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Gosplan Watch: Plumbing alert as commodity hedging unravels

The next liquidity crisis never comes from the same one the last one did.

Big, in fact huge, news in the world of commodity trading. Specifically the nickel markets.

I will do a more comprehensive wrap about what this all means for PAID subscribers later today. (Head to my subs page to get the info on that.)

But very quickly – writing this on an iPhone while trying to get daughter to school so please be forgiving about typos – Bloomberg is reporting that China Construction Bank is being given extra time by the LME to deliver margin call related to a major Nickel short in the market.

Here’s the key bit in bold:

By Bloomberg News
(Bloomberg) — Nickel soared past an unprecedented $100,000
a ton on the London Metal Exchange amid a huge short squeeze
that’s embroiled a major state-owned Chinese bank and encouraged
rule changes from one of the world’s top commodity exchanges.
The material used in stainless steel and electric-vehicle batteries surged as much as 111% Tuesday after rallying as much as 90% the day before. The market on the London Metal Exchange
is in the grip of a massive squeeze in which holders of substantial short positions are being forced to cover at a time of low liquidity. Nickel rose 106% to $99,000 a ton as of 2:23
p.m. in Shanghai. Late Monday, the LME decided to allow traders to defer delivery obligations on all its main contracts — including nickel — in an unusual shift for a 145-year-old institution that touts itself as the “market of last resort” for metals. The LME also gave a unit of China Construction Bank Corp. extra time
to pay hundreds of millions of dollars in margin calls that were due Monday, according to people familiar with the matter.

To give more time on a margin call is pretty unprecedented. To give China Construction Bank specifically more time than most other players – and hence the appearance of special treatment – is even more significant.

First you have to question how it is possible that CCBC doesn’t have the funds to cover this?

Either they don’t have the funds – which seem ludicrous – or they do but don’t want to pay for geopolitical reasons. Alternatively they are facing a situation where a client has defaulted on them but they are also prepared to default on the LME (quite extraordinary) if they don’t get paid.

What are the implications?

Well, the worst case scenario is that the LME experiences a domino wave that feeds through the entire commodity complex. No biggie.

On which note, the following from Zoltan Pozsar’s latest note – one of the world’s most informed money market experts – is really a very likely possibility.

We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West.

A crisis is unfolding. A crisis of commodities. Commodities are collateral, and collateral is money, and this crisis is about the rising allure of outside money over inside money. Bretton Woods II was built on inside money, and its foundations crumbled a week ago when the G7 seized Russia’s FX reserves…

The beautiful paradox of linear rates (the stuff you trade and I write about) is that you need to think linear to find relative value most of the time, but you have to think non-linear to recognize and survive regime shifts. We are seeing a regime shift unfold in funding markets currently (which, as always, will pass), and a sea change in inflation dynamics and FX reserve management practices.

I agree with Zoltan.

We are moving into the new commodity-backed Gosplan, with each major influence zone operating its own CBDC system. See all my work on the Eurodollar, xenodollar and cbdc market at the FT for background.

The question is how interoperable will these Gosplan systems be? How far spread will the Gosbankification be? What element of free floating currencies will be left? How will counter trade and the black market evolve? Will bitcoin be able to operate with such high energy costs at all?

The pathway from here to Gosplan is via rationing. I can’t see any other way around it.

Hang on for the ride because it’s going to be a wild one.

I might even consider accepting Bitcoin 😜 (Or nickel.)

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