated with JSMineset, alongside Jim Sinclair. He is formerly from Miles Franklin, where he might have become too controversial in his very appropriate but unconventional views. Holter offers an extreme warning for people of the United States, that a series of nasty events is coming. Holter warns that the events will be so disruptive and historical without precedent, that recovery will be extremely difficult without proper preparation. This warning is the latest in a long string of such detailed specific warnings, as a result of the systemic breakdown and urgent official actions to come. The Jackass agrees with 97% of his message, a true red alert warning.
THE BIG SYSTEMIC BUST
A shocking $100 billion in Glencore debt has emerged, linked to commodity derivatives. The next Lehman has been spotted in the commodity trading arena, if not the gold mining sector. Similar exposure is cited for other large players, to reveal a potential half $trillion hole in energy finance. The global financial crisis is set to endure a redux of Lehman in a systemic event, as commodity derivatives reveal a major hole in the financial picture. The huge gaps of insolvency have nothing to do with mining project shutdowns, except perhaps indirectly. They are more directly related to lower commodity prices, in an immediate effect.
Bank of America has done an extensive analysis to break down Glencore’s true gross exposure. Glencore PLC is an Anglo–Swiss multinational commodity trading and mining company headquartered in Baar Switzerland, with its registered office in Saint Helier Jersey Isle. Here is their conclusion. “We consider different approaches to Glencore’s debt. Credit agencies such as Standard & Poors start with normal net debt, i.e. gross debt less cash and then deduct some share (80% in the case of S&P of RMIs, the Readily Marketable Inventories). These are considered to be cash-like inventories (working capital) in the marketing business. At the last results, RMIs were about US$17.7 billion. Giving full credit for RMIs plus a pro-forma for the equity raise and interim dividend, we derive a Glencore Adjusted Net Debt of about US$28 billion. On the other hand, from discussions with our banks team, we believe the banks industry (and ultimately regulators) may look at the number, i.e. gross lines available (even if undrawn) plus letters of credit with no credit for inventories held. On this basis, we estimate gross exposure (bonds, revolver, secured lending, letters of credit) at around $100bn. With bonds at around $36bn, this would still leave $64bn to the banks account (assuming they don’t own bonds). Over US$100bn in estimated gross exposures to Glencore.
We estimate the financial system’s exposure to Glencore at over US$100bn, and believe a significant majority is unsecured. The group’s strong reputation meant that the buildup of these exposures went largely without comment. However, the recent widening in GLEN debt spreads indicates the exposure is now coming into investor focus.” Debt default comes very soon, complete with huge fallout effects and contagion within the energy sector.
In other words, counting all exposure beyond ordinary debt, like derivative exposure, Glencore is mired in a $100bn hole. The Zero Hedge group of analysts is on the job, as always. They reported recently a change in the finance winds, making it more difficult to support the debt and other related exposure. Bond market spreads imply a non-investment grade rating. ZH reported the following. The group’s bond spreads imply a rating in the single-B range and a rollover cost of funding over 200 basis points (bps) above the cost of debt outstanding. We believe banks have gross margins on their exposures that are below the Glencore group’s average funding cost, with drawn financing at spreads around 50bps and undrawn lines materially below this. The cost of hedging exposure is currently over 600bps. Thus, the profit & loss (P&L) dynamics for banks are difficult.
This implies that banks may increase the challenge for the business model of commodity traders. This implies that banks may increase the cost of and reduce the availability of credit to commodity traders, thus challenging their business model. TCK refers to Teck Resources, in deep shiitte. Ooops, errr, deep sneakers! Glencore is in red, in severe trouble also. One must recall that Glencore is a major commodity trading house, and not an active business with tangible product in its activity. The chart given has a mix of trading firms and mining firms. All are at tremendous risk of failure.
Not only Glencore is cause for deep concern in bank exposure. Very likely the rest of the commodity trading space is in the same vulnerable position. Their combined gross exposure blows up to a simply stunning number. Among these unique firms, Glencore might not be the only exposure in the commodity trading space. Other entities such as Trafigura, Vitol, and Gunvor could become a new perceived risky feature on bank balance sheets as well. Think $100bn exposure, times four. A ripe half $trillion in very highly levered exposure to commodities is a very real prospect. The oil & gas price declines triggered this sector crisis. Bear in mind, the energy asset class has been crushed in the past year. According to the derivative desks, the Glencore 5-year Credit Default Swap tightened by 85 bps in a recent single day to around 640 bps.
Bank of America does some solid analysis. Here is their conclusion in summary. 1) Comparisons are being made with some financially leveraged companies during the 2008 Global Financial Crisis. 2) If credit is downgraded, banks could lower their exposure to Glencore. 3) The high yield market is small and therefore expect to see temporary dislocations in a scenario in which GLEN is downgraded to junk. 4) Bank stress tests could start to include commodity trader distress. This could lead to less credit availability and more expensive bank funding of traders. Credit to Zero Hedge for excellent analysis on an ongoing basis.
One can combine the energy sector debt distress with the commodity derivative exposure, to see a systemic Lehman event on the near horizon. The many factors are lining up to force a systemic failure event, a massive financial crisis globally with numerous sectors in failure mode. The energy sector has been well detailed for its debt risk to the big banks. The legal prosecution with heavy fines and penalties remains a big risk in the mortgage sector. The Emerging Market debt exposure, triggered by both currency risk and economic decline, has also been well detailed. The market rigging cases grow by the month. Finally, with cases like Glencore, the commodity derivative risk has entered the picture. The Jackass has been recounting the risk and building the case for a major systemic Lehman type of event in the very near future.
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