Financial market report for Monday, November 21, 2011
1) … Stocks fell sharply lower as fears of sovereign insolvency and failure of global growth increased.
Moody's warns of Change In French Rating Outlook and Reuters reports Global Economic Outlook Grim, China To Spend 1.7 Trillion On Strategic Sectors
Solar, TAN, Energy Service, OIH, IEZ, XES, Commodity Stocks, such as Silver Miners, SIL, Copper Mining, COPX, Coal, KOL, Uranium, URA, Wildcatters, WCAT, Small Cap Energy, PSCE, Energy Production, XOP, Steel, SLX, Metal Manufacturing, XME, Rare Earth Miners, REMX, Gold Miners, GDX, led Materials, MXI, lower.
Risk trade leaders Internet Retailers, HHH, and Small Cap Gold Miners, GDXJ, plummeted.
Semiconductors, XSD, SMH, Smartphone, FONE, and Cloud Computing, SKYY, Networking, IGN, Nanotechnology, PXN, led Technology Stocks, MTK, lower.
Austria, EWO, Australia Dividends, AUSE, India Earnings, EPI, European Financials, EUFN, Financials, XLF, Global Financials, IXG, Emerging Market Financials, EMFN, FGEM, Investment Banks, KCE, Stockbrokers, IAI, Banks, KBE, IAT, KRE, QABA, the Too Big To Fail Banks, RWW, were strong fallers, taking the World Stocks, ACWI, and ACWX, lower.
Wall Street Journal reports Credit Suisse warns of "last days" with the euro and EconomicPolicy Journal writes Europe's banking system could end up shut for days
National Bank of Greece, NBG, and India’s HDFC Bank, HDB, and ICICI Bank, IBN, led world banks lower,seen in this Finviz Screener, on fears of currency deflation, specifically a failure of the Euro, FXE, and the India Rupe, ICN.
All the global banks traded lower today: BSBR, ITUB, BBD, BBVA, IBN, HDB, UBS, RBS, STD, DB, LYG, KB, WF, SHG, CHIX, GGAL, BFR, BMA, SMFG, BCH, BCA, EPI, CS, WBK, BLX, BCS, ING, MTU. Lloyds Banking Group, LYG, Royal Bank of Scotland, RBS, HSBC Holdings, HBC, were strong fallers, as was Bank of America, BAC, and Citigroup, C, and Deutsch Bank, DB. Lloyds Banking Group, LYG, has lost 15% in the last five trading days.
Italy, EWI, led Europe, VGK, and FEU, strongly lower. Germany, EWG, Spain, EWP, and France, EWQ, all lower.
Industrial Office REITS, FIO, led Real Estate, IYR, lower.
Tata Motors, TTM, led automobile stocks, VROM, lower.
Egypt, EGPT, fell strongly as its military battled civilians. Business Insider repaorts Egypt's Cabinet Has Submitted Its Resignation To The Military Council, As Huge Protests Break Out In Cairo. And Sweden, EWD, Israel, EIS, South Korea, EWY, and Taiwan, EWT, were major country fallers.
The BRICS, EEB, BIK, BKF, fell strongly as Russia, RSX, RSXJ, India, INDY, INP, SCIN, China, YAO, HAO, TAO, FXI, CHIM, CHIE, CHII, Brazil, EWZ, BRF, fell lower on fears of the failure of growth.
Turkey, TUR, Indonesia, IDX, led the emerging markets, EEM, lower.
Taiwan Small Caps, TWON, South Korea Small Caps, SKOR, India Small Caps, SCIF, Canada Small Caps, and Australia Small Caps, KROO, led the Small Cap Stocks, VSS, and Emerging Market Small Caps, EWX, lower.
Shippers, SEA, plummeted.
Agricultural shares, PAGG, and MOO, fell strongly; these included AGCO ,LNN, DE,
Boeing, BA, a company with a lot of debt, and a global growth leader fell strongly.
Industrial companies, IBM, CAT, ROK, turned parabolically lower.
Defense companies, ORB, ST, HON, HEI, GD, LLL, TDG, all turned parabolically lower.
Manufactured Housing Firm, CVCO, a rally leader, fell parabolically lower.
Railroad, KSU, was a strong transportation faller.
Mid Cap Growth, JKH, and Russell, 2000, IWM, both fell 2.5%. The S&P, SPY, broke below its 50 day moving average, Bespoke Investment Blog reports
Focus Media Holdings, FMCN, once a consistently strong China technology stock fell 40%.
Gilead Sciences, GILD, fell 9% as the HIV drug maker will spend about $11 billion to buy Pharmasset Inc. in what one analyst termed an "amazing risk," a high stakes gamble, AP reports.
Leveraged Buyouts, PSP, and Junk Bonds, JNK, fell strongly, as did World Government Bonds, BWX, and Emerging Market Bonds, EMB. Business Insider reports Sovereign Risk is Spreading Like Wildfire.
Commodities, DBC, traded sharply lower on fears of global economic contraction with Base Metals, DBB, Precious Metals, JPP, Gold, GLD, Silver, SLV, Timber, CUT, Copper, JJC, Cotton, BAL, Corn, CORN, Grains, GRU, Agricultural Commodities, JJA, lower.
The US Dollar, $USD, UUP, rose to a six week high, to close at 78.30, as competitive currency devaluation continued at a fast clip, driving world currencies, DBV, and emerging market currencies, CEW, lower. Currencies trading lower as seen in this Finviz Screener, included FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, BZF, FXRU,
International Business Times reports US Money-Market Funds Seen at Risk Due to Europe's Debt Storm.
2) … Fears of bank and sovereign insolvency, together with fears of economic contraction, were the force driving stocks, commodities, and currencies lower today. Reuters reports Absence Of An Effective Firewall To Halt A Meltdown In Sovereign Bonds The risk premiums on Spanish, Italian and French government bonds rose as investors fled to safe-haven German Bunds, while European shares fell more than 2 percent after Moody's warned that France's credit rating faces new dangers. "This crisis is hitting the core of the euro zone. We should have no illusions about this," European Economic and Monetary Affairs Commissioner Olli Rehn said. He defended the European Union executive's advocacy of austerity policies blamed for choking off growth and jobs. "One simply cannot build a growth strategy on accumulating more debt, when the capacity to service the current debt is questioned by the markets," Rehn told a Brussels seminar. "One cannot force foreign creditors to lend more money, if they don't have the confidence to do it.” Two newspapers said the ECB's governing council had imposed a weekly limit of 20 billion euros on purchases of euro zone government bonds.
Greek Prime Minister Lucas Papademos will meet EU Commission President Jose Manuel Barroso and Eurogroup head Jean-Claude Juncker on Monday after EU, IMF and European Central Bank representatives held tough talks in Athens. Fearful of alienating voters, Antonis Samaris, head of the conservative New Democracy party, refused to give a written commitment to the terms of a second bailout program, no matter who wins an election expected on February 19. The leader of the far-right LAOS party said international lenders would not release the 8 billion dollars Greece needs to avoid default in mid-December without the guarantee.
Bloomberg reports Rajoy Party Wins Spanish Elections After Debt Crisis Overwhelms Socialists. Mariano Rajoy won the biggest parliamentary majority in a Spanish election in almost 30 years, and told Spaniards to brace for difficult times as the nation fights to avoid being overwhelmed by the debt crisis. Rajoy’s People’s Party swept the ruling Socialists from power after eight years, winning 186 of the 350 seats in Parliament, compared with 110 for the ruling party’s candidate Alfredo Perez Rubalcaba. That’s the worst result for the Socialists in more than three decades. Opinion polls in the month before the vote showed the PP winning 184 to 198 seats. “Hard times lie ahead,” Rajoy told supporters outside the PP’s headquarters in Madrid, giving no new details of his plans. “We are going to govern in the most delicate situation Spain has faced in 30 years.” Rajoy, 56, who said on Nov. 18 he hoped Spain wouldn’t need a bailout before he can be sworn in as prime minister in a month’s time, has pledged to slash the budget deficit and regain the nation’s AAA credit rating, without saying how he will do it. He inherits a stagnant economy with a 23 percent unemployment rate and borrowing costs back at the levels Spain was paying before it joined the euro.
The WSJ reports European Commission to Propose Shared Euro-Zone Representation at IMF. Europe's upcoming proposals to fight its debt crisis will include new economic rules for the continent and shared representation for euro-zone nations at the International Monetary Fund, a senior European Commission official said in an interview Saturday. Viviane Reding, a European Commission vice president, said the new steps to be unveiled Wednesday will show Europe building stronger ties to relieve mounting international doubts about the future of the 17-nation currency bloc.
The WSJ reports Brussels Seeks More Control Over Euro-Zone Member Budgets. The European Commission will set out proposals Wednesday that would significantly tighten Brussels' control over the budget policies of euro-zone member states, according to draft documents. The proposals would see struggling governments forced to submit to frequent reviews of their policies and accounts, and could see euro-zone governments effectively forced to seek financial assistance by a vote of their peers
Ambrose Evans Pritchard relates Spain Becomes Fifth Victim To Fall In Europe’s Arc Of Depression. “Spain has been the biggest victim of cheap capital from German, Dutch, and French banks. The eurozone crisis is as much a tale of excess bank leverage and poor risk management in the core as of excess consumption and wasteful investment in the periphery”, relate Philip Whyte and Simon Tilford, in a paper for the Centre for European Reform. Too much Austrian economic virtue is “collective vice” argue the researchers.
Mr Pritchard continues “Given that the structure of EMU itself caused the North South imbalances that lie behind the crisis, the EU authorities and the creditor states surely have a duty of care to the countries now trapped in slump. Instead, we heard last week from Brussels that the Spain must “help itself”, and from Germany the usual mantra of reform.”
Expansionary fiscal contraction is the combination of structural reforms, such as austerity measures, pension overhauls, reworked national wage contracts and centralized fiscal supervision favored by German economic and political leaders, such as Wolfgang Schauble, Olli Rehn, and Guido Westerwelle, which eliminate labor privileges such as inflation inked wage rises, that eat away at intra Euro zone competitiveness. The economic theory of expansionary fiscal contraction is the concepts of Harvard’s Alberto Alesina, and Goldman Sachs’ Broadbent and Daly, writes George Irvin in the Social Europe Journal, stating, “it is very difficult to see how massive fiscal contraction can be expansionary in Britain today.” And Simon Johnson writes Under four conditions, fiscal contraction can be expansionary. But none of these conditions is likely to apply in the United States today. Wolfgang Muchau wrote in the FT, “I cannot see how somebody with a solid training in macroeconomics, and with a minimal sense of honesty, could come up with a fairy tale of an expansionary fiscal contraction. Or, that coordinated austerity programmes would not affect growth in the short run.”
I relate that the Eurocracy is determined that Greece’s fiscal spending will not continue at its current level. It’s economy is in a Fisher Depression, which Brian Griffin covers in Seeking Alpha article Irving Fisher on Debt, Deflation, and Depression.
Bloomberg reported on June 30, 2011, that Goldman Sachs,strengthened its managemnt team with hire from the UK Central Bank Goldman Sachs Group, GS, hired Andrew Benito from the Bank of England as a senior European economist, reinforcing a link between the fifth-biggest U.S. bank by assets and monetary policy makers. Benito joined the New York-based bank on June 27 in London after 11 years as an economist at the U.K. central bank, according to an internal Goldman Sachs memo sent to employees today and obtained by Bloomberg News. Spokeswoman Fiona Laffan confirmed its details. The hiring comes the same month as Ben Broadbent joined Sushil Wadhwani and David Walton as Goldman Sachs alumni who have become Bank of England policy makers and weeks after the bank named former central bankers as its chief economists for Europe and Japan. Benito’s arrival marks a further reshaping of the bank’s economics division, which includes the appointment of Huw Pill, the ECB’s deputy director general of research, as chief European economist. He will join in August to replace Erik Nielsen, who is transferring to UniCredit SpA as its global chief economist. Naohiko Baba joined in January as chief economist in Japan after leading financial systems analysis at the Bank of Japan. Educated at the universities of Warwick and Cardiff, Benito was most recently a senior economist in the Bank of England’s structural economic analysis division and has also spent time at the Bank of Spain and International Monetary Fund, according to the Goldman Sachs memo.
3) … An inquiring mind asks, Will the EU become a totalitarian collective?
Greece lost its debt sovereignty in May 2010, as it began accepting EU ECB IMF Troika aid, and Italy lost its debt sovereignty when its interest rate surpassed seven percent. Having experienced sovereign insolvency, Greece and Italy are no longer sovereign nation states. Now Italy too will have to look to EU ECB and IMF leadership, that is EU ECB and IMF diktat, and their sovereign authority for seigniorage, that is moneyness, as well as a resource for their fiscal spending.
Soon EU leaders will meet in summit, waive all national sovereignty by announcing regional framework agreements, establish a fiscal union, a common treasury, and empower the ECB as a bank, not so much for the needs of the people, but rather for the security of the region.
In 1974, 300 of the world’s elite met and made a call for strong regional economic governments in all of the world’s ten regions, as a means of coping with the deleveraging, disinvesting, and derisking out of the Milton Friedman Free To Choose floating regime. The 1974 Call of the Club of Rome is clarion, that is clear, distinctive and ringing, and it comes with the authoritarian imperative.
Insolvent sovereigns cannot govern. Greece and Italy having lost their debt sovereignty, now lack seigniorage, the ability to create money. And today Spain has lost its debt sovereignty and lacks debt seigniorage as the interest rate on its 10 year bond has risen to 6.6. The periphery nations cannot spend what they do not have. They are without fiscal spending resources, and have to depend on the sovereign authority of a Euracracy, that is the EU ECB Troika. The seigniorage of freedom is history, and the seigniorage of diktat has commenced. And it is mandating expansionary fiscal contraction.
While some might say that expansionary fiscal contraction is hyperbole, or doublespeak, Frances D’Emilio and Colleen Barry of the AP, in article Italy Hit By Protests As PM Unveils Economic Plan report on Mario Monti’s expansionary fiscal contraction plans in Italy.
They relate, Monti revealed plans to fight Italy's pervasive tax evasion, lower costs for companies so they can hire more and possibly lower taxes rates for women to encourage their increased participation in the work place. Hee warned Italians they must brace for more "sacrifices," including the probable return of a property tax on primary residences.
"We must convince the markets we have started going down the road of a lasting reduction in the ratio of public debt to GDP. And to reach this objective we have three fundamentals: budgetary rigor, growth and fairness," Monti said. He said he would quickly work to lower Italy's staggering public debt, which now stands euro1.9 trillion ($2.6 trillion) -- 120 percent of its GDP. "But we won't be credible if we don't start to grow," Monti added.
Stefano Folli, a political analyst at the il Sole-24 Ore paper, viewed Monti's overture to the nation as more political than economic, aimed at convincing both Italians and the international community of his mission. "The anti-crisis discussion was aimed at Italians to seek a season of sacrifices and rigor, and abroad to say Italy wants to gain credibility." Folli said.
Monti said his government would consider reforms to lower Italy's "elevated" tax rates. Employers say high payroll taxes discourage them from hiring. In the workplace, Monti called for structural reforms but added "we must avoid the anguish that accompanies it."
The question of how long Monti's government will last has sparked intense debate among Italy's political parties. Monti has said he intends to govern until the legislative period expires in the spring 2013. But Berlusconi's longtime ally the Northern League wants elections earlier. Sen. Roberto Calderoli, a Northern League leader, gave a "thumbs-down" signal at the end of Monti's speech.
Some in Berlusconi's conservative People of Freedom Party have called for early elections, but top party officials have said they will support Monti in parliament to achieve anti-crisis measures. Monti indicated he was looking for wide support among Italians.
Paul Mitchell writes in WSWS article Social Democrats Pave Way For Return Of Right Wing Popular Party In Spain relates Spain remains a social powder keg. Much of the world’s press crowed that the vote represented a swing to the right. In fact, the PP only increased its vote from 10.2 million to 10.8 million votes. Nearly 10 million voters, over 28 percent, abstained. The swing to the PP was for the most part due to the collapse of the PSOE vote from 11.1 million in 2008 to 6.9 million. This shift also benefited the pseudo-left parties such as the United Left, which saw its number of seats increase from two in 2008 to 11. The new Basque coalition Amaiur went from zero to seven seats in Congress and now outnumbers the region’s traditional Basque Nationalist Party, which only won five seats.
For the new government to meet the public deficit target of 4.4 percent of gross domestic product by the end of 2012, the PSOE failed to meet the 6 percent for this year, will have to slash spending by 30 billion euros ($41 billion), twice as much as the PSOE, at a time when the economy is sinking deeper into recession.
Fearful that Spain faces a crisis of revolutionary proportions, new PP Prime Minister Mariano Rajoy called for Spaniards of all political persuasions to work together. “It is no secret to anyone that we are going to rule in the most delicate circumstances Spain has faced in 30 years,” he said. “We stand before one of those crossroads that will determine the future of our country, not just in the next few years but for decades.”
He combined this with an appeal for the financial markets to realise “that there are elections and that the winners must be given a little room for manoeuvre that should last more than half an hour.” There were, he added, “no miraculous cures to solve Spain’s economic troubles.” He must act, while seeking to avoid creating “artificial division.”
But the global financial oligarchy interpreted Rajoy’s appeals, even though they come from the major party of the ruling elite—the political heirs of the dictator General Francisco Franco—as a sign of weakness. The PP’s domestic political calculations do not count for much to the global banks, which have been behind the installation of unelected technocratic governments in Greece and Italy.
The common demand of the “financial markets” is for the new government to grit its teeth and immediately impose greater austerity measures, further slashing living standards, “reforming” employment protection laws and destroying what remains of the welfare state.
To underline their diktat, on Monday interest rates on the country’s 10-year bond rose by 12 basis points to 6.56 percent. These are far above Germany’s rates of 1.88 percent and close to the 7 percent levels that prompted Greece, Ireland and Portugal to request huge bailouts from the European Union and the International Monetary Fund earlier this year. Madrid’s Ibex stock exchange dropped nearly two percent in early trading. Spain is now considered to be less creditworthy than Italy, where former European Union commissioner Mario Monti has been installed as prime minister. Charles Grant, the director of the Centre for European Reform, declared contemptuously, “Little is known about him [Rajoy] outside Spain… He reminds me of Zapatero. If it is going to be that way, Spain will continue to lose influence.”
A Madrid-based bond trader told Reuters, “They [the PP] still haven’t done anything so it makes sense there’s no support from the market. It’s good they’ve won a majority, but the global economy remains in a bad way, and this won’t change one day to another… The problem remains. There are no clients. There is no interest. Maybe the ECB [European Central Bank] is buying bonds, but it’s the only one that is.”
Another said, “Rajoy says he can rebuild market confidence in Spain but his arrival isn’t enough and he hasn’t said anything ‘magical’ tonight. The crisis is moving too fast; in this environment bond markets might not extend him credit while we wait.”
The vice chairman of Spain’s largest employers’ organisation the Spanish Confederation of Business Organizations Arturo Fernández said the bond rates were not “sustainable” and the country was on the “edge of an abyss.”
Whatever their concerns regarding the political and social stability of Spain, Rajoy’s government will do as it is told.
In juxtaposition, The Sunday Telegraph reports EU Officials Threaten Strike Action Over Pay And Conditions. reported that 40,000 EU officials are embroiled in a dispute over plans to increase their working week from 37.5 hours to 40 hours, raise their retirement age, and award a pay rise of 1.8%. Protests are planned in Brussels tomorrow and EU civil service unions have threatened strike action. Open Europe’s Pieter Cleppe was quoted arguing that the move is unjustified “at a moment when all European governments are cutting their budgets, also at the instigation of the EU.” Pieter was also quoted in the Irish Independent.
In a world of credit evaporation, credit will come via regional stakeholder bodies, that lend to companies deemed essential to the well being of the region. Structural reforms, such as austerity measures, pension overhauls, reworked national wage contracts, as well as bank nationalizations, and debt servitude will be de rigueur. In as much as the EU is characterized by failed nation states, moneyness will come by diktat. The seigniorage of diktat may provide dole for the fiscal spending of former nation states, as all will be vassal states existing in a totalitarian collective. Totalitarian collectivism will be the way of life for all in the Euro zone, this being seen as Reuters reports Spain Starts Fresh, Saying Adios To The Socialists. Mariano Rajoy and his People’s Party won the biggest majority in a Spanish election in almost 30 years on Sunday, sweeping the ruling Socialists from power after eight years and winning an absolute majority in Parliament, with 186 of 350 seats.
The political dynasties of European Socialism in the periphery countries of Portugal, Italy, Greece, and Spain, that provided pork via patronage, are history.
A new paradigm, that being, regional economic government, and a policy of expansionary fiscal contraction, will give birth to the New Europe.
An entirely new economic, political, and investment landscape is at hand. Its as EUobserver reports that, at a business congress in Istanbul on Friday, Turkey’s former Ambassador to the EU Volkan Bozkir said, “The EU dream has come to an end for the world. There is a paradigm shift. The EU is no longer the same Union that provided comfort, prosperity and wealth to its citizens as in the past.”
Financial Post writes Europe Can Say Goodbye To La Dolce Vita.
Christoph Dreier in WSWS writes The Threat Of Dictatorship In Greece. The manner in which the new Greek government was imposed and the forces upon which it relies underscore the mounting threat to the democratic rights of working people in Greece and throughout Europe.
Stephen Foley in the Independent What Price The New Democracy? Goldman Sachs Conquers Europe communicates that the Euro currency union, is the Goldman Sachs investment bankers project, and that it is continually striving for consensus that the creditors be paid in full. This is the basis of the mandate for expansionary fiscal contraction.
Mr. Foley relates While ordinary people fret about austerity and jobs, the eurozone's corridors of power have been undergoing a remarkable transformation
The ascension of Mario Monti to the Italian prime ministership is remarkable for more reasons than it is possible to count. By replacing the scandal-surfing Silvio Berlusconi, Italy has dislodged the undislodgeable. By imposing rule by unelected technocrats, it has suspended the normal rules of democracy, and maybe democracy itself. And by putting a senior adviser at Goldman Sachs in charge of a Western nation, it has taken to new heights the political power of an investment bank that you might have thought was prohibitively politically toxic.
This is the most remarkable thing of all: a giant leap forward for, or perhaps even the successful culmination of, the Goldman Sachs Project.
The political decisions taken in the coming weeks will determine if the eurozone can and will pay its debts – and Goldman's interests are intricately tied up with the answer to that question.
Simon Johnson, the former International Monetary Fund economist, in his book 13 Bankers, argued that Goldman Sachs and the other large banks had become so close to government in the run-up to the financial crisis that the US was effectively an oligarchy. At least European politicians aren't "bought and paid for" by corporations, as in the US, he says. "Instead what you have in Europe is a shared world-view among the policy elite and the bankers, a shared set of goals and mutual reinforcement of illusions."
This is The Goldman Sachs Project. Put simply, it is to hug governments close. Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort.
Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government. The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest.
Mr Monti is one of Italy's most eminent economists, and he spent most of his career in academia and thinktankery, but it was when Mr Berlusconi appointed him to the European Commission in 1995 that Goldman Sachs started to get interested in him.
First as commissioner for the internal market, and then especially as commissioner for competition, he has made decisions that could make or break the takeover and merger deals that Goldman's bankers were working on or providing the funding for. Mr Monti also later chaired the Italian Treasury's committee on the banking and financial system, which set the country's financial policies.
With these connections, it was natural for Goldman to invite him to join its board of international advisers. The bank's two dozen-strong international advisers act as informal lobbyists for its interests with the politicians that regulate its work. Other advisers include Otmar Issing who, as a board member of the German Bundesbank and then the European Central Bank, was one of the architects of the euro.
Perhaps the most prominent ex-politician inside the bank is Peter Sutherland, Attorney General of Ireland in the 1980s and another former EU Competition Commissioner. He is now non-executive chairman of Goldman's UK-based broker-dealer arm, Goldman Sachs International, and until its collapse and nationalisation he was also a non-executive director of Royal Bank of Scotland.
He has been a prominent voice within Ireland on its bailout by the EU, arguing that the terms of emergency loans should be eased, so as not to exacerbate the country's financial woes. The EU agreed to cut Ireland's interest rate this summer.
Picking up well-connected policymakers on their way out of government is only one half of the Project, sending Goldman alumni into government is the other half. Like Mr Monti, Mario Draghi, who took over as President of the ECB on 1 November, has been in and out of government and in and out of Goldman. He was a member of the World Bank and managing director of the Italian Treasury before spending three years as managing director of Goldman Sachs International between 2002 and 2005 – only to return to government as president of the Italian central bank.
Mr Draghi has been dogged by controversy over the accounting tricks conducted by Italy and other nations on the eurozone periphery as they tried to squeeze into the single currency a decade ago. By using complex derivatives, Italy and Greece were able to slim down the apparent size of their government debt, which euro rules mandated shouldn't be above 60 per cent of the size of the economy. And the brains behind several of those derivatives were the men and women of Goldman Sachs.
The bank's traders created a number of financial deals that allowed Greece to raise money to cut its budget deficit immediately, in return for repayments over time. In one deal, Goldman channelled $1bn of funding to the Greek government in 2002 in a transaction called a cross-currency swap.
On the other side of the deal, working in the National Bank of Greece, was Petros Christodoulou, who had begun his career at Goldman, and who has been promoted now to head the office managing government Greek debt. Lucas Papademos, now installed as Prime Minister in Greece's unity government, was a technocrat running the Central Bank of Greece at the time.
Goldman says that the debt reduction achieved by the swaps was negligible in relation to euro rules, but it expressed some regrets over the deals. Gerald Corrigan, a Goldman partner who came to the bank after running the New York branch of the US Federal Reserve, told a UK parliamentary hearing last year: "It is clear with hindsight that the standards of transparency could have been and probably should have been higher."
When the issue was raised at confirmation hearings in the European Parliament for his job at the ECB, Mr Draghi says he wasn't involved in the swaps deals either at the Treasury or at Goldman.
It has proved impossible to hold the line on Greece, which under the latest EU proposals is effectively going to default on its debt by asking creditors to take a "voluntary" haircut of 50 per cent on its bonds, but the current consensus in the eurozone is that the creditors of bigger nations like Italy and Spain must be paid in full. These creditors, of course, are the continent's big banks, and it is their health that is the primary concern of policymakers.
The combination of austerity measures imposed by the new technocratic governments in Athens and Rome and the leaders of other eurozone countries, such as Ireland, and rescue funds from the IMF and the largely German-backed European Financial Stability Facility, can all be traced to this consensus.
"My former colleagues at the IMF are running around trying to justify bailouts of €1.5trn-€4trn, but what does that mean?" says Simon Johnson. "It means bailing out the creditors 100 per cent. It is another bank bailout, like in 2008: The mechanism is different, in that this is happening at the sovereign level not the bank level, but the rationale is the same."
So certain is the financial elite that the banks will be bailed out, that some are placing bet the company wagers on just such an outcome. Jon Corzine, a former chief executive of Goldman Sachs, returned to Wall Street last year after almost a decade in politics and took control of a historic firm called MF Global. He placed a $6bn bet with the firm's money that Italian government bonds will not default.
When the bet was revealed last month, clients and trading partners decided it was too risky to do business with MF Global and the firm collapsed within days. It was one of the ten biggest bankruptcies in US history.
The grave danger is that, if Italy stops paying its debts, creditor banks could be made insolvent. Goldman Sachs, which has written over $2trn of insurance, including an undisclosed amount on eurozone countries' debt, would not escape unharmed, especially if some of the $2trn of insurance it has purchased on that insurance turns out to be with a bank that has gone under.
No bank – and especially not the Vampire Squid – can easily untangle its tentacles from the tentacles of its peers. This is the rationale for the bailouts and the austerity, the reason we are getting more Goldman, not less. The alternative is a second financial crisis, a second economic collapse.
Shared illusions, perhaps? Who would dare test it?
4) … A Sovereign and a Seignior will provide Euro zone wide seigniorage, that is moneyness.
The EU will morph into the New Europe. Expansionary fiscal contraction, coming from technocratic government, will be the basis for the rise to power of the Sovereign, a ruler, and a Seignior, a banker, who will provide the seigniorage of diktat, as the seigniorage of freedom, that existed under the Milton Friedman Free To Choose floating currency regime, is history. The word, will and way of these two will provide moneyness, and the people will be amazed and follow after it, giving it their full allegiance.
Roy Schwarcz writes that Germany and a powerful leader will rise to empower a European Super State in a type of Roman Empire. “The Roman Empire fell apart from within, no enemy destroyed it. Rome is living in the great nations of Europe today: Italy, France, Great Britain, Germany, and Spain are all part of the old Roman Empire. The laws of Rome live on, as well as the language. Latin today is the base of French, Spanish, and other languages. Her warlike spirit lives on also as Europe has been at war ever since the empire broke up into these kingdoms. What is happening in Europe today? There is a diminishing of the nations and a unifying of the people with a common currency, common markets and common government. The foundation is being laid for the man who is coming someday to put the Roman Empire back together again.” This man will be the Seignior.
A leading candidate for the Sovereign is Herman van Rompuy, President of the European Council. Consillium provides a video of Mr. Van Rompuy, during a debate on European economic government at the European Parliament. Reuters reports Van Rompuy urges euro zone to pool sovereignty. And G7 Finance reports Mr Van Rompuy saying in a speech to a conference held by a Brussels think tank, “The euro zone has to move towards real economic union commensurate with monetary union.” … “We need to give both our citizens and the markets a clear message about the irreversibility of the euro,” … “This will imply in some of these areas a pooling of sovereignty in exchange for a stronger, more stable monetary union,” Van Rompuy stated “(Deepening economic union) will require a combination of two things, a significant strengthening of our rules and mechanism for fiscal responsibility and a large step in terms of integration in economic policies.” … “We have to fight for our economic and monetary union and Europe’s place in the world,” … “In Italy, it is an hour of truth.”
A leading candidate for the Seignior is Mario Draghi, yet there is a wide field of others including Olli Rehn.
The former Eurozone had its political capital from the people across Europe. The political capital of the New Europe will come from Brussels, Berlin, France, and Goldman Sachs.
5) … In today’s news
Simon Johnson in Bloomberg writes Deutsche Bank Could Transfer Contagion. You’ve probably never heard of Taunus Corp, but according to the Federal Reserve, it’s the U.S.’s eighth-largest bank holding company. Taunus, it turns out, is the North American subsidiary of Germany’s Deutsche Bank, CB, with assets of just over $380 billion. Deutsche Bank holds a large amount of European government and bank debt; it also has considerable exposure to lingering real estate problems in the U.S. The bank, therefore, could become a conduit for risk between the two economies. But which way is Deutsche Bank more likely to transmit danger to or from the U.S.?
Bloomberg reports Dollar Preeminence Grows as Foreign Banks Double Deposits at Fed. Foreign bank deposits at the Federal Reserve have more than doubled to $715 billion from $350 billion since the end of 2010 amid Europe’s debt turmoil, buttressing the dollar’s status as the world’s reserve currency. Forty-seven non-U.S. banks held balances of more than $1 billion at the New York Fed as of Sept. 30, up from 22 at the end of 2010, according to a survey of 80 financial institutions by ICAP Plc, the world’s largest inter-dealer broker. The dollar has appreciated 6.6 percent since Standard & Poor’s cut the nation’s AAA credit rating Aug. 5, the best performance among developed-nation peers, according to Bloomberg Correlation Weighted Currency Indexes. A budget deficit of more than $1 trillion, a deadlock among Congressional supercommittee members on spending cuts and 9 percent unemployment haven’t deterred investors from seeking safety in the world’s biggest economy.
The euro has been undermined by the region’s sovereign debt crisis, while the Swiss franc and yen have fallen as their governments buy billions of dollars to weaken them. “There’s not anything close to a substitute and part of it is the deepness of the market, the liquidity,” Jack McIntyre, a fund manager, who oversees $23 billion in debt.
An inquiring mind asks, is the rise in M2, nothing more than a flight to safety in US Treasuries held at the Federal Reserve? Is the rise in M2 inflationary? or is the rise in M2, simply a rise in the notational value of US Government debt, trade by ETFs, such as ZROZ, EDV, TLT, IEF, and SHY?
Bloomberg reports Japan Exports Fall on Yen Gains, Europe Crisis. Japan’s exports fell for the first time in three months, indicating that the yen’s appreciation and financial turmoil in Europe are slowing the nation’s recovery from the March disaster. Shipments dropped 3.7 percent in October from a year earlier, the Ministry of Finance said today in Tokyo, worse than all 29 estimates of economists surveyed by Bloomberg News. Exports to China, Japan’s biggest market, slid 7.7 percent, the largest drop since May, today’s report showed. “A sharp slowdown in demand from eurozone countries should be weakening exports from Asia, in turn leading to weakness in exports from Japan,” said Masayuki Kichikawa, chief economist at Bank of America Merrill Lynch in Tokyo. “Exports should be weakening toward the end of this year, or possibly until January or February.”
Tyler Durden reports Italy’s domestic financial institutions, mainly banks, have been increasing their holdings of Italian Treasury Debt, increasing their accumulation by €23bn to €267bn.
Tyler Durden reports European Black Swan Sighted In European Investment Bank Bonds. While everyone's attention was focused intently on peripheral European bond spreads last week and the incessant call for ECB intervention, a dramatic, (and contagiously panic-worthy) move occurred in the European Investment Bank, EIB, bonds.
NYT reports Europe Fears a Credit Squeeze as Investors Sell Bond Holdings. Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral. Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations. If this trend continues, it risks creating a vicious cycle of rising borrowing costs, deeper spending cuts and slowing growth, which is hard to get out of, especially as some European banks are having trouble meeting their financing needs.
The flight from European sovereign debt and banks has spanned the globe. European institutions like the Royal Bank of Scotland and pension funds in the Netherlands have been heavy sellers in recent days. And earlier this month, Kokusai Asset Management in Japan unloaded nearly $1 billion in Italian debt. At the same time, American institutions are pulling back on loans to even the sturdiest banks in Europe. When a $300 million certificate of deposit held by Vanguard’s $114 billion Prime Money Market Fund from Rabobank in the Netherlands came due on Nov. 9, Vanguard decided to let the loan expire and move the money out of Europe. Rabobank enjoys a AAA-credit rating and is considered one of the strongest banks in the world. “There’s a real sensitivity to being in Europe,” said David Glocke, head of money market funds at Vanguard. “When the noise gets loud it’s better to watch from the sidelines rather than stay in the game. Even highly rated banks, such as Rabobank, I’m letting mature.” The latest evidence that governments, too, are facing a buyers’ strike came Thursday, when a disappointing response to Spain’s latest 10-year bond offering allowed rates to climb to nearly 7 percent, a new record.
A Global Eurasia War is coming. AP reports U.S. and allies to unveil new Iran sanctions The measures come amid growing concern that Tehran is pursuing a nuclear weapon. And Reuters reports Romney urges Obama to stop looming military cuts. Nature Economist Elaine Meinel Supkis writes Congress works only for AIPAC, not US voters. Libertarian Robert Wenzel reports The neo-con American Enterprise Institute, in partnership with CNN and The Heritage Foundation, is sponsoring a Republican presidential debate on national security and foreign policy that will take place on Tuesday, November 22, at 8 p.m. ET.
Financial market report for Monday, November 21, 2011