Very soon we will be entering the month of June. Normally June is
the time of year in the northern hemisphere when people think of picnics,
parks, water sports and the outdoors. It is a time where plans are made
for vacation, rest and relaxation. This year may be a little bit
different. I say “different” because there is a plethora of converging
events, any single one of them with the ability to take the financial markets
down to their knees!
Let’s first list the events (which may not even be all inclusive because I
either forgot something or am unaware of). What I see converging in
June is as follows; the Austrian mortgage banks and banking sector, Greece,
Ukraine, India, Russian sanctions, a Russian/Chinese announcement, the “very
secret” TPP, and let’s not forget the second largest gold expiration on
COMEX.
Since we know so little about the TPP (Trans Pacific Partnership), let’s
start with this one. We know so little about it because it is being
negotiated in secrecy. So
“secret” in fact, anyone who gets to see what is written so far is threatened
with jail time if they divulge anything about it. This harks back
to Obamacare when Nancy Pelosi once giggled like a little school girl and
said “we have to pass it to see what’s in it!”. Fast forward and yes,
we now know what was in it, a healthcare industry in turmoil, higher premiums
and a “tax” if you don’t participate… Going all the way back to NAFTA,
none of these deals has been “good” for the American worker, one can only
imagine how deafening that “giant sucking sound” will be that Ross Perot
first heard in 1991? Not even sure how this is possible, our
legislative process has been kidnapped with no ransom even
requested. If this masterpiece gets unveiled in June, a wonder as to
market reaction?
Next there is the Austrian mortgage bank Hypo Alpe Adria, will they make
their smallish payment of 500 million euros or will they start a chain
reaction? If you recall, this pinch came about when the Swiss de pegged
the franc and revalued some 20-30% higher within 10 minutes, in many cases
it made the loans in Swiss francs worth more than the underlying properties
themselves. The southern province of Carinthia has already backed away
from pledges previously made by simply saying “we can’t pay”. An
important understanding is how all of these banks …own each
other’s debt. In other words, the “cross ownership” of debt means
that when one goes down it will act as a hit to many of the other’s
portfolios. While this is not a huge trigger, all of Eastern Europe can
and will be affected by what originated from the Swiss de pegging the franc
from the Euro. With the system as illiquid as it is, there is no
telling how far this one could reverberate?
On to Greece, they have already raided pension funds and sequestered local
monies, June 5th is the deadline according to their finance minister.
They owe 320 billion euros, they do not have the money to pay nor do they
have a printing press to create it. The only way out is to borrow more
…or default and fall into the open arms of Russia and China. The latter
seems most likely to me. Greece is a natural trading partner with
Russia and does sit along the “old silk road”, moving away from the U.S. and
even the Eurozone seems a natural. Please remember the big “nut” here
is not the 320 billion euros, it is the CDS written in multiples on their
debt AND the interest rate swaps in existence, these are in the TRILLIONS,
not chickenfeed in an already illiquid world!
Logically, the next one to segue into is Russia and the NATO sanctions due
to expire …in June. If a vote were to be taken today, would the
sanctions be re imposed? Would Germany vote for them? Will Greece
vote for them if they are still a member of NATO by June? Please
understand the relationship between Mrs. Merkel and Mr. Putin, they “used to”
talk on the phone daily …until the NSA spying revelations of last year.
Will Mrs. Merkel go for more sanctions? What will she do about further
aid to Greece. Greece has the ability to ignite many things,
financially and politically all bad for the West.
Moving along, let’s look at Ukraine. The IMF is seeking a
restructuring (read haircut) on $10 billion worth of Ukrainian debt with
private holders.
This, the IMF says is necessary before another aid package of $40 billion is
approved. The “haircuts” requested are in the neighborhood of
40-50%, will this one fly? Let’s not forget, Russia lent $3 billion to
Ukraine in late 2013, I wouldn’t bet they will be accepting haircuts any
time soon. In fact, wouldn’t it behoove Russia to watch Ukraine default
…and further pressure the financial system of the West? Interestingly,
John Kerry just met over the weekend with Russian minister Lavrov, what exactly
did they talk about? If I had to speculate, my guess would be the U.S.
has just walked away from this pink elephant. But why? Why would
the U.S. walk away now?
Again, further speculation but it seems to me quite odd that Russia would
announce “Chinese gold holdings” of 30,000 tons via Pravda. To rehash
this, would Pravda have released this article without Moscow’s
permission? Would Moscow have given permission without the approval
from Beijing? Was Mr. Kerry/Obama informed that China will announce
this 30,000 ton hoard of gold shortly? Is it a true story or
not? As I wrote a few days ago, “gold” is a financial thermonuclear
weapon, able to destroy the fiat of the West. It would not surprise me
in the least if Washington was given the “courtesy” of a heads up to some
sort of coming announcement even if a smaller sum than 30,000 tons. The
point here is this, any announcement by China raises the question of Western
holdings which of course brings Western currencies into question. It
will be very interesting to see how forceful the U.S. is regarding Ukraine,
this gold issue may just be the “softener”? I believe we will see very
soon whether or not the U.S. changes tack regarding Ukraine (amongst others)
as I suspect the Pravda announcement was no error at all.
Another
June deadline is India trying to remonetize gold .They propose to allow
the deposit of gold on account and interest paid on it. This would
immediately boost the economy with a shot of adrenaline as collateral would
be massively boosted and lending could blossom. The only problem is
that this is about the 5th or 6th time such a plan has been trial ballooned
and even if passed, the citizens of India will probably not go for it in
masse anyway. They have a long history of holding their gold in hand
with no counterparty risk between them and their gold. It might work to
some extent but the number of 25,000 tons being deposited is a pipe
dream. It should be said however, when China does finally announce
their holdings and increase their ability to “price” global assets, the
Indians will sit at the table as there is no doubt they hold massive
quantities in total!
Lastly but not least important is the June gold expiration on the planet’s
favorite gold “pricing” mechanism, COMEX. As of today, there are
187,500 contracts open for June; this represents 18.75 million ounces of gold
or 581 tons. The “registered” for delivery category has been bled down
to about 11 tons or about 378,000 ounces of gold. The first notice day
is June 1st, only seven trading days away. Does anyone see a potential
problem here? A “problem” as in there are 50 ounces of gold contracted
for every one ounce COMEX claims to have?
Yes, yes, I know I have gone through this exercise before and each time
the open interest just dried up and blew away. In fact, many expiration
months have seen accounts FULLY FUNDED with cash to purchase the gold on
first notice day, only to “go away” later in the month. This makes no
sense whatsoever. Why would anyone fund their account fully in order to
pay for purchase and then just walk away? On the other side, why would any
short not deliver on the 1st or 2nd day of the month as they must pay storage
costs for each day they don’t deliver? The answer of course is very
simple, the gold does not exist to make delivery and the shorts do not want
to let go of what very little they have …and instead cash settle with a
little cherry on top? Before finishing this section, it should be
pointed out that the ETF GLD has bled 17 tons over the last few weeks where
gold rose $50. How does this make any sense at all? It only makes
sense to me if someone needed the metal to deliver elsewhere and immediately.
A strange occurrence but a topic for another day.
So there you have it, June could be quite the month as many events all
converge over the 30 day timeframe, and none of them good! I have
warned and warned, you must have exactly the positions you want should the
markets close and not offer you the chance to alter. Please, imagine a
world where things actually make sense and logic counts for something when it
comes to valuing assets. Let’s call it “Mother Nature world” where
values make some sense and are actually related to each other and to
reality. How would your portfolio or financial position look like if we
woke up one fine Monday morning in June to a brand new world?