A Canary Named Glencore

In the U.K., the largest commodity-related equity in Europe, has dropped by  more than 60+ Billion British Pounds, that is more than 80 Billion U.S. dollars. That’s a lot. That’s a large canary in the coalmine, and more than you may realize, it is an instructive story.

History Rhymes and Glencore

In case you missed it, you can read my July Financial Markets Update. Go to Expert’s Corner, and there is a link in the middle of the second row. If Glencore cannot fulfill its borrowing obligations on loans or bonds or other borrowing, then look out.  The way this works? The bank calls Glencore, Glencore can’t pay. The banks thinks they have a “hedge,” something that protects them from losing money, that they have purchased from another bank/investor. That bank or investor? Also exposed to Glencore. That bank or investor must sell something pay the original bank. What do they sell? Anything, let’s call it Google. So, while you are thinking that Glencore has nothing to do with you? Now you can see that assumption is like most other assumptions you make.

Now, it is not the opinion here that Glencore, specifically, is about to fail on some obligation to a lender, but that is the way the market is reacting. What wasn’t announced on the financial “news”? Banks and financial company stocks also got hurt more than the market average today. Hmmm. As is the case when there is any sense of panic, the professionals sell first, and ask questions later.

The real question is: how many Glencore-like borrowers exist around the world? The central challenge to the market is the answer to this question: the number is too high to count, and it ranges from the top of the S&P 500 to newly-formed companies.

Haven’ We Seen This Movie?

The answer is yes. Erase Glencore, and replace “your neighbor that bought a house they couldn’t afford.” Leave the word “bank” unchanged. Change “Google” to a “homeowner 1000 miles away.” “Your neighbor” has nothing to do with “homeowner 1000 miles away,” right? Now, they might as well live next door to each other. Have you witnessed this? 2007-2008. So while the players may have changed, the plot hasn’t really changed at all.

Haven’t we learned the lesson? Well…History Rhymes.

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