Wednesday, November 30, 2011

Currency Wars: Fed Acts To "Increase the Availability of Dollars Outside the United States"

"Several people have asked what I think about this.

I wrote about this just yesterday. I could not ask for a better straight man than Ben Bernanke.

"I think the major monetization is already occurring in the Eurodollar markets, and an ongoing stealth bailout of European debt, in order to save the big money center banks at home and broaden the reach of the Dollar.

And this is why the Fed stopped reporting on Eurodollars some years ago, as a component of M3. It was to pave the way for the monetary equivalent of a financial neo-con, to addict European governance to the US dollar and pave the way for a stronger position for the dollar as a one world currency."


The collateral limits of coordinated action

"Wednesday’s central bank intervention is impressive in its symbolism but unlikely to do much more than buy eurozone leaders a few days.

RBS’ US rates team has provided a useful analysis of the move. The immediate background to the intervention, according to the strategists, is that European institutions have been having trouble funding in the US repo market so have turned to the currency markets instead — buying USD then reversing the transaction three or so months later. Hence the recent stress in the currency basis swap markets..."


Financial comet crashes into planet hyperbole

"Well, we asked for an update. Now let’s play spot the difference.
Before (about 10am New York time):

After (about noon New York time):.."

Central Banks Announce Coordinated Liquidity Effort to Alleviate Euromess

"Any of you who are market oriented no doubt are all over the news of central bank coordinated liquidity efforts. This is from the Federal Reserve’s announcement:
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity..."

Armageddon Delayed; All Quiet on the European Bond Front; Italy and Spain Bond Schedule through 2021; Belief in Fairy Tales

"Steen Jakobsen, chief economist from Saxo Bank in Copenhagen notes a huge belief in fairy tales. Steen writes via email ....
There is HUGE believe in the ECOFIN meeting producing news, good news on the fiscal union. Some commentator speculate we will be in EU Heaven.

Clearly these things takes a lot longer time wise than we would like but declaring the EU either dead-or-alive by the next EU Summit on December 9th is slightly overdone. The EU process continues and the politicians clearly feel they have ample time on their hands..."


Ron Paul Statement On The Fed's Bailout Of Europe

"Statement on the Fed's Continued Euro Bailout

The Fed's latest actions in cooperating with foreign central banks to undertake liquidity swaps of dollars for foreign currencies is another reason why Congress needs enhanced power to oversee and audit the Fed. Under current law Congress cannot examine these types of agreements. Those who would argue that auditing the Fed or these agreements with central banks harms the Fed's independence should reevaluate the Fed's supposed independence when the Fed bails out Europe so soon after President Obama promised US assistance in resolving the Euro crisis.

Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis. Central banks are grasping at straws, hoping that flooding the world with money created out of thin air will somehow resolve a crisis caused by uncontrolled government spending and irresponsible debt issuance. Congress should not permit this type of open-ended commitment on the part of the Fed, a commitment which could easily run into the trillions of dollars. These dollar swaps are purely inflationary and will harm American consumers as much as any form of quantitative easing..."


22 Reasons Why We Could See An Economic Collapse In Europe In 2012

"The following are 22 reasons why we could see an economic collapse in Europe in 2012....

#1 Germany could rescue the rest of Europe, but that would take an unprecedented financial commitment, and the German people do not have the stomach for that. It has been estimated that it would cost Germany 7 percent of GDP over several years in order to sufficiently bail out the other financially troubled EU nations. Such an amount would far surpass the incredibly oppressive reparations that Germany was forced to pay out in the aftermath of World War I.

A host of recent surveys has shown that the German people are steadfastly against bailing out the rest of Europe. For example, according to one recent poll 57 percent of the German people are against the creation of eurobonds.

At this point, German politicians are firmly opposed to any measure that would place an inordinate burden on German taxpayers, so unless this changes that means that Europe is not going to be saved from within.

#2 The United States could rescue Europe, but the Obama administration knows that it would be really tough to sell that to the American people during an election season. The following is what White House Press Secretary Jay Carney said today about the potential for a bailout of Europe by the United States..."


The problem of the West is too much Debt and too many unfunded liabilities

"Marc Faber : “The optimism arises from some sort of a bailout and monetization. But if you look at the market, OK it’s up, but gold is also up and oil is up. Like in the US, we monetized time and again and it’s just postponing the problem. In the end, crisis will eventually happen. The problem of the Western world is that there is too much debt and too many unfunded liabilities.”


Europe will Monetize like the US

"Marc Faber : “The big picture endgame in Europe is that they will also monetize like in the US and that will postpone the problem, but it will not solve it.”


Monday, November 28, 2011

Worries continue

"If you're prone to worry about where the economy's headed, last week's developments weren't very reassuring.
On Tuesday, the Bureau of Economic Analysis revised its estimate of third-quarter real GDP growth down from the initially reported 2.5% annual rate to a new figure of 2.0%. That revision in itself is not particularly scary, since it mostly came from the fact that inventories were drawn down even more than originally estimated-- real final sales still grew at a decent 3.6% annual rate for the third quarter. But more troubling is the fact that Tuesday's figures also gave us the first reading on an alternative measure of third-quarter GDP that is based on a calculation of the total income being earned. This measure, gross domestic income, is conceptually equivalent to GDP but indicated only 0.4% annual real growth for 2011:Q3. Fed economist Jeremy Nalewaik maintains that GDI can give a slightly better early warning of a business cycle turning point. One reasonable procedure is to go with the average of the GDI and GDP growth rates, which gives an anemic 1.2% annual real economic growth rate for the third quarter..."

Quarterly growth of real GDP and real GDI, quoted at an annual rate, 2006:Q1-2011:Q3.


Euro Fracture: It’s the Politics, Stupid!

"Politics has been and will be the constraint on the latest iteration of Bailout Europe 4.0. We at the Global Macro Monitor really want to see Europe make it, for markets to rally, and for all to make money.
But the latest bailout announcement, which includes a Euro 600 billion loan facility from the IMF, which, by the way, exceeds the Fund’s total lending capacity, currently around $400 billion, doesn’t pass the political smell test. There are also rumors swirling of a Eurobond. As usual, the news has sparked a nut cracking short covering rally with S&P futures up over 25 points.
We see several political reality checks on the latest deal rumors, however, because at the end of the day any large sovereign bailout is a bailout of the major European banks. The global public doesn’t want here about global systemic risk and we expect huge political pushback on this one. Imagine how this will play in the U.S. Presidential election.
1) 79 percent of Germans oppose a Eurobond;
2) Occupy _______ will not be happy if taxpayers have to contribute more funds to the IMF to bailout European financial institutions, mainly French and German banks;
3) Italians will not be happy with severe austerity imposed by the IMF, which will require massive labor reforms, including cutting pensions and wages;
The financial rivets are popping and the latest rumors of new deals could buy some valuable time. But we’re beginning to believe it’s too late for Euro as we know it.
Maybe because there is no magic solution — x/ hyperinflation — as the true end game will be debt restructuring and the allocation of losses to those who caused crisis in the first place — i.e., the sovereign borrowers and private lenders – as it should be, no? Reality is setting in and Europe is running out of illusions, delusions, and quick fix short squeezes..."


Quelle Surprise! Banks Lied About Bailout Funds and Got $13 Billion in Profit from Them

"Bloomberg News is continuing with the tankless task of pushing forward with FOIA requests relative to the Fed’s lending programs, and once it eventually gets its troves of documents, having to slog through them to see what they reveal.
Bloomberg has a long article up on its site about its latest findings. And the bottom line is everybody close to the process lied like crazy. For instance:
Banks lied during the crisis. The big banks said they were in really good shape even as they were sucking tons of credit from the Fed. The ones that arguably were healthier, like JP Morgan, tried the “they threw me in the br’er patch, I really didn’t want all that money,” in fact stayed in the program well beyond the acute phase of the crisis because it liked getting all that cheap funding.
Now this sort of misrepresentation is a securities law violation, but since the regulators presumably winked and nodded and it would be hard to prove damages, no bank executive will be held to account.
Bloomberg also performs the useful task of trying to ascertain how much benefit the banks derived from the cheap funding. They come up with $13 billion, or roughly 23% of profit (they assume typical margins, when it would take a good deal of internal data to make more refined estimates). This is actually a very narrow definition of profit impact. The Fed stepping into the markets to shore up the banks by design stabilized and boosted asset prices, which surely had a significant profit impact.
Regulators lied to Congress. The article does a good job of marshaling details:
Bernanke in an April 2009 speech said that the Fed provided emergency loans only to “sound institutions,” even though its internal assessments described at least one of the biggest borrowers, Citigroup, as “marginal.”….
Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark.
“We didn’t know the specifics,” says Gregg, who’s now an adviser to Goldman Sachs.
“We were aware emergency efforts were going on,” Frank says. “We didn’t know the specifics.”…
Lawmakers knew none of this.
They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. (INDU) The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only “healthy institutions” were eligible…
Had lawmakers known, it “could have changed the whole approach to reform legislation,” says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size..."

The End Of The Euro

"Investors sent Europe’s politicians a painful message last week when Germany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven.

Since the global financial crisis of 2008, investors have focused on credit risk and rewarded Germany with low interest rates for its perceived frugality. But now markets will focus on currency risk. Inflation will accelerate and the euro may break up in a way that calls into question all euro-denominated obligations. This is the beginning of the end for the euro zone..."


ICAP Testing Trades In Greek Drachma Against Dollar and Euro

"ICAP Plc, the world's largest inter-dealer broker (one that carries out transactions for financial institutions rather than private individuals), is now Testing Trades In Greek Drachma Against Dollar, Euro
ICAP Plc is preparing its electronic trading platforms for Greece's potential exit from the euro and a return to the drachma, senior executives at the inter-dealer broker said Sunday..."


Sunday, November 27, 2011

Houses of Pain: More Americans Support Communism than Approve of Congress

"NPR's All Things Considered featured a story on Friday regarding growing discontent in the US over Congress  and lawmakers' sentiments on political problems in America. In October, a CBS News/New York Times poll showed that Congress' approval rating had sunk to 9 percent, an all-time low. It appears that the vast majority of Americans do not approve of Congress as we hobble towards the 2012 elections.

In response to the poll, Sen. Michael Bennet, a Democrat from Colorado, while on the floor of the nearly empty Senate quipped that, "More people support the United States becoming communist -- I don't, for the record -- at 11 percent, than approve of the job that we're doing." Bennet continued, "I guess we can take some comfort that Fidel Castro is at 5 percent."

While political gridlock and economic troubles may play into Congress' poor approval rating, there may be deeper issues at stake. Commenting on the failure of the congressional bipartisan supercommittee to make a deal on federal savings, Sen. John Kerry, D-Mass, told reporters that the question to be asked is, "What is the problem?" And in response, Kerry concluded that "the problem is a huge ideological divide in our nation."

Nevertheless, a stark ideological divide in the US is old news. From the NPR story: "[Michigan Rep. Candice Miller] noted that voters did elect a divided government last year." Miller: "We are really a reflection of the country...because you have half the country that probably wants more government, more government spending, etc., more government regulation. You have the other half of the country that is saying, 'no'."

Even so, again, political division based on ideology in the US is old news. This country has worked through political division in the past. In this time period, the crux then becomes actually working towards a sense of viable compromise going forward by way of mutual cooperation. But in this light, increasing polarization in American society is causing the American political process to appear counterproductive. Political factions do not seem to even want to come to the table to discuss options -- let alone work together to find common solutions..."


Number of the Week: Germany, France Not Immune to Debt Problems

"37,700 euros: Euro zone debt per working-age person in 2011
Pressure has built on France and Germany to shore up the finances of their struggling partners in the euro zone, but the two countries have debt issues of their own that could limit the amount of help they can extend.

Greece, Ireland and Italy have been at the forefront of the sovereign debt crisis in the euro zone and for good reason. They have the highest debt per working-age person in the common-currency region. According to data from the European Commission, Greece has some 47,000 euros of debt per capita, while Ireland and Italy have 55,000 euros and 48,000 euros, respectively. The euro zone average is 37,700 euros.

France and Germany are better off than Greece, Ireland and Italy, but they’re still above the euro zone average. France has 40,000 euros in debt for each person in the country, while Germany is at 39,000 euros per capita. That puts both of them above Portugal and Spain, which are often lumped in with the struggling periphery. Portugal debt per capita is 25,000 euros, while Spain’s is 24,000 euros..."


This Is A Dangerous Shift In The Middle Eastern Balance Of Power

"U.S. troops are in the process of completing their withdrawal from Iraq by the end-of-2011 deadline. We are now moving toward a reckoning with the consequences. The reckoning concerns the potential for a massive shift in the balance of power in the region, with Iran moving from a fairly marginal power to potentially a dominant power. As the process unfolds, the United States and Israel are making countermoves. We have discussed all of this extensively. Questions remain whether these countermoves will stabilize the region and whether or how far Iran will go in its response.
Iran has been preparing for the U.S. withdrawal. While it is unreasonable simply to say that Iran will dominate Iraq, it is fair to say Tehran will have tremendous influence in Baghdad to the point of being able to block Iraqi initiatives Iran opposes. This influence will increase as the U.S. withdrawal concludes and it becomes clear there will be no sudden reversal in the withdrawal policy. Iraqi politicians’ calculus must account for the nearness of Iranian power and the increasing distance and irrelevance of American power.

Resisting Iran under these conditions likely would prove ineffective and dangerous. Some, like the Kurds, believe they have guarantees from the Americans and that substantial investment in Kurdish oil by American companies means those commitments will be honored. A look at the map, however, shows how difficult it would be for the United States to do so. The Baghdad regime has arrested Sunni leaders while the Shia, not all of whom are pro-Iranian by any means, know the price of overenthusiastic resistance..."


The Entire Sovereign Debt Crisis Can Be Understood By Looking At Sweden Vs. Finland

"These two charts basically explain everything.
The first chart shows the yield on the Swedish 5-year bond.
As you can see, it's absolutely plummeting right now.

Image: Bloomberg

Now here's a look at its neighbor, Finland, and the yields on its 5-year bond.

Image: Bloomberg

Basically they look identical all through the year up until November and then BAM. Finnish yields are exploding higher, right as Swedish yields are blasting lower.
The only obvious difference between the two: Finland is part of the Eurozone, meaning it can't print its own money. Sweden has no such risk.
This is a narrow version of something that much of the media picks up on earlier last week that UK gilts were trading with a lower yield that German bonds, a reflection of the same principle: In UK the government can print. In Germany, it can't..."


Growth from international capital flows: The role of volatility regimes

"Recent commentary has suggested that capital inflows – long considered a positive for growth – may actually be doing more harm than good. This column presents new evidence reinforcing the conventional interpretation. It finds that volatility is the determining factor. With volatility below a threshold, an inflow of foreign capital promotes growth. But during periods of volatile growth, the effect is opposite.

In a recent survey, Kose et al (2006) find little robust evidence for long-run growth benefits from global capital inflows. Prasad et al (2006) go a step further. They argue that developing countries grow faster when they rely less on foreign capital, as suggested by a positive relationship between current-account surpluses (capital outflows) and average growth (Figure 1). The conclusion then is that international capital may even hurt economic growth in poor countries.1 This proposition has now acquired the status of a ‘stylised fact’ and is the cornerstone of a growing theoretical literature (eg Gourinchas and Jeanne 2007)..."

Figure 1. The paradox of capital


Italy Is Closer To Collapse Than Anyone Realized, And So Is The World

"Some stories in European press (La Stampa - Zero Hedge link) suggest that Italy is working on a very big loan package from the IMF. I have no doubt that there are ongoing discussions. There has to be. Either someone puts a finger in the dike or Italy goes tapioca.

That thought is difficult for me to fathom. How could we be so close to the brink? At this point there is zero possibility that Italy can refinance any portion of its $300b of 2012 maturing debt. If there is anyone at the table who still still thinks that Italy can pull off a miracle, they are wrong. I’m certain that the finance guys at the ECB and Italian CB understand this. I repeat, there is a zero chance for a market solution for Italy. Either the ECB (aka Germany) steps in and underwrites the debt with some form of Euro bonds or the IMF (aka the USA) steps in with some very serious money..."


Report:: Euro-zone considering bilateral agreements for fiscal integration

"As we all know the markets are moving faster than the policymakers in Europe. So it appears the policymakers are going to try to implement a fiscal union quicker.

But will that help? Will it bring private investors back into the bond market? Probably not, but some people think it might allow the ECB to take more aggressive action.

Oh well, the new key date is Friday December 9th.

From the WSJ: Euro Zone Weighs Plan to Speed Fiscal Integration
Euro-zone countries are weighing a new plan to accelerate the integration of their fiscal policies ... Under the proposed plan, national governments would seal bilateral agreements that wouldn't take as long as a cumbersome change to European Union treaties ... The pact that euro members are considering could be announced before the EU summit on Dec. 9 ... Some German and French officials fear that an EU treaty change could take far too long.
A new, binding fiscal regime would not be enough to justify the creation of collective euro-zone bonds, German officials say. But it might be enough to justify ECB action to stabilize bond markets..."

Merkozy Proposes Quick, New, Drastic "Stability Pact" to Fight the Euro Zone Sovereign Debt Crisis; Maastricht Treaty Trashed by Committee

"German chancellor Angela Merkel and French President Nicolas Sarkozy proposed a "quick new stability pact" that allegedly will bypass the need for treaties. However, there is already disagreement over the role of the ECB.

Please consider Germany, France plan quick new Stability Pact
German Chancellor Angela Merkel and French President Nicolas Sarkozy are planning more drastic means - including a quick new Stability Pact - to fight the euro zone sovereign debt crisis, Welt am Sonntag reported on Sunday.

The report, which echoed a Reuters report on Friday from Brussels, quoted German government sources as saying that the crisis fighting plan could possibly be announced by Merkel and Sarkozy in the coming week.

The report said that because it would take too long to change existing European Union treaties, euro zone countries should avoid such delays be agreeing to a new Stability Pact among themselves - possibly implemented at the start of 2012..."

EFSF Cash For Irish Bailout Running Out

"Just when Europe thought it would only have to worry about an Italian bailout, we get news that not only is Greece about to renegotiatie its entire debt haircut, but that Ireland suddenly finds itseld out of bailout cash. From the Independent: "As EU leaders dither, the European Financial Stability Facility (EFSF) -- the limp pan-euro bailout fund -- may struggle to raise enough money to fund the payments to Ireland agreed under the €67bn IMF/EU bailout package. There is "genuine fear" that the fund may not be able to access the markets as investors shun the euro region, according to UBS." As noted earlier, the EFSF's rates are soaring at an alarming pace: "every 1 per cent rise in funding costs for the EFSF costs Ireland about €200m, according to calculations by Goodbody Stockbrokers' economist Dermot O'Leary." All is good though according to UBS because should the EFSF fail in even its existing duties which do not involve being levered at an X multuiple to rescue Italy, others will step in: "But UBS indicated that there was no "immediate funding threat to Ireland" as money may also be available from the IMF and through bilateral loans from the UK, Denmark or Sweden." We wonder if the UK, Denmark or Sweden are aware that suddenly they are on the hook to rescue Ireland, which up until recently was considered the A+ student of the European bailout. If not, we are confident the bond market will shortly remind them..."


Thursday, November 24, 2011

European Industrial New Orders Crumble

"Industrial production within Europe for the month of September was ugly (see here), but nothing compared to new orders made during the same month (which leads to future production). The Economic Times details:
Euro zone industrial new orders slumped in September, the EU said on Wednesday, the deepest fall since December 2008 and far worse than economists had forecast, in the latest sign that Europe may be heading for a recession.

Orders in the 17 countries sharing the euro tumbled 6.4 percent in the month compared to August, well below expectations of a 2.5 percent fall, with Germany and France registering sharp contractions, the EU's Statistics Office Eurostat said.

"The scale of the deterioration is surprising," said Clemente de Lucia, an economist at BNP Paribas. "We are entering some kind of contraction in the last quarter of this year that will continue in the first quarter of next year," he said..."

The Clearest Sign Yet That Europe Has Entered A Dangerous New Phase

"Great chart from Morgan Stanley, showing that for the first time, German yields are moving up along with everyone else's.
If this trend continues it's a huge deal, since it means that Germany is no longer a special intra-Europe safe-haven, where yields improve when everyone else's get worse.
The fact that yields have been moving higher strongly suggests that yesterday's German bond auction failure was not merely a technical matter, but rather a reflection (even if only a little bit) that credit risk is creeping into Germany, which would be: a big deal..."




"Via Richard Russell’s Dow Theory Letters:
“Day after day, everyone asks whether gold has topped out. Nobody ever asks whether the market has topped out. Think about it, we’re in a low inflation, low investor fear environment, a dollar that appears to have bottomed and is now firming, and still gold holds above 1700 an ounce. This is a remarkable performance aided by heavy buying in China, India, and Asian nations. But what happens when we hit the inevitable inflation; when investors fears are on the rise? To conclude, gold is holding well in an environment that is not bullish for gold, but in due time, the environment will turn highly bullish for the yellow metal. Do not time your gold purchases. Simply continue to accumulate gold. The skyrocketing phase lies ahead, maybe one to three years.. "

Wednesday, November 23, 2011

DON'T LOOK NOW: All The Ratings Agencies Are Inflating Fears About France's AAA Rating

"PREVIOUSLY: Fitch is adding fuel to the firestorm of debate surrounding France's AAA credit rating.

This morning, the ratings agency released a note saying that France's hold on the agency's top rating is already shaky at best, but it stands to lose the agency's top marks if economic conditions in the eurozone deteriorate any further.

That follows a hints last month and earlier this week from Moody's that France could soon be put on downgrade review..."



"Here’s another hurdle the market doesn’t need right now. Citigroup’s economic surprise index is showing elevated levels. This is consistent with a market environment in which analysts have generally grown excessively optimistic about economic data. The data set is notoriously mean reverting as analysts overestimate and underestimate economic data. Readings at current levels are near the upper end of the historical range so we shouldn’t be shocked if analysts ratchet down expectations or economic data begins to disappoint.

Most alarming is the fact that my Expectation Ratio is showing similar signs of excessive optimism. The combination of the two lead to an environment in which analysts are universally optimistic about earnings AND economic data. That leaves the markets particularly susceptible to downside risks. Just another headwind the markets don’t need at a time when turmoil seems to be the theme day in and day out…"



"Just a few weeks ago I wrote how the lack of true sovereignty in Europe meant that none of the currency users were “risk free” bond issuers. That is, there’s a very real default risk for all of these nations. They can all “run out” of Euro. I wrote:
“So, not to belabor the point, but I feel that 10 year German Bunds are an absolutely atrocious deal at 1.78%. This doesn’t mean the risk of default is on the table, but the simple fact that default is a risk at all makes these bonds infinitely more risky than, for instance, a US 10 year note at 2.05%. In sum, the term “safe haven” in Europe appears to be a bit of a misnomer in my opinion. Nothing is safe as long as this wretched monetary system continues to exist in its current format.”

Video: German Failed Bond Auction, 6 Billion Offered, 3.6 Billion Takers; Contagion Spreads From Periphery to Outer Core, Then from Outer Core to Inner Core

"No doubt emergency meets are underway in numerous countries right now following a failed German bond auction. Bond auctions have failed before, but not in Germany (at least by this much), and never at a worse time..."


Eurozone Contagion Deepens After Disastrous German Auction; Silver Supply Issues

"...The euro came under pressure due to the surprise collapse in new Eurozone industrial orders which led to Germany failing to get bids for 35% of bunds offered. The German 10-year bund yield rose sharply from 1.92% to over 2.06%.

This is one of Germany's worst auctions since the launch of the Euro with the Bundesbank having to pick up nearly 40% of the 6 billion euros on offer.

The German auction in turn led to further weakness in European equity markets. Asian equity indices followed US equities lower after news of a new US bank stress test and then the poor Chinese manufacturing data..."


Sarkozy: Europe's "Liquidity Run" Has Begun Because There Is An Unsolvable $30 Trillion Problem

"No, not that Sarkozy. His half-brother - the one who actually can use a calculator. In an interview on CNBC, the Carlyle group head had the temerity to tell the truth, the whole truth, and use math - that long-forgotten concept which one has to scour various backwater blogs to rediscover - to explain nothing but the truth which is that Europe needs many more trillions than either the EFSF or the ECB can afford to give. Actually, we take that back. The ECB can inject the needed €3-5 trillion, but after that concerns about localized episodes of (hyper)inflation, especially now that Kocherlakota has confirmed that the transmission mechanism between bank reserves and inflation may be broken, will be all too justified. In the meantime, Sarkozy on Europe math fail: "The math i'm working with is very simple. In the US banking sector, we had 3 trillion of wholesale funding that needed to be stabilized, got stabilized by the implementation of TARP which saw the US treasury buy $212 billion worth of preferred in the banking sector to stabilize that $3 trillion, give our banks the time to work through hair problem their problem assets. In Europe, that $3 trillion is $30 trillion. so if you multiply the $212 by 10, you get the $2.12 trillion. In my view, the issues on the European banks are bigger than the issues on the books of the US Banks. So if you want to stabilize that $30 trillion and in my view it's not that you want to, it's that you have to, you do not have a choice, you're going to have to be at least at 2.1 trillion and i suspect it may need to be more." Q.E.D. - there, the math wasn't that difficult, was it?"


Tuesday, November 22, 2011

China's banks use gold as legal currency

"A prominent economist says that China's economic importance is growing strong and steady that the ailing US and EU economies will exchange their gold reserves for Beijing's financial bailouts.

G-20 leaders are facing growing pressure at home over the economic woes of their countries, where protests are being held in some nations on a daily basis.

There are fears that more delays in resolving the eurozone debt crisis could push not only Europe but much of the rest of the developed world back into recession.

Analysts say that the recent hike in the price of gold will add fuel to the flames caused by concerns over the United States' economic outlook, rising inflation, worries over the euro zone debt crisis, and the lowest-ever interest rates in the US.

Meanwhile, the International Monetary Fund expects China's economy to expand by 9 percent in 2012, while an increase in domestic product should account for a full quarter of total global growth.

Press TV has conducted an exclusive interview with Dan Collins from to further discuss the issue.

The following is a transcript of the interview.

Press TV: The big news coming from China in the past few weeks is that investment demand for gold and silver is up. Give us the numbers.

Collins: Yeah, real big news, Max. Shanghai Gold Exchange reported last week, starting with silver, silver demand's up 750 percent for silver forward contracts. The major buyers here are the large commercial banks of China.

First of all, I'll talk a little bit about silver. They're following the gold pattern here in China which is average Chinese citizens here now can buy silver in their bank account. So, you don't need to keep cash in your bank, you can go online and move your cash into silver or you can move it into gold. And that's really what's driving the increase in gold and silver prices here.

They started the gold trade in the major commercial banks about three years ago. Silver started last year in August, 2010. But what was really shocking is the numbers that have come out. I mentioned the year over year increases.

But if we look at just one Chinese bank, the ICBC, Industrial and Commercial Bank of China, first half of this year they sold over 300 tons of silver. 300 tons is roughly about 10 million ounces. So, this year they'll do roughly 20 million ounces of silver which is roughly 2 percent of all the silver mined in one year.

So, we look at the Chinese banking system just starting these new products in China, this year they could take nine or ten percent of all the silver mined in the world. And these products are just getting started. Two, three, four years from now, the Chinese banks could be selling 20, 30, 40 percent of all the silver mined globally. And that's really why we're seeing huge increases in silver..."


Gold Takes Another Step Towards Reserve Currency Status?

Students of gold’s monetary role would have also been interested to note two statistics coming out of the Europen continent:
i) The growth in European investment demand of a staggering 135%, as Europe became the world’s largest gold investment market. As the European debt crisis has continued to grow from slight obscurity two years ago to a fully feldged international crisis, market participants have been increasingly drawn to gold’s uncorruptible reserve status free from counterparty risk. Anecdotal evidence from the recent Munich precious metals conference is suggestive of such demand, where commentators were amazed at the levels of physical up-take by conference attendees. Trust in government issued paper is collapsing, and gold, the antitheis of government debt, has been sought out.
ii) The more than doubling of demand for bars and coins in Switzerland. This demand jumped by 121% to 37.2 tonnes and was partially attributed to the surprising intervention of the Swiss National Bank (SNB) to essentially peg the Swiss Franc to the Euro. This phenomenon seems rather notable given that the Swiss used to enjoy one of the world’s most sound currencies. Although as Ned Naylor-Leyland urges, currencies like the Swiss Franc were always just ‘the best looking horses in the fiat glue factory’. With the SNB undermining the Swissie, the savings of millions of Swiss suddenly became less secure and they seem to have responded by trading in their paper for gold. Who can blame them..."


Deep economic pain ahead for the U.S. and the world: Simon Hunt

"The U.S. and other major industrialized economies face more pain ahead, with the world "in a balance-sheet depression" that could make another credit crisis likely.

The world economy will go through a period of deleveraging through at least the year 2018. In the meantime, the U.S. is predicted to slip into another recession either in 2012 or 2013, according to a November-December economic report from Simon Hunt Strategic Services, based in Surrey, England.

As this less than optimistic report hits the markets, The Commerce Department is also advising Americans that third-quarter gross domestic product is lower than previously thought, dropping from a 2.5% growth estimate to 2% in the final report..."


The Debt Quake In The Eurozone

"Great graphic from Mint showing the extent of debt and borrowing in the Euro-zone:
Click for ginormous chart:

Source: Then and Now: The European Debt Crisis, November 21, 2011"


Official Denial in Greece Regarding "Indefinite Liquidity and Banking Stability"; Is a Worthless Guarantee Twice as Good When Doubled?

"Things are really humming along in Greece, complete with an official denial of instability in the Greek banking system.

Please consider Government Doubles Bank Guarantees
State guarantees to Greek commercial banks are to double from 30 billion to 60 billion euros in order to secure liquidity in the market, Finance Minister Evangelos Venizelos told lawmakers in Athens on Monday.

Addressing Parliament’s Financial Affairs Committee, Venizelos said that ensuring the market’s cash flow continues will secure the liquidity of the banking system and safeguard bank deposits.

“The Greek banking system is guaranteed with indefinite liquidity and there is no issue with the stability of the system. This is the case for all eurozone countries,” Venizelos said.
"Official Denial" is Ominous

The concept of official denial comes from British television sitcom, Yes, Minister.

“The first rule of politics,” Sir Humphrey, the wily civil servant in the show, insists is: “never believe anything until it is officially denied.”

In case you missed it please see Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied)..."


Perfect Storm the Most Likely Scenario; Is Europe Set to Declare a Chapter 11 in Early 2012?

"Panic is spreading says Steen Jakobsen, chief economist at Saxo Bank. Steen eyes the perfect storm including a potential "Chapter 11" call for European banks.

Via Email
This morning there is too much bad news.

US Super Committee failed to find the 1.2 trillion US Dollar needed to stop the automatic spending cuts being initiated from 2012, but the more acute problem being the expiration of the payroll tax and the emergency benefits by year-end 2011. It now looks less likely a deal can be struck as Congress now have even less incentive to find common ground ahead of next year US election..."

"Whither Europe?" - UBS' George Magnus Asks What Happens After The ECB Prints

" 'By George' author, UBS George Magnus asks the right question, and one posed by Zero Hedge two weeks ago, namely even assuming Germany relents and allows the ECB to print, what happens then? "Some argue that Germany will, sooner or later, capitulate on this issue too, since the only real alternative to the ECB adopting a full lender of last resort role is the slimming down of the EZ in what would be dangerous, unpredictable and almost certainly acrimonious circumstances. If the crisis escalates alarmingly, the ECB does look a little more likely to be given the light to widen its remit, even if under conditions. But then what? How would German voters and the powerful banking elite react to ECB policies that would turn the Bundesbank white? And what would the political consequences of further printing of money be? I ask the questions not to disagree, but to emphasise that what many of us think as the logical way out also has consequences that may not be immediately transparent."

Full remarks:..."


Uncle Sam To The Rescue: IMF Creates New European Bail Out Facility, The "Precautionary And Flexible Credit Lines"

"And here comes Uncle Sam:


And here is the math: Italy's quota is 7,882.3SDR; Spain is 4,023.4 SDR. Multiply by 5 and you get 40 Billion and 20 billion SDRs respectively, which translates to $61 billion and $31 billion. A total of $91 billion in additional capacity? And that's it: enough to fund Italy and Spain for... two months. This is the best the regime can come up with? Are you SERIOUS?

Good thing America can get its own house in order so it can go out and fix the world next, not with one, but two credit lines. Incidentally, absent the US ratifying these two credit lines they are as good as useless because with 17.7% of the total allocation, the US is the defacto lender of only resort (since this is used to bail out Europe, which effectively means Europe will not be lending into these credit lines). And good luck passing a global bail out vehicle through the Frankenstein monster that is the US legislative body.

And the final nail why this move is completely irrelevant:
The IMF board of governors agreed December to roughly double quotas from around $375 billion to around $750 billion. But out of the 187 member countries, only 17 have legally accepted the increase, including Japan, the U.K. and Korea. Most of the countries with the biggest quotas, such as the U.S., China and Germany, haven't yet gone through the legal process, such as parliamentary or congressional approval, need to hand over their promised dues..."

17 Quotes About The Coming Global Financial Collapse That Will Make Your Hair Stand Up

"The following are 17 quotes about the coming global financial collapse that will make your hair stand up....

#1 Credit Suisse's Fixed Income Research unit: "We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks."

#2 Willem Buiter, chief economist at Citigroup: "Time is running out fast. I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it."

#3 Jim Reid of Deutsche Bank: "If you don't think Merkel's tone will change then our investment advice is to dig a hole in the ground and hide."

#4 David Rosenberg, a senior economist at Gluskin Sheff in Toronto: "Lenders are finding it difficult to finance their day-to-day operations with short-term funding. This is a lot like 2008 but with more twists."

#5 Christian Stracke, the head of credit research for Pimco: "This is just a repeat of what we saw in 2008, when everyone wanted to see toxic assets off the banks’ balance sheets"

#6 Paul Krugman of the New York Times: "At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira. Next stop, France."

#7 Paul Hickey of Bespoke Investment Group: "More and more, we are hearing anecdotal comments from individual and professionals that this is the most difficult environment they have ever experienced as the market is like a fish flopping around after being taken out of the water."

#8 Bob Janjuah of Nomura International: "Germany appears to be adamant that full political and fiscal integration over the next decade (nothing substantive will happen over the short term, in my view) is the only option, and ECB monetisation is no longer possible. I really think it is that clear and simple. And if I am wrong, and the ECB does a U-turn and agrees to unlimited monetisation, I will simply wait for the inevitable knee-jerk rally to fade before reloading my short risk positions. Even if Germany and the ECB somehow agree to unlimited monetisation I believe it will do nothing to fix the insolvency and lack of growth in the eurozone. It will just result in a major destruction of the ECB‟s balance sheet which will force an ECB recap. At that point, I think Germany and its northern partners would walk away. Markets always want short, sharp, simple solutions."


The end crisis will be postponed until the sovereigns go bankrupt

"Marc Faber : "The end crisis will be postponed until the sovereigns go bankrupt,"
"They can postpone the end-game endlessly...say another five to 10 years. Each money-printing exercise brings about unintended consequences. These unintended consequences are higher inflation rates than had no money been printed."


Monday, November 21, 2011

Global Systemic Crisis: Decimation of the Western Banks

"As anticipated by LEAP/E2020, the second half of 2011 is seeing the world continuing its unstoppable descent into global geopolitical dislocation characterized by the convergence of monetary, financial, economic, social, political and strategic crises. After 2010 and early 2011 which has seen the myth of a recovery and exit from the crisis shattered, it's now uncertainty that dominates the States’ decision-making processes just like businesses and individuals, inevitably generating increasing apprehension for the future. The context singularly lends itself: social explosions, political paralysis and / or instability, return to the global recession, fear over banks, currency war, the disappearance of more than ten trillion USD in ghost-assets in three months, widespread lasting and rising unemployment...

Besides, it’s this very unhealthy financial environment that will cause the "decimation (1) of Western banks" in the first half of 2012: with their profitability in freefall, balance sheets in disarray, with the disappearance of trillions of USD assets, with states increasingly pushing for strict regulation of their activities (2), even placing them under public supervision and increasingly hostile public opinion, now the scaffold has been erected and at least 10% of Western banks (3) will have to pass that way in the coming quarters..."


The Neuroeconomics Revolution

"Economics is at the start of a revolution that is traceable to an unexpected source: medical schools and their research facilities. Neuroscience – the science of how the brain, that physical organ inside one’s head, really works – is beginning to change the way we think about how people make decisions. These findings will inevitably change the way we think about how economies function. In short, we are at the dawn of “neuroeconomics.”
Efforts to link neuroscience to economics have occurred mostly in just the last few years, and the growth of neuroeconomics is still in its early stages. But its nascence follows a pattern: revolutions in science tend to come from completely unexpected places. A field of science can turn barren if no fundamentally new approaches to research are on the horizon. Scholars can become so trapped in their methods – in the language and assumptions of the accepted approach to their discipline – that their research becomes repetitive or trivial.
Then something exciting comes along from someone who was never involved with these methods – some new idea that attracts young scholars and a few iconoclastic old scholars, who are willing to learn a different science and its different research methods. At a certain moment in this process, a scientific revolution is born.
The neuroeconomic revolution has passed some key milestones quite recently, notably the publication last year of neuroscientist Paul Glimcher’s book Foundations of Neuroeconomic Analysis – a pointed variation on the title of Paul Samuelson’s 1947 classic work, Foundations of Economic Analysis, which helped to launch an earlier revolution in economic theory. And Glimcher himself now holds an appointment at New York University’s economics department (he also works at NYU’s Center for Neural Science).
To most economists, however, Glimcher might as well have come from outer space. After all, his doctorate is from the University of Pennsylvania School of Medicine’s neuroscience department. Moreover, neuroeconomists like him conduct research that is well beyond their conventional colleagues’ intellectual comfort zone, for they seek to advance some of the core concepts of economics by linking them to specific brain structures.
Much of modern economic and financial theory is based on the assumption that people are rational, and thus that they systematically maximize their own happiness, or as economists call it, their “utility.” When Samuelson took on the subject in his 1947 book, he did not look into the brain, but relied instead on “revealed preference.” People’s objectives are revealed only by observing their economic activities. Under Samuelson’s guidance, generations of economists have based their research not on any physical structure underlying thought and behavior, but only on the assumption of rationality.
As a result, Glimcher is skeptical of prevailing economic theory, and is seeking a physical basis for it in the brain. He wants to transform “soft” utility theory into “hard” utility theory by discovering the brain mechanisms that underlie it.
In particular, Glimcher wants to identify brain structures that process key elements of utility theory when people face uncertainty: “(1) subjective value, (2) probability, (3) the product of subjective value and probability (expected subjective value), and (4) a neuro-computational mechanism that selects the element from the choice set that has the highest ‘expected subjective value’…”
While Glimcher and his colleagues have uncovered tantalizing evidence, they have yet to find most of the fundamental brain structures. Maybe that is because such structures simply do not exist, and the whole utility-maximization theory is wrong, or at least in need of fundamental revision. If so, that finding alone would shake economics to its foundations.
Another direction that excites neuroscientists is how the brain deals with ambiguous situations, when probabilities are not known, and when other highly relevant information is not available. It has already been discovered that the brain regions used to deal with problems when probabilities are clear are different from those used when probabilities are unknown. This research might help us to understand how people handle uncertainty and risk in, say, financial markets at a time of crisis.
John Maynard Keynes thought that most economic decision-making occurs in ambiguous situations in which probabilities are not known. He concluded that much of our business cycle is driven by fluctuations in “animal spirits,” something in the mind – and not understood by economists.
Of course, the problem with economics is that there are often as many interpretations of any crisis as there are economists. An economy is a remarkably complex structure, and fathoming it depends on understanding its laws, regulations, business practices and customs, and balance sheets, among many other details.
Yet it is likely that one day we will know much more about how economies work – or fail to work – by understanding better the physical structures that underlie brain functioning. Those structures – networks of neurons that communicate with each other via axons and dendrites – underlie the familiar analogy of the brain to a computer – networks of transistors that communicate with each other via electric wires. The economy is the next analogy: a network of people who communicate with each other via electronic and other connections.
The brain, the computer, and the economy: all three are devices whose purpose is to solve fundamental information problems in coordinating the activities of individual units – the neurons, the transistors, or individual people. As we improve our understanding of the problems that any one of these devices solves – and how it overcomes obstacles in doing so – we learn something valuable about all three."


US/Eurozone GDP Component Comparisons

"ISI notes the differences between the US and EuroZone in terms of GDP components:
• Housing in the US at just 2% GDP has already collapsed; housing in the Eurozone at 5% has substantial downside risk.
• Capex in the Eurozone at 14% has downside risk.
• Eurozone consumer already is a significantly smaller share of GDP than US.
• Exports & imports = 24% in Eurozone is much more exposed to global slowdown and currency changes.
here is the chart comparing the two regions:


Trade tensions mount

"The last Global Trade Alert report back in July 2011 raised concerns that a deteriorating macroeconomic climate would lead to greater protectionism. The fear has come to pass. This column, which introduces the latest GTA report, shows that the incidence of protectionism in the third quarter of 2011 is as high as during the most troubling of 2009, when protectionist fears were at their peak. Several large trading nations have taken across-the-board measures that adversely affect many trading partners. The world trading system may face its greatest test in the year ahead.

The 10th Global Trade Alert report documents several factors that together imply that the protectionist threat to the world trading system is probably as significant as it was in the first half of 2009, when such concerns were last at their peak. In our last report, published in July 2011, concerns were raised that a deteriorating macroeconomic climate would lead to greater protectionism. This fear has come to pass. The initial reports of the quantum of protectionism in the third quarter of 2011 are as bad as comparable early reports on protectionism in the first half of 2009. Less than a third of these protectionist measures taken are tariff increases or trade defence measures; worse, some of these measures have been taken by large trading nations and affect many sectors or trading partners. Recent protectionism cannot be dismissed as a large number of small pinpricks.
Looking forward, the macroeconomic climate is expected to deteriorate further. For example, it is telling that the most recent estimate for growth by the EU economies in 2012 was only half a percentage point, and that was on the assumption that the Greek and Italian sovereign debt concerns are contained and will abate quickly. The European Commission's forecast openly acknowledged that worse outcomes, i.e. a recession, were possible and, in a telling aside, noted that they could be worsened by growing protectionist pressures.1 The growth slowdown in Europe has already caused the pace of Chinese export growth to Europe to lessen. A recession in Europe would also affect North American multinationals, many of whom still earn a disproportionate amount of sales and profits from European customers.
What is particularly troubling is that in recent months, trade disputes between leading trading nations have widened in scope. For much of 2010 and early 2011, the highest profile disputes concerned so-called currency wars and misalignments - and arguably these were only taken so far. Nowadays, many of the subsidy regimes instituted early in the crisis are becoming the subject of disputes between leading trading nations (see Box 1). The disagreements between China, India, the US, and the EU over local content requirements, technology transfers, and subsidies in the solar power industry are cases in point.2
Now that the scale of discriminatory government intervention in markets during the crisis is adding to trade tensions, one has to ask how strong are the domestic political restraints should another global economic downturn lead to pressures on governments to "save jobs," "protect local industries", etc. As remarkable as it may seem given the tumult of 2008 and 2009, the open world trading system may face its greatest test in the year ahead..."


European ERM 1992 Replay: Same Problems, Same Issues, Same Countries, Only the Politicians Differ; Irony of the Maastricht Treaty

"...The irony of the Maastricht Treaty is that it did temporarily bring about the currency stability everyone wanted. However, that currency stability came at the expense of something far worse - inherent interest rate instability (coupled with heightened fiscal instability).

It just took some time to play out.

Now, instead of attempting to defend untenable currency targets, the ECB, the Eurocrats, and the IMF all have their hands full attempting to maintain untenable interest rate targets. With yields soaring in Greece, Spain, Italy, Ireland, Portugal, and Belgium in relation to Germany, the Troika has failed.

To alleviate interest rate concerns and fiscal instability caused by the Maastricht Treaty, politicians now openly discuss breaking up the Eurozone, which of course will immediately kick off a full-blown currency crisis in various countries.

Interest Rates on Government Bonds Go Full Circle

click on chart for sharper image

Chart from Spiegel Online

When the currency crisis happens and the Eurozone breaks up as is inevitable, Europe will have gone full circle on both interest rates and currencies, with politicians chasing their tail every step of the way."


Sunday, November 20, 2011

News Links: Spain becomes eurozone’s weaker link

  • Spain Set to Vote for Rajoy Cuts as Crisis Claims Fifth Leader – BloombergSpaniards may hand the biggest majority in three decades to opposition People’s Party leader Mariano Rajoy as polls suggest Europe’s debt crisis will push a fifth government from power. Rajoy will win as many as 198 of the 350 seats in Parliament in tomorrow’s federal elections, the largest majority any Spanish government has secured since 1982, polls show. Set to inherit a 23 percent jobless rate and the highest financing costs since Spain joined the euro, Rajoy has pledged to deepen spending cuts and overhaul the economy after a four-year downturn.
  • BBC News – Spain becomes eurozone’s weaker linkIn 1989, Spain’s ratio of government debt to GDP – the value of what the country produces – was just 39%. Its ratio of corporate debt to GDP was 49%, the ratio of household debt to GDP was just 31% and financial sector debt was just 14% of GDP. The aggregate ratio of debt to GDP was 133%. By the middle of this year, the picture was utterly different. The aggregate ratio of debt to GDP had soared to 363% of GDP. And it was really from 2000 onwards, the euro years, that Spain really got the borrowing bug, with the ratio of aggregate debt to GDP rising by a staggering 171 percentage points of GDP. The biggest increment over the past 20 odd years has been in the ratio of corporate debts to GDP, which has soared to a staggering 134% of GDP. Spanish companies have become addicted to debt.

  • at

    98 per cent of credit derivatives are recorded by DTCC… right?

    "It’s a claim that is often made by representatives of the International Swaps and Derivatives Association and of The Depository Trust and Clearing Corporation that 98 per cent of all credit derivatives outstanding are recorded in the latter organisation’s Trade Information Warehouse.
    It’s a comfort to know that data on nearly all such derivatives are stored in a single place, where the public can glance into the normally opaque over-the-counter world and regulators can have a proper dig if they want to.
    But wherever the “98 per cent” claim has been made, there have been understandable howls of “but how can they possibly know that if they don’t see the 2 per cent?! How do they know that’s the amount they are missing?”
    Credit derivatives and people who are killed by coconuts
    That 98 per cent has an air of what Joel Best called a “Legendary Number” about it. It’s a phrase used in his book More Damned Lies and Statistics, wherein this explanation is given for numbers of this type, using an example of 150 people being killed by coconuts each year:..."


    China vice premier sees chronic global recession

    "A long-term global recession is certain to happen and China must focus on domestic problems, Chinese Vice Premier Wang Qishan has said.
    "The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic," Wang was quoted by the official Xinhua news agency as saying at the weekend.
    Wang's comments were the most bearish forecast ever by a top Chinese decision-maker about the world economy, and Beijing's worry about a worsening global environment could translate into an impetus for pro-growth policies at home..."


    Buyers Of Last Resort: As Dumping Accelerates, Here Is Who Is Stuck Buying Another €741 Billion In Italian Bonds

    "Spoiler alert: There will be no surprise "I see dead bondholders"-type ending here. Having suggested precisely what the BTP trading dynamics look like previously, we now get official confirmation. With everyone else dumping Italian bonds in the open market, there are only two parties on the bid side: the ECB, and Italian banks. That's it. The only question is "how much" in order to determine at what point the selling onslaught will overhwhelm both insolvent Italian banks whose Risk Weighted capital will soon become too high forcing them out of the market, as well as drag down Draghi's recently expanded bond buying desk (we would say trading, but that would imply a two way market). Here is Barclays with the full breakdown: "Italy’s government bonds, representing the largest bond market in Europe, or the third largest in the world, have been particularly unstable since the beginning of July. The sheer size of the €1.6trn outstanding stock, of which around €220bn of bonds and €120bn of bills are rolled over every year, begs the questions who will be the buyers going forward. We thus update the breakdown of Italian bond holders which we presented in July (see Who Owns Italy's Government Debt? July 29, 2011), and analysed who has been selling and buying between the beginning of July (when widening started) and end of September (as of the latest available data). ECB has been the main buyer since August 8th, and held 4% of the Italian bond market as of September. Domestic holders, mainly financial institutions (banks) have gradually increased their holdings, taking domestic holding from 55% to 56% of the total market. Foreign investors, consisting of European non-Italian banks and real money investors as well as international asset managers, have been the main seller of BTPs, reducing their holdings from 45% to 39%." As said earlier - nothing at all unexpected: everyone who can get out is getting out. The only buyers are those for whom selling equates to suicide. That said, we wish Italian banks and the ECB the best of luck as they seek to purchase the €741 billion in bonds that are still to be offloaded as Merkel persists in refusing to let the ECB even considering announcing monetization intentions..."


    Saturday, November 19, 2011

    How much of an ECB guarantee would be needed?

    "Here is one recent report (insightful throughout, FT link):
    But the scale of the problem is bigger than in 2008. Mr King notes there is $3,000bn of government bonds trading with spreads of more than 150bp to German Bunds. There were only $2,000bn CDOs outstanding at the peak.
    The population of Germany is about 81 million, if you wish round that up to about 100 million, if you include some of the smaller Triple A countries. In other words, that is a guarantee of $30,000 per German, or $120,000 for a household of four. Note in passing that an ECB guarantee either requires recapitalization of the central bank or a higher rate of inflation, unless you think the whole thing is a self-sustaining free lunch and all the liquidity problems would vanish (unlikely, at this point). In any case a guarantee has to at least put resources on the table..."


    Number of the Week: More Stress, More Physical Euros

    "9.7%: Euros in circulation as a percentage of euro area M2
    Let’s say you lived in a European country where there the possibility of a euro exit was becoming less remote by the day.

    Thinking that through, you might worry that the euros you have in the bank might suddenly be converted into a currency of uncertain value that we will call the lirchma. You might also worry about your ability to access your cash in any form, since your country’s financial institutions might have to shut down for a while as they tried to get clarity on what the new currency is worth, sort out contracts — and prevent a bank run from depositors rushing to pull their lirchma and convert them into euro.

    It’s an exercise that might convince you to hold a few more cold, hard euros in cash.
    And indeed, Europeans’ preference for cash in hand over cash in the bank seems to be growing. In September, currency in circulation accounted for 9.7% of euro area M2 — a money supply category that also includes close substitutes for money such as savings accounts, checking deposits and retail money market funds. That is up from 8.9% at the start of 2009.

    The other thing to do if you were worried about your country exiting the euro would be to put your money in another country. There’s some of that going on as well."