Tuesday, September 29, 2015

Financial Turmoil Warning Signs

Glencore, the mining and trading giant, is experiencing deep financial distress. Glencore is among the biggest commodity traders in the world and is experiencing distress because of the collapse in commodity prices.

Glencore is tentatively being compared to Lehman Brothers:

Nyshka Chandran, "Should you fear a ‘Glencore’ moment?" CNBC, September 29, 2015:http://www.cnbc.com/2015/09/28/glencore-may-spark-a-lehman-moment-for-miners.html

Experts are beginning to warn of the dire financial impact across the mining and metals space if Glencore, one of the world's largest resource companies, is unable to control its skyrocketing debt load.

Hong Kong-listed shares of the Anglo–Swiss commodity giant crashed 27 percent on Tuesday, on the back of a 29 percent plunge in the company's London-listed shares in the previous session.

The fall was sparked by a widely-circulated note on Glencore released Monday by Investec that pointed to a debt base well above its peers and a lower-margin asset base. The brokerage also warned of a scenario in which earnings could collapse entirely as Glencore worked purely to repay debt, which would eliminate all shareholder value. 
"Glencore is like Lehman Brothers, they have the most sophisticated trading desk when it comes to metals, coal, copper, iron ore. They're not just a company processing ore from the ground. If it was to unravel, that could have a global impact," Frank Holmes, CEO and chief investment officer at U.S. Global Investors, told CNBC on Tuesday.

....Glencore could be the name that drags the entire market down because it has an elevated leverage ratio in order to secure high returns, Holmes explained, adding that the firm also has many counterparty transactions, so there are concerns about a domino effect and the leverage of other parties.....

BACKGROUND on COMMODITY MARKETS AND ETFs (excerpted from my recent book project: Dispossession: Liberalism's Crisis)

Neoliberal Bubbles

Financialization of the economy produced vast speculative bubbles. Over the last twenty-years of neoliberal financial government, the US experienced the collapse of two major financial bubbles: the dot.com bubble in 2001 and the housing bubble in 2007-2008. In 2014-2015 the world faced implosion of another bubble that grew out of vastly increased financial speculation in tangible assets, especially commodities, such as food, oil, metals, etc. [i]

Speculation in commodities by large and small investors alike occurred in the wake of the dot.com implosion, the financial crisis, and continues presently, although commodities markets reached their peak in 2011.[ii] Speculative activity in commodities was facilitated by creation of Exchange Traded Funds (ETFs) and fueled after 2005 by investors’ growing concerns about debt-based securities, especially mortgages.

ETFs were invented in 1993.[iii] Defined most basically by NASDAQ, ETFS “are funds that track indexes like the NASDAQ-100 Index, S&P 500, Dow Jones, etc. When you buy shares of an ETF, you are buying shares of a portfolio that tracks the yield and return of its native index.”[iv] There are many types of ETFs and their myriad constitutions and derivatives are so complicated that experts routinely debate their fundamental nature, arguing about whether they are derivatives or equities.[v]

Some ETFs track mutual funds, but many track commodity markets in energy, grains and water and may be derived from future contracts on those commodities. These EFTS are derivatives. All forms of ETFs can create bubbles in commodities as a result of speculative-driven demand. ETFs based in food commodities were seen as a primary reason for the 2008-2009 food bubble that further impoverished millions of people as investors fleeing housing backed securities thronged commodity markets.[vi]

Assets in EFTS doubled between 2007 and 2012, reaching $1.2 trillion.[vii] However, as with housing-backed securities and derivatives, ETFs amplified systemic risks by simplifying investors’ capacity to make leveraged investments in commodities, while not actually owning them.

Indeed, in 2011, Mario Draghi, chairman of the IMF’s Financial Stability Board, which was instituted after the financial crisis to monitor transactions, asserted in an April 2011 interview with The Guardian that accelerating growth of exchange traded funds (ETFs) into a $1,200bn (£735bn) business was “reminiscent of what happened in the securitisation market before the crisis."[viii]

[i] Sharma, Ruchir. “The Next Global Crash: Why You Should Fear the Commodities Bubble,” The Atlantic (April 16, 2012), http://www.theatlantic.com/business/archive/2012/04/the-next-global-crash-why-you-should-fear-the-commodities-bubble/255901/

[ii] Javier Blas, “Oil-Rich Nations Are Selling-off Their Petrodollar Assets at Record Pace,” Bloomberg (April 13, 2015), http://www.bloomberg.com/news/articles/2015-04-13/oil-rich-nations-burn-through-petrodollar-assets-at-record-pace.

[iii] Investment Company Institute, “2014 Investment Company Factbook: Chapter Three Exchange Traded Funds,” Investment Company Factbook (2014): http://www.icifactbook.org/fb_ch3.html.

[iv] “What are ETFs,” Nasdaq (no date): http://www.nasdaq.com/etfs/what-are-ETFs.aspx.

[v] For example see Felix Salmon, “ETFs aren’t Derivatives,” Reuters (October 1, 2010): http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/Felix Salmon

and Herb Greenberg, “ETFs are Derivatives (Flash Crash Report),” CNBC, (October 1, 2010): http://www.cnbc.com/id/39463242.

[vi] Kaufman, F. (2010). The food bubble. Harpers, 27-38.

[vii] Bigda, Carolyn and Penelope Wang EFTs: Why so Complicated? Money Magazine (2012, September 1), http://money.cnn.com/2012/09/01/investing/etfs.moneymag/index.html.

[viii] Phillip Inman, “IMF raises alarm over exchange traded commodities funds,” The Guardian (April 17, 2011), http://www.theguardian.com/business/2011/apr/17/imf-commodities-funds-sub-prime.

1 comment:

  1. thanks for the heads-up majia. i guess when this one falls fukushima will be completely buried