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Will China Default ON Derivatives ?

Kong Sez:

    Folks, it's about to hit, and hit hard. Better get your curds and whey up, or you may find yourself sitting home with nothing to eat.

    Also, in speaking to Mr. "B," he reports to get a Pressure Cooker, if you do not have one. He listed so many reasons, I'll have to tell you about them later.

    But, for now, he states adamantly: " Get a Presto Stainless Steel Pressure cooker for 6 quarts for now; later get another with 8 quarts stainless steel pressure cooker. Do not get an aluminum cooker! Order with it, a stainless steel steamer with trivet, extra gasket, overpressure plug, air vent/cover lock with rubber gasket.

    He literally scared the living fire out of me! I ordered the 6 and 8 quart with the extra parts and have begun practicing with the 6 quart for all the emergencies he said that would be coming...especially for the rotten food and contaminated water. "Don't," Mr. "B" said, "feel secure in your freeze–dried foods and home canning when you have to start eating them to just stay alive. There are problems out there you're not aware of."

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    Unknown to the general public, China has decided it is tired of losing money on derivatives trades that are likely being manipulated by the big banks (the usual suspects), so it has decided to default rather than take the losses.

    What does this mean? It means that the bankrupt big banks, which have already been rescued once by huge amounts of taxpayer money, are about to take some really huge losses. And all for making bets on the price of oil.

    Remember what happened last year about this time, when the credit markets all over the world seized up? Look for more of the same, and maybe worse.

Let's take a look at what Dr. Gary North has to say about the subject on his members-only website. Click on his links to read more about the subject:

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What Will Happen When (Not If) China Defaults on Its Derivative Contracts?
Gary North
Sept. 7, 2009

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China has announced that it may default on derivatives held by several government enterprises.

I don't think there is any "may" about it. I strongly believe that China will default.

The banks on the other side of the contracts can scream bloody murder. So what? Where can they sue China? Whose court? Who will enforce a judge's ruling on China?

The day China defaults is the day that some big banks will experience some enormous losses. Which banks? Click here for the original Reuters story. The story says that no banks have been named. I'll bet not! It did report this:

Spokespersons at Goldman Sachs (GS.N) and UBS (UBSN.VX) declined comment, and media officials at Morgan Stanley (MS.N) and JPMorgan (JPM.N) were not immediately available for comment. All are major global providers of commodity risk management.

I will say this much: if any of these goes bust, the FDIC will have to go to Congress for more money.

Click here for a detailed discussion of the coming default.

The article speculates, intellectually speaking, on the commodity at risk. It's oil. If China bows out, leaving these banks holding the bag — long contracts — then they will have to sell, and sell fast. They will all sell at once. Oil's price will fall like a stone.

The markets are ignoring this. That's because the thought of a default by China is unthinkable. It could create another October 2008 scenario in the capital markets. The traders want to believe that China is bluffing. The Chinese government must be after something from Washington. It would have to be Washington. No one else has enough leverage, politically speaking. That is because banks have way too much leverage, economically speaking.

China will get away with a default. There are no sanctions available to penalize China enough to keep the country from defaulting. It's too big.

Why should China continue to pay American banks for the privilege of being in a rigged market? China thinks it's rigged. These are not stupid people. They are self-confident people. And they are bureaucrats. They don't want to be exposed as the idiots they were, entering into loss-producing contracts with wily capitalist bankers. They will not take the hit, eat the loss, whatever you want to call it.

When China defaults, the derivatives market could easily go into gridlock. Yet it's a huge market. How large? In mid-2008, the estimate of the Bank for International Settlements was over a quadrillion dollars. That is not net, after all contracts are offset. Offset, maybe $14 trillion. No one knows. In short, this is larger than what any government or central bank can cover. After China defaults and gets away with it, no one will know what the $1,100-trillion nominal value contracts are really worth.

Mark to market? What market?

You get the idea.

China has warned Western banks that this is coming. The investing public does not believe China. I do.

If the disputed contracts are oil-related, oil will fall and gold will rise as a crisis hedge.

Anyone dumb enough to enter a leveraged contract with a sovereign nation on the other side is really, truly stupid. Yet our best & brightest did this. Now they (and we) must pay the consequences.

Gasoline prices will be lower. Heating oil will be lower. Unemployment will be higher.

If I were a Chinese bureaucrat holding the bag on bad derivatives, I would recommend default. What if this locked China out of the oil markets? "Some other bureaucrat's problem." But would this lock out China? Not if China agreed to pay cash in the commodities market. Oil sellers will be desperate to sell at any price.

China imports oil. What better way to buy oil at a bargain? I can't think of any.

If China is bluffing, what is it bluffing for? A concession from the U.S. government? On what? A bluff that does not rattle the targeted market is not taken seriously. Why go public with this story in advance if it's a bluff? In any case, what if Washington calls the bluff, thinking it's a bluff, and it isn't? This is a high-states bluff.

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Kong Sez:

    Kong is looking for the bananas to hit the fan in the upcoming month. He's hiding his bananas in the nearest cave with his pressure cookers.

    And look for the government to try and rescue these loser-banks AGAIN! How long do we have before the United States government is forced to declare default?

    Look for total chaos in the very near future.

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Kong Sez:

    By the way, The Elliott Wave Financial Forecast, August 28, 2009, writes:

"Barely six months into his presidency," a Washington Post column observes, "Barack Obama seems to be driving south into a political speed trap known as Carter Country: a sad–sack landscape in which every major initiative meets not just failure but with scorn from political allies and foes alike."

    The pressure is increasing on him and will start taking its toll on his looks, (already more gray), health, and his making more irrational/ill–logical decisions. He is not ready for what's coming to this country.

    ... And For Those Who Missed The Recent ChemBioUpdate, The Egg! Click Here.

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