A Highly Levered Player, In a Highly Levered Industry, Tied to a
Highly Levered China
Full Report: Download
pdf - - 8 Pages
We have felt since the announcement by the US Federal Reserve of its
"TAPER" program that an inevitable collapsing commodity market in
Emerging Economies would be the catalyst for the next crisis. We concluded in
our Thesis paper "The Globalization
Trap" that a good proxy for a slowing China would initially be
commodity prices and in turn the levered players behind the massive commodity
run-up.
Make no mistake about it, China is in the process of a hard landing which
is being once again temporarily camouflaged by credit expansion! However, few
appreciate fully that the global credit cycle has turned! It is always the
first to turn with the catalyst being falling corporate free cash flows.
Buying the Credit Default Swaps of Commodity Trading Giant Glencore, had
been an ideal way to trade the Chinese hard landing and there is a lot we can
learn from Glencore about how the changing financial landscape will unfold.
Presently Glencore is the commodity trading firm getting most of the press
because
It is a Highly Levered Player, in a Highly Levered Industry, Tied to a
Highly Levered China
Be aware however, that it could just as easily have been the Vitol Group,
Trafigura, Gunvor Group Ltd Mercuria Energy Group, Louis Dreyfus Commodities
or Noble Agri. and there are more.
This group alone has recently raised at least $125 billion of debt . Why??
What is the panic?
A Trading Desk - The Counterparty Risk
We must appreciate that Glencore is first and foremost a trading desk
which serves as a counterparty with trillions in derivatives notional
exposure to virtually every other commodity using and trading entity in the
world. It is then easy to appreciate why Glencore's IG (Investment Grade)
rating is so critical.
Glencore is really not so much the Lehman as the AIG of the commodity
world: without an investment grade rating, a self-reinforcing collapse
will begin that could ultimately terminate Glencore's trading desk, in the
process liquidating one of the world's biggest commodity trading
counterparties.
Stay tuned, it is only beginning!
Read
Full Report - A "Glencore" Was Easy to See Coming!
