In today’s Money Morning…cracks at the seams…a rally to end all rallies…improbable outcomes…and much more…
On Tuesday, market watchers witnessed something historic…
The price of nickel on the London Metals Exchange went absolutely ballistic.
From a closing price just shy of US$30,000 last Friday, it soared to over US$100,000 at one point on Tuesday. And while it has since pulled back from that extreme high, it’s still trading around US$48,000 at the time of writing.
For a popularly traded commodity, that is extreme. Even the ongoing conflict in Ukraine, while it certainly played a part, can’t be solely blamed for this.
No, see the real reason for this massive spike was margin calls. Turns out a handful of highly leveraged short sellers were on the wrong end of a big squeeze.
As a result, when they couldn’t front the money for what they owed, the LME price went parabolic. And while personally I am bullish on the long-term prospects for nickel, this news has given me pause for thought.
Frankly, this is a black swan event.
One that appears to have been smoothed over for the most part but begs a whole lot of questions…
Cracks at the seams
The biggest loser of all in this nickel frenzy is Chinese billionaire Xiang Guangda.
As the chairman of Tsingshan Holding Group — the world’s largest nickel producer — he had a huge stake in this nickel short. It’s a strategy that is employed by many commodity producers in order to hedge their own output and stabilise prices.
Unfortunately for Xiang, who is better known as ‘big shot’, he has been caught out.
Estimates suggest he may be down as much as $11 billion!
However, it seems unlikely that ‘big shot’ will have to front that much cash.
LME has already stepped in and halted trading while this mess is being sorted. And Xiang, according to Bloomberg, has already secured new loans and promises from JPMorgan and China Construction Bank.
Xiang certainly isn’t the only loser here, though, just the most prolific. Because while the cost is certainly high, it likely won’t matter all that much to his own fortunes or that of his company.
What does matter, though, is the precedent it has created.
The issue is that many investors are cheering from the sidelines as the price of nickel, oil, wheat, and a bunch of other commodities skyrocket. A rally to end all rallies, which has people greedy for gains.
I’ll admit I’ve even been somewhat swept up in all of this. It’s hard not to be when you consider the fact that Russia, a huge commodity exporter, has been outlawed from trade.
All logic suggests that supply is going down, so prices will go up!
Trouble is that logic doesn’t always cut it in the real world. Markets are far too unpredictable for that…
And that’s where the question of money, margins, and credit comes into the mix. Because as notorious Credit Suisse strategist Zoltan Pozsar states:
‘If you believe that the West can craft sanctions that maximize pain for Russia, while minimizing financial stability risks in the West, you could also believe in unicorns.’
Improbable outcomes
If you have the time, I would definitely recommend reading Pozsar’s full commentary for yourself. You can access it right here.
Keep in mind, I’m not telling you to treat his words as gospel. He may be right, or he may be wrong, but all that matters is that he’s offering a perspective few else are.
In his view, liquidity is quickly becoming a global economic issue. By cutting off Russia and subsequently raising the price of key commodities, we’re seeing (and will continue to see) more and more margin calls.
That means more squeezes, more credit, and a whole lot less liquidity.
It’s practically the same story as 2008, just in commodities rather than housing this time — a situation where too many market participants are overleveraged in collateralised assets. And if the funding runs out, the you-know-what hits the fan.
So does that mean you should run for the hills while you still can?
No.
Pozsar’s scenario has yet to play out, and like I said, he may be wrong. But the reason I wanted to share it with you is because it is worth knowing about.
The best way to not only make money in markets, but also retain it, is to stay aware.
It’s often the most improbable of ideas that winds up catching investors off guard.
Which begs the question, what should you do?
Well, as Pozsar concludes his commentary with:
‘After this war is over, “money” will never be the same again…
‘…and Bitcoin (if it still exists then) will probably benefit from all this.’
After all, the last big liquidity crisis was the catalyst for Bitcoin’s [BTC] creation.
It seems only fitting that the next one would crown it as the future of money.
Regards,
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Ryan Clarkson-Ledward,
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.
