Theme collision...

This is a wonderful collision of major themes on this blog, namely:

1.  Gold is not a "safe" investment or necessarily negatively correlated to recessions, currency weakness, etc.

2.  China has little to no control over its internal credit procedures, which are largely politically directed, thus resulting in one of the biggest economic bubbles in history.

And so now we "discover" that an amount equal to the GDP of Iceland (15 Billion dollars or so) is the result of falsified transactions...and with "owners" of gold having to deal with multiple collateral claims in various jurisidctions, it again begs the question of "what do you, precisely, own when you have claims on precious metals in storage somewhere".

And what do the correspoding banks in China "own" when they list these loans as assets?

China’s chief auditor discovered 94.4 billion yuan ($15.2 billion) of loans backed by falsified gold transactions, adding to signs of possible fraud in commodities financing deals.

Twenty-five bullion processors in China, the biggest producer and consumer of gold, made a combined profit of more than 900 million yuan from the loans, according to a report on the National Audit Office’swebsite.

Public security authorities are also probing alleged fraud at Qingdao Port, where copper and aluminum stockpiles may have been pledged multiple times as collateral for loans. Steps by the Chinese government to rein in credit by raising borrowing costs in recent years created a surge in commodities financing deals that Goldman Sachs Group Inc. estimates to be worth as much as $160 billion.

There are two Iraqs...

The one with people, and the one with oil.  Which one remains a vital U.S. interest?

Militants seized the airport, TV stations and governor's
offices in Mosul, Iraq's second-largest city, as police and soldiers
ran from their posts -- a stunning collapse of the security forces
that has raised questions about Prime Minister Nuri al-Maliki's
ability to hold the country together.

In perhaps a sign of just how serious the threat is to Iraq's
stability, al-Maliki took to the airwaves to call on all men to
volunteer to fight, promising to provide weapons and equipment.

"We will not allow for the remainder of the ... province and the city
to fall," he said in a live speech broadcast on Iraqi state TV.

The facepalm is strong...

...concerning a recent interview statement given by "Maestro" Greenspan.

"I've made lots of mistakes in the 18½ years that I was at the Fed. I don't think that that (read: lowering rates) one was one and I don't think that we were as an organization significantly involved in what was happening in the global markets."

A new age...

...of corporate espionage.  Of course in this case, public and private interests are a bit comingled.

Full article here.

In 2010, as Westinghouse and China began talking about building more plants, the hackers intercepted internal discussions between Westinghouse's former CEO Aris Candris and about a half dozen other top-level decision makers, the indictment claimed. The correspondence dealt with strategy for negotiating a deal and concerns that the Chinese might one day become a competitor to Westinghouse in nuclear technology.

Over the next two years, the indictment said, Westinghouse had at least 1.4 gigabytes of information stolen from its computers. That's roughly equivalent to 700,000 pages of e-mails and attachments.

More on collateral shortages...

The engine is stalling...but what will the reversal bring?

Excluding those held by the Federal Reserve, Treasuries due in 10 years or more account for just 5 percent of the $12.1 trillion market for U.S. debt. New rules designed to plug shortfalls at pension funds may now triple their purchases of longer-dated Treasuries, creating $300 billion in extra demand over the next two years that would equal almost half the $642 billion outstanding, Bank ofNova Scotia estimates.

Fewer available bonds, along with a lack of inflation and increased foreign buying, help to explain why longer-term Treasuries are surging this year even as the Fed pares its own bond purchases. The demand has pushed down yields on 30-year government debt by more than a half-percentage point to 3.37 percent, the most since 2000, data compiled by Bloomberg show.

The supply of collateral

The Fed must taper at this point, given the lack of available collateral (and the decline in issuance of Treasury and "safe" Agency securities).  We are indeed in strange times, as if the black hole of QE and associated bond purchases is beginning to eject matter via the quasar of Fed tapering.  The consumption, storage, and ejection of all this financial matter is one of my major interests at the moment.

The interesting part is defining what the "matter" is...a zero interest note (dollars) or some "debt instrument" that accrues dollars via some future rate schedule?

Once of the themes of this blog is "what ramifications are produced when a world is run by a fiat currencies".  This is an unpredecented experiment in geo-political cooperation, and can be generally thought of as a treaty between the G20 nations.

Of course, treaties are always broken.

Billions and Billions...indeed.

The Crossfit Bubble

As a student of financial bubbles, I also seem pre-programmed to study the causes and effects of cultural, technological, political, intellectual, and environmental bubbles as well.  A "bubble" can be loosely defined as any function where outputs suffer marginally decreasing returns from inputs.  Put another way, a model cannot be sustained from increased effort and becomes inherently unstable.   Examples in unsustainability are all around us, and while the inputs and outputs may vary wildly through the spectrum of life, the causes and effects are quite consistent.

One example of an unsustainable growth model has to be the branded commodity called "Crossfit". This is an exercise program which emphasizes semi-random, extremely intense workout sessions.  I have tried Crossfit.  It is certainly challenging, but the emphasis here is not to argue about the merits of Crossfit as a training regimen, but rather investigate how sustainable it will be as a cultural and business phenomenon.  I have also attended the Crossfit Games ("The Games") in an effort to further understand the cultural sustainability aspect of Crossfit.

For the sake of Brevity, let me state that Crossfit  is most certainly an unsustainable cultural and economic bubble.

By emphasizing "elite fitness", and marketing the accomplishments of highly trained and physically gifted individuals, it naturally creates a division between patrons who are competing for the Crossfit Games and those who are "merely" there to exercise.  This was demonstrated in the cultural response to "registration" for the The Games whereby anyone with $20.00 to spend could post their results for several "open workouts" that would qualify them for competition.  Many elite competitors found it silly that novice athletes would attempt to qualify for one of the most strenuous contests of human work output on the planet.  But of course, this is the result of Crossfit attempting to grow by exploiting more revenue streams from its members.  A registration fee of $20.00 for, say, 300,00 members equates to $6 Million in profits with a cost basis of a spreadsheet program and associated webpage maintenance.  Not a bad take.

Also, the sheer number of Crossfit gyms (I live in New Orleans and there are now 3 within walking distance) has all the classic signs of a bubble.  Rapid expansion to capture the primary revenue stream of Crossfit (the sale of certification classes to teach Crossfit) has resulted in a glut of Crossfit gyms whose marketing materials state they "forge elite fitness".  If Crossfit wishes to continue this marketing image, and it must be understood that the marketing component creates much of the worth of the Crossfit brand, then diluting this image by catering to a mass audience will only serve to alienate Crossfit's core community.  Becoming the McDonald's of fitness does not enhance their brand.  It is a marketing tightrope walk that is unsustainable.  The core membership will fracture into several different types of branded fitness outlets, and the Crossfit brand will be hollowed out.

Speaking of competition, there is already exogenous competition in the form of athletic clubs and the like as well and endogenous competition in the form of Crossfitesque gyms  Again, this is branded exercise and there are no barriers to entry.  The Games themselves have a new competitor in the National Pro Fitness League.  This is reminiscent of the many "Texas Hold'em Poker" T.V. shows that proliferated in the early and mid 2000s before disappearing en mass.  All of this activity further erodes the branded fitness sector that Crossfit has come to dominate, and this dilution will cause crossfit gyms to compete on pricing alone (the fate of a commodity) and the bubble will burst.

The above analysis does not even take into account the possibility of even further brand erosion once Crossfit enthusiasts understand that competitors in The Games follow wildly different training programs than the rank and file members of individual Crossfit gyms.  But again, I don't want to get into efficacy arguments about the Crossfit regimen.  It is intense physical training.

I give this particular bubble 3-4 more years before the stresses due to an unsustainable model begin to challenge the brand and the entire business model.   I am not saying it will disappear completely.  People still watch Texas Hold'em poker shows...but viewship, prize money, and registration to major events are all down 30-50% from their peaks.  The inputs and outputs are different, but the causes and effects are the same.