Financial Market Report for the week ending December 16, 2011
1) … Introduction
Fitch Threatens Massive Euro Downgrade After Saying Comprehensive Solution To Crisis Is Beyond Reach … European Banks Described As Insolvent ... Peripheral Europe May Face A Bank Run … India Suffers From Intensifying Inflation Destruction…. China Industrial Production Seen Decreasing … Gold Stocks Experience Deleveraging … Collateral Shortages Emerge … The BuBa Shadow Lending System Comes Into Focus ... A Global Run On Banks Has Commenced
2) … Today’s News
Bloomberg reports Fitch Threatens Massive Euro Downgrade After Saying Comprehensive Solution To Crisis Is 'Beyond Reach'.
Bloomerg reports These Are The 29 Massive Banks That Could Take Down The Global Economy. Many of these are seen in this Finviz Screener.
Bloomberg reports BlueCrest's Platt Says European Banks Insolvent. Michael Platt, the founder of the $30 billion hedge fund BlueCrest Capital Management LLP, said most of the banks in Europe are insolvent and the situation will worsen in 2012 as the region’s debt crisis aelerates. “I do not take any exposure to banks at all if I can avoid it,” Platt, 43, said today in an interview on Bloomberg Television’s “Inside Track With Erik Schatzker.” If European lenders had to mark their books to markets every day in the same way hedge funds do, most would be proven “insolvent,” he said.
Bloomberg reports Peripheral Europe May Face a Run on Banks in Coming Months, Kyle Bass. Kyle Bass, the Dallas based hedge fund manager who said in 2009 that governments would default within three years, said Greek, Portuguese and Spanish depositors will withdraw money from banks in the coming months. “Just as Latvians ran to the ATMs this weekend, so will depositors all over peripheral Europe in the months ahead,” Bass, who runs Hayman Capital Management LP, said in an investor letter. “Deposits are now declining at an aelerated pace. What’s surprising is that it hasn’t happened much sooner.”
Bloomberg reports IMF's Lagarde: Europe Crisis 'Escalating'. The European debt crisis is growing to the point that it won’t be solved by one group of countries, Christine Lagarde, the managing director of the International Monetary Fund said today. Lagarde said that if countries don’t work together, the world will face a situation similar to the 1930s, before the world slid into World War II. “There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super- advanced economies that will be immune to the crisis that we see not only unfolding, but escalating at a point where everybody would actually have to focus on what it can do,” Lagarde said. If the international community doesn’t work together, “the risk from an economic point of view is that of retraction, rising protectionism, isolation,” Lagarde said. “This is exactly the description of what happened in the ‘30s and what followed is not something we are looking forward to.” Lagarde said the world economic outlook “is quite gloomy” with pervasive downside risk, downward revisions, slower growth than expected, higher deficits than predicted and public finances in shaky condition. “And that is pretty much true the world over,” Lagarde said.
Reuters reports Europe's Lenders On Central Bank Life Support. European banks face a 725 billion euro funding crunch in 2012, forcing them deeper into the arms of a European Central Bank which is prepared to prop up banks but not governments. The central bank is throwing European lenders a three-year liquidity lifeline in response to pressure from desperate top executives who have seen interbank lending and funding from wary money market investors come to an abrupt halt. "There's a huge funding issue in Q1 where a lot of banks have to refinance debt so there's a big crunch coming," a senior banker at a European firm told Reuters on Friday. "Couple that with uncertainty about what's going to happen with the euro and it could be a very interesting first quarter."
The epicenters of deleveraging out of Neoliberalism are seen EWZ, EPOL, EIS, ECH, EWD, EWT, EWI, INP, TUR, ARGT, EWO, RSX, CHII in this Google Finance Chart and in this Finviz Screener. India is a poster nation of debt deflation and inflation destruction. Bloomberg reports India's Bond Yields at This Week's High on Inflation Concern. India’s 10-year bonds were little changed, holding yields at this week’s highest level, on concern an aelerated slide in the rupee will boost the cost of imports and spur inflation. The rupee slid 8.3 percent this quarter, the biggest drop among Asian currencies, and touched a record low of 54.3050 per dollar today. The benchmark wholesale-price index rose 9.11 percent in November from a year earlier, government data showed yesterday. The Reserve Bank of India will keep the repurchase rate unchanged at 8.50 percent at a policy review tomorrow, aording to all 14 economists in a Bloomberg survey. “The central bank can’t afford to ease its policy stance as inflation continues to be a worry,” said N.S. Venkatesh, head of treasury at Mumbai-based IDBI Bank Ltd. “The rupee’s drop will also push prices higher.”
Bloomberg reports Manufacturing May Shrink From China to Europe as Demand Weakens. Manufacturing May Shrink From China to Europe as Demand Weakens. Manufacturing may contract this month from China to the euro region as global demand slows and Europe’s leaders struggle to contain the worsening debt crisis. Chinese factory output may decline for a second month in December as Europe’s fiscal woes weigh on exports and home sales slide, preliminary results from a Markit Economics survey indicate. In the euro area, manufacturers may face a fifth straight month of contraction as the region endures its worst quarter for 2 1/2 years, a separate report showed. Ripples from Europe’s debt turmoil have dented confidence among companies and consumers and hit global demand. The Organization for Economic Cooperation and Development said last month that trade in goods stalled in most major economies in the third quarter and it cut its growth forecast. The slowdown is spilling over into unemployment, with Nokia Siemens Networks announcing last month that it plans to eliminate 17,000 jobs worldwide. “The near-term outlook is still bleak” in Europe, said Stella Wang, an economist at Nomura International Plc in London. “With the uncertainty about the sovereign debt crisis and slowing momentum of the euro area’s main trading partners, both businesses and consumers look set to continue holding back their investment and consumption decisions going into 2012.”
Bloomberg reports Chinese Stocks Head for Biggest Weekly Drop Since 2010. China’s benchmark index headed for its biggest weekly losses in 17 months on concern exports will slump next year and the government won’t ease monetary policy fast enough to stem an economic slowdown. China Cosco Holdings Co., the nation’s largest shipping line, slid 1.1 percent after Commerce Minister Chen Deming said he is “not too optimistic” about exports in 2012. Yanzhou Coal Mining Co. dropped for a sixth day amid speculation the economic slowdown will curb energy demand. New China Life Insurance Co., the third-biggest life insurer, jumped 12 percent in its debut. “Investors are still concerned whether the economic slowdown will be gradual and whether consumer prices will rise,” said Wei Wei, an analyst at West China Securities Co. in Shanghai. “Any gain will be short term.” The Shanghai Composite has slid 6 percent this week, poised for the biggest drop since the week ending July 2, 2010, after reports showed economic growth is decelerating. Foreign direct investment dropped for the first time since 2009, while manufacturing may contract for a second month. The Conference Board’s leading index for China, which captures prospects over the next six months, fell in October, while lending slowed in November and money supply grew the least in a decade. Google Finance Chart of CAF, CHII, CHIM
Reuters reports “Deposits fell sharply at China's big four state banks early this month, partly due to an outflow of hot money from China, local media reported. The big four banks, which account for half of total bank deposits in China, reported a 400 billion yuan ($62.76bn) fall in deposits in the first 10 days of December, the 21st Century Business Herald reported.
Irish Central reports Major Setback For Irish Economy As Deflation Recorded In Third Quarter and AP reports Irish Economy Slumps As Euro Debt Tensions Mount
Open Europe writes that a Germanized Europe terrifies the independent Poles. Polarised Poles Unite In Fear Of Franco-German Run EU. The Law and Justice and Solidarity Poland parties aused the government, and in particular Foreign Minister Radoslaw Sikorski (following his controversial speech calling on Germany to play a more active role in Europe) of betraying Polish interests and sovereignty. They were also very critical about the possibility of Poland offering financial assistance via the IMF to countries with a higher standard of living than that enjoyed by Poland.
The WSJ reports that The EU ECB and IMF Troika Tells Greece It Must Undertake Structural Reforms. The IMF's mission chief to Greece, Poul Thomsenthe, tells the Greeks that tax levies and across-the-board wage and pension cuts have reached their limit and that they must start dismissing workers in the public sector and elimination of unnecessary governmental organizations.
Marcel Fratzscher and Arnaud Mehl write in VOX, The Renminbi Is Already Well On Its Way To Being The Dominant Currency In Asia. The Shanghai Cooperative is rising to be the regional global governance sovereign authority in Asia. It will be centered around China and its Renminbi currency; and this is an effective working of the 1974 Clarion Call of the Club of Rome for regional global governance, as a means of providing stability and security for the deleveraging and derisking out of the Free To Choose Floating Currency Banker Regime of Neoliberalism.
Ambrose Evans Pritchard writes of Europe’s devolution, Talk Of Nuclear Default Sums Up Left's Anger At EU Dictates. Left-leaning parties in Europe are becoming increasingly defiant, accusing the Right of exploiting its grip on the European machinery to force through polices that are in effect dismantling parts of the welfare state or undermine trade union power. Germany's Angela Merkel, France's Nicolas Sarkozy, and Holland's Mark Rutte are all conservatives, and will soon be joined by Spain's Mariano Rajoy. Francois Hollande, France's Socialist leader and front-runner in the presidential elections, has vowed to renegotiate last week's EU summit deal if elected next May, saying it violates the fiscal sovereignty of the French parliament, imposes perpetual austerity, and fails to offer struggling states any way out of economic crisis. "There must be growth," he said. Oskar Lafontaine, a leader of Germany's Linke (Left) party, said the euro was hurtling towards destruction on current policies. He blamed Germany's system of screwing down wages to undercut other EMU countries, or "wage dumping", for causing the imbalances behind the eurozone crisis. "A shared currency cannot work without coordination of wage policy. Once wages have diverged as far as they have in recent years, devaluation and revaluation is the only way out." He accused Merkel and Sarkozy of driving Greece into a downward spiral and now trying to inflict the same "demented" policies on the whole of Europe.
Throughout history fate has provided kingdoms to rule mankind. For the last one hundred and fifty years, two iron legs of hegemony have governed the world, these being the UK and the US. But now, destiny is developing the ten toed kingdom of regional global governance. It is also presented the Beast Regime of Neoauthoritarianism, coming forth from the Mediterranean Sea nations of Italy and Greece.
This monster of statism has seven horns, symbolic of mankind’s seven institutions, and ten heads symbolic of its rule in the world’s ten regions. It’s ten toes being comprised of the iron of diktat and the clay of democracy, will crumble as these are not compatible building materials. This beast, although dreadful and terrible, and although eventually being ruled by ten world king, will fail, and a Sovereign and his banking partner, the Seignior, will eventually gain the upper hand, and will rise to power to establish a one world government, a one world currency, and global seigniorage.
Out of sovereign armageddon, that is a credit collapse and financial system breakdown, a credible sovereign will rise to power in Europe. This New Charlemagne will rule in authoritarian fashion over what constitutes a revived Roman empire. He will be one thoroughly familiar with framework agreements. Currently, there is one who is a conciliator, one who works to gain consensus and guide leaders. Perhaps Herman van Rompuy will be New Europe’s Chancellor and provide order out of chaos. The EU President recently promoted actions that would quickly bypass national governments as a means of addressing the EU’s crisis, as reported in Le Figaro, December 6, 2011, Towards a Stronger Economic Union: Interim Report.
The appointment of technocratic government in Italy and Greece, and the rise of the power of the EU ECB Troika is laying the foundation for a Federal Europe. The Sovereign’s rise to power will mark a major inflection point in human history where political capital increasingly becomes more important than economic capital or investment capital. The Sovereign will have political capital to enforce fiscal rule. The word will and way of the Sovereign and the Seignior will enforce totalitarian collectivism.
3) … Stock market fallers of the week.
Sectors falling included
WCAT, -10, GDX, -9, SIL, -9, COPX, -9, REMX, -9, OIH, -9, IEZ, -8.5, XOP, -8.5, KOL, -8.5. EMMT, -8, URA, -7, IGN, -7, ALUM, -6.5, CHIM, -6.5, PSCE, -6.5, SLX, -6.5, XSD, -6.5, VROM, -6, CHII, -6, SKYY, -6, SMH, -6, CARZ, -6, ITB, -6,
Financials falling included
EUFN, -9, EMFN, -5, KCE, -8. IAI, -6, IXG, -6
World small caps falling lower included
EWX, -9, SCIF, -9, KROO, -7, CNDA, -7, HAO, -6, RSXJ, -6, GERJ, -6, LATM, -6, SKOR, -6
Commodities falling included
DBC, -4, USCI, -4, CUT, -4, UGA, -4, DBB -5, USO, -6, JJC, -6, UNG, -6, GLD -7 , SLV -8,
Bonds rising included
LAG, AGG, BND, MBB,
Bonds falling included
The US Dollar, $USD, rose 2.1, as currencies, seen in this Finviz Screener, falling lower included
South African rand, SZR, 3.6, Norwegian krone 3.5, Indian Rupe, INR, 3.0, Brazilian real, BZF, 2.9,
Swedish krona, FXS, 2.9, Euro, FXE, 2.5, Danish krone 2.5, Australian dollar, FXA, 2.3, Mexican peso, FXM, 2.2, Canadian dollar, FXC, 2.1, Russian ruble, FXRU, 1.9, New Zealand dollar 1.8, Swiss franc, FXF, 1.4, South Korean won 1.0, Singapore dollar 1.0, British pound, FXB, 0.8,
Taiwanese dollar 0.5, Japanese yen, FXY, 0.1.
4) … Doug Noland writing in Target 2 presents the Germanization of credit and the growth of the BuBa shadow lending system.
Dow Jones, “German Finance Minister Wolfgang Schaeuble… said the euro is stable, and the current crisis isn't one of the currency itself. He made his comments as the euro dipped as low as $1.299, its lowest point since January this year. ‘We don’t have a crisis of the euro. What we have is a crisis and problems in a series of member states,’ Schaeuble said at a speech to mark the tenth anniversary of the introduction of euro notes and coins… Introducing the euro and giving up the deutschmark was no easy decision, he said. ‘But already then it was the right decision,’ Schaeuble said. The finance minister stressed that inflation during the euro years has been low. ‘The euro is a stable currency,’ he said.”
For months now, European political leaders and central bankers have repeatedly reassured the marketplace that the euro is a “strong” and “stable” currency. We were ensured that confidence in the euro was not an issue – and for months this view was bolstered by the euro’s resiliency in currency trading. But talk of euro confidence rings increasingly hollow. I believe that market perceptions have changed, and faltering European Central Bank (ECB) and euro confidence now likely marks the next phase of the unfolding global financial crisis.
The evolution of a crisis from Credit issues to broader currency fears marks a major escalation from the standpoint of policymaking. A strong/resilient currency affords policymakers important flexibility, both fiscal and monetary. Importantly, and as we’ve witnessed in the case of the ECB, a central bank has significant capacity to monetize (expand asset holdings) so long as the marketplace trusts the stability of the underlying currency. As a crisis of confidence deepens, this monetization can play an important role in both bolstering debt and equities markets and financing government spending programs. And, of course, relatively stable markets and economies are critical to currency stability.
The ECB is no “developing” central bank. And as one of the world’s predominant reserve currencies, the euro is no peso, baht, won or ruble. Global markets have afforded the euro the benefit of the doubt for much of 2011, perceptions of “too big to fail” again prevalent in the marketplace. The euro has been bolstered both by the perception that European policymakers would eventually (when all other options were exhausted) come together with sufficient resolve to deal with the crisis, as well as the perception that China, the U.S., the IMF and others would join in to ensure the crisis did not spiral out of control.
The euro is not a pegged currency regime vulnerable to a destabilizing de-pegging, but instead trades freely against currencies such as the dollar and yen that have their own serious structural issues.
But the euro is the handiwork of a historic experiment in monetary integration. Its origins go back to an era of optimism, cooperation and, importantly, financial (including monetary policymaking) innovation. I would argue it is a creature borne from the halcyon upside phase of an epic Credit cycle.
A global backdrop of easy Credit, unprecedented leveraged speculation, liquidity abundance and attendant policymaking flexibility/aommodation was instrumental in the convergence of borrowing costs and deficits throughout the eurozone prior to euro introduction. It is worth recalling that the Bank of Italy was an investor in Long Term Capital Management (LTCM), and LTCM was a major operator in Italian debt instruments.
The pegged currency regimes from the nineties fostered major market distortions that were later resolved through financial and economic calamity.
Yet when it comes to distortions, nothing compares to what unfolded under the “pegging” of 17 individual currencies and market yields in the process of euro monetary integration. In particular, yields collapsed in Greece, Portugal, Ireland, Belgium, Spain and Italy, as their funding costs “converged” toward the “stability anchor,” “AAA,” and disciplined manufacturing powerhouse, the Federal Republic of Germany. And while improved fundamentals no doubt played a role, the perception both that the euro was here to stay and that sovereign default would always be held at bay was instrumental in the collapse of risk premiums across the euro region.
Until more recently, one could argue that the European debt crisis was largely a tug-o-war. On one end, markets were imposing more reasonable risk premiums upon profligate sovereigns. On the other, policymakers were taking increasingly desperate measures to pull borrowing costs back down to artificially low levels. The stakes were extraordinarily high. Considering the enormous debt loads coupled with maladjusted economic structures, a significant jump in market yields would raise questions as to the viability of debt structures for many sovereigns. And a crisis of confidence in “periphery” debt markets, Italy in particular, would raise liquidity and solvency issues for the European banking system. The stakes were so high that the markets had been largely content to presume that policymakers would eventually exert sufficient pull to win the war.
But the longer policymakers went without tug-o-war triumph the more the markets recognized the complexities and gravity of the situation. Greece was the tip of the proverbial iceberg, and economic structures were much more impaired than had been earlier assumed. If little Greece had become a formidable financial black hole, what might lie ahead with Italy? And if Italian solvency was at issue, the solvency of the European banks was in jeopardy, and suddenly the world looked like a very uncertain and over-leveraged place.
Perhaps a major inflection point in the Credit Cycle had been reached, with ominous portents for markets, economies, politics and the social mood more generally. Over the past few weeks, doubt has been cast on the viability of the euro monetary experiment.
My thesis is that, with the sustainability of euro integration now a pressing issue, capital flight has begun in earnest. There is evidence that huge flows have left the “periphery” banks in search of the safety of German and other “core” institutions. A fascinating Bloomberg article yesterday (“Germany’s Hidden Risk” by Peter Coy) introduced the term “Target2.” “It’s the name for the European Central Bank’s suddenly important interbank payment system, which before the crisis was just a lowly bit of financial plumbing. The bottom line: Germany’s Bundesban, BuBa for short, has quietly, automatically lent 495 billion euros ($644bn) to the European Central Bank via Target2.
That lending has balanced correspondingly huge borrowings from Target2 by the central banks of weaker nations including Greece, Ireland, and Portugal, and lately Spain, Italy, and even France. They are technically ‘claims,’ not loans. To find them you have to root around in the footnotes of the reports of the 17 national central banks of the euro zone.
As Bloomberg’s Peter Coy explains it, “Target2” is basically the system for tallying and settling obligations between euro region central banks. And, clearly, there’s been lots of tallying and too little settling, as fellow euro central banks acumulate enormous debts to Germany’s Bundesbank. Say, for example, a wealthy Italian, or multinational corporation, decides it’s now safer to park their euros in German bank deposits rather than to leave them in Italy. The fund transfer would see balances shifted to Germany, although the Italian bank (where the funds are exiting) would likely be suffering funding issues. So this transfer would require the local bank to borrow from the Italian central bank. Through the ECB’s Target2 system, the end result would be a new payable claim whereby the Italian central bank owes euro funds to the Bundesbank.
It is my view that heightened euro disintegration risk has unleashed destabilizing capital flight – within the euro region and without. I’ll presume the flow out of Italian, Spanish, Greek, Portuguese and other “periphery” banks to Germany will equate to only more astonishing growth in “Target2” balances. And I’m not sure why this wouldn’t turn into a serious issue for the ECB, the Bundesbank and for an already unsettled German political landscape. The high standing in which the Bundesbank is held by the German people could be at risk. For now, the ballooning of both the ECB balance sheet and claims owed to the Bundesbank will likely be a source of market worry, weighing further on the euro and creating greater momentum for capital flight out of the European financial system.
There is at this point alarmingly little to show for the massive ballooning of the ECB’s balance sheet (and “Target2” balances owed to the Bundesbank). One is left pondering how the ECB/Bundesbank can be expected to backstop an almost unfathomable amount of vulnerable European sovereign debt and banking system obligations – not to mention potentially enormous capital outflows.
There was more focus this week on Europe’s “plumbing.” How will markets and payment systems function in the event of major change – one or more countries exiting or complete disintegration - in the euro regime? I expect this to be a major issue for the coming weeks and months. If the euro as we know it today does not survive, there will be major market dislocations and bank failures.
5) … Benton Harbor is a city that lies in twilight zone, somewhere between Neoliberalism and Neoauthoritarianism.
Pater Tenebrarum writes that depression is actively underway in Greece in article The Greek Tragedy Chaos Beckons.
While Greece serves as the poster nation for Neoauthoritarianism, Benton Harbor is a surrealistic example of a corporate plantation that tax payers have funded. It occupies a time and space between the former Banker regime of Neoliberalism and the coming Beast Regime of Neoauthoritarianism.
Yes, you the taxpayer have funded Whirlpool Corporation’s, WHR, luxuriant corporate campus, HarborShores, which is being built in the ruins of rust belt Benton Harbor. HarborShores is an emerald oasis golf course community that stands in stark contrast to the black community of Benton Harbor that surrounds it. Jonathan Mahler’s New York Times Magazine article Now That The Factories Are Closed, It’s Tee Time In Benton Harbor, Michigan, reports the strange second life of a factory town that lost its factories. One meets diversity consultant Marcus Robinson, who works for The Consortium for Community Development. He reminds me of a shoe polish man in a Wall Street Lobby, one who puts a good shine on things. Benton Harbor has some characteristics of Neoliberalism. Its gentrification comes from the Livery, a micro brewery, and serves as an example of urban development. And Benton Harbor has a few of the characteristics of Neoauthoritarian devolution. Democracy is history here, as it is operated by political capital from the state of Michigan. It has technocratic government that comes in the form of an emergency manager, whose governing authority comes from Public Act 4. Corporatism is the way of life in Benton Harbor and HarborShores.
6) … Nature economist Elaine Meinel Supkis writes on UK And US Hegemony relating NATO Global Banking Mess Creates Wars And Insurrections.
Collateral shortage is fancy talk for ‘country debts going bad and thus, eliminating the capital base for all other loans.’ When homeowners and businesses defaulted in mass numbers, this was fixed by piling in massive amounts of government debts which the bankers then sit on like hens on eggs and desperately collect feeble ‘rent’ on these debts. But now governments are going down into bankruptcy and there is this frantic search for ‘good debts’ to passively hold so they can lend money made out of thin air to people seeking loans.
The biggest banking power in Europe thanks to the offshore islands and City of London, all owned basically by the Crown, are not regulated hardly at all, so they can create more credit out of thin air compared to say, Germany, that bases its credit on its huge sovereign wealth holdings. Despite running everything in the red, the UK can still create imaginary loans but this is rapidly falling apart so the UK is actually unable to give IMF more funds for euro-bailout. .Who can bail out the EU? Germany, of course. And this is life. Creditors get to call the shots.
Once upon a time, the UK ruled the Seven Seas and had the world’s biggest and most modern navy. Look at it today! The last aircraft carrier being canned. Virtually no air force left. The remaining, tiny fleet of destroyers cut by 50% this year. This is a desperate government maintaining the pomp, ceremony and expenses of a huge imperial Throne system while reducing military support to midget size. This is due to complacency over US protection: they expect us to protect the dame living with her welfare spawn in massive, expensive palaces, on our military spending. The US will look like the UK eventually. No surprise to historians who are realistic. Perpetual lack of capital as real capital systems vanish, our military will vanish, too. All of Europe is sleepwalking towards exposure to invasion by other powers. Of course, the US response to obvious rises in Chinese powers, is to spend more on our military and expand it even further overseas but this is fatal and China knows it. China’s military exposure is strictly within a short range of its home state.
The US is grossly overextended and has a presence nearly everywhere and therefore, has seen direct power dissipate into vapor. And the cost of trying to be equally strong everywhere is causing a classic ‘infinity to zero’ situation. That is, our military power, devoid of any backing from capital, labor or industrial tax base, devoid of tariffs to fund it, will collapse the entire country into bankruptcy. Which is now 100% unavoidable.
I saw on Al Jazeera, the 1% elite sheikhs of the oil pumping dictatorships are demanding Syria bow to them as 17 Protesters Killed as 200,000 Rally in Syria. This revolt in Syria is a point of great interest of NATO and the dictators in the oil nations that fear uprisings. They desperately want to control it by bringing up a new, better dictator just like they are struggling to impose on Egypt.
7) … Pater Tenebrarum writes of a liquidity gusher and inflationary push in The ECB Decision A Detailed Analysis.
First off, it should be stressed that in spite of the adverse reaction in 'risk' markets to the ECB announcement yesterday, the ECB has in fact taken very significant steps designed to bring the liquidity gusher to bear and ease the banking system's funding pressures.
First of all, there is of course the 25 basis points rate cut, which immediately sent all key Euribor rates down sharply. Due to the above mentioned fact that assets pledged to obtain funding are often subject to vast haircuts, a collateral shortage has developed in the euro area banking system, a problem which we have first discussed several weeks ago. This developing collateral shortage put paid to ECB board member Lorenzo Bini-Smaghi's full-throated assurances of a few months ago that 'there is plenty of eligible collateral in the euro are banking system'. In fact, it appears that an amount of € 14 trillion in eligible collateral thought to be available at the time has quickly shrunk to next-to-nothing. Of course this has been further egged on by the Fed's and BoE's 'QE' operations, which permanently remove 'safe collateral' from the marketplace, as well as the constant stream of credit rating downgrades, which make collateral previously regarded as 'safe' decidedly 'unsafe'. In the sovereign bond space in Europe alone, trillions in debt collateral have been pushed into the 'unsafe' category. The effect is that haircuts and margin requirements are constantly increased. The collateral used a 'secondary media of exchange' in the repo markets has now become victim to the hazards Mises mentions: its sale is only feasible at a loss, which in turn means that its value as collateral in the chain of hypothecation and re-hypothecation has commensurately declined.
Therefore, the second important decision the ECB has announced yesterday was a further relaxation in its 'collateral eligibility rules'. Instead of lending only against collateral of impeccable quality, it sounds as though the ECB will possibly soon accept everything from beanie-babies and comic book collections upward (as long as they are securitized). In this it has adopted the methodology employed by the Fed in the 2008 crisis: it is relieving the banking system of assets of rather dubious quality. You can bet that the 'national central banks' in the euro system will make liberal use of their discretion. Also, the lower quality asset backed securities (NYSE:ABS) the ECB is now prepared to accept are often securities the banks have created with the specific intent of pawning them off to the ECB – they would be completely illiquid in the secondary market.
Now to the trail of MF Global's business, which financial journalists have lately followed and which has led to increased scrutiny of the 're-pledging chains' in the so-called 'shadow banking system'. What is most remarkable about this is that investment banks and brokers can use the assets belonging to their customers held in margin accounts without their customers' assent in any way they deem appropriate (or rather, the situation is that customers must sign a blanket assent when opening an account – thereafter they have no control whatsoever over the manner in which securities that belong to them are used). These third party assets are then pledged and re-pledged in a sheer endless chain of hypothecation that is obviously only as strong as its weakest link. Moreover, the relatively low margin requirements involved make this a form of fractional reserve banking using secondary media of exchange. This means that although the so-called 'shadow banking system' can not by itself create money from thin air, it can still create an enormous amount of systemic leverage by employing secondary media of exchange in these operations. We have to leave a more detailed discussion of MF Global's specific trades for a future post, in the meantime we would however like to point readers to an article at Thompson-Reuters that gives a detailed account of the shadow banking system's activities in London's unregulated repo markets. It should be obvious from this that a 'collateral shortage' impinges greatly on systemic liquidity and hence on asset prices. This also explains why the ECB's continued refusal to finance euro area governments with a form of 'QE' has led to a sharp sell-off in 'risk assets' yesterday. Here is the article at Reuters by Christopher Elias, entitled 'MF Global and the great Wall Street re-hypothecation scandal'. An excerpt: Most have been focused on how a Eurozone default would result in huge losses in Eurozone bonds being felt across the world’s banks. However, re-hypothecation suggests an even greater fear. Considering that re-hypothecation may have increased the financial footprint of Eurozone bonds by at least four fold then a Eurozone sovereign default could be apocalyptic.
U.S. banks direct holding of sovereign debt is hardly negligible. According to the Bank for International Settlements (NASDAQ:BIS), U.S. banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal and Spain. If we factor in off-balance sheet transactions such as re-hypothecations and repos, then the picture becomes frightening. As for MF Global’s clients, the recent adoption of an “MF Global rule” by the Commodity Futures Trading Commission to ban using client funds to purchase foreign sovereign debt, would seem to suggest that it was indeed client money behind its leveraged repo-to-maturity deal – a fact that will likely mean that very few MF Global clients few get their money back.”
No wonder then that the ECB continues to implement 'extraordinary measures' and remains committed to its quest of becoming Europe's biggest 'bad bank'. Its balance sheet accordingly continues to grow by leaps and bounds. In summary we would say that the market seems to greatly underestimate the importance and likely impact of the measures the ECB has announced yesterday. As far as we can tell, these measures amount all in all to a truly gigantic inflationary push. The euro area's true money supply (NYSE:TMS), via Michael Pollaro. The mountain of uncovered money substitutes dwarfs covered money substitutes and currency.
8) … James A. Kostohryz writes in Seeking Alpha A 'Lehman Event' May Be Near
Judging by the action in the various indicators of bank funding stress, the ECB measures announced on December 8th do not appear to have had any discernible material effect on market expectations surrounding bank liquidity. The market action of bank shares such as Deutsche Bank (NYSE:DB) in Europe and investment banks in the U.S. such as Morgan Stanley (NYSE:MS) that are highly sensitive to this issue are also signaling that there is a major bank funding problem brewing.
The question is, why? It is clear that many depositors and money market participants are essentially engaged in a “run” on European banks. However, with the ECB committed to providing “unlimited” funding for up to three years, it is not immediately apparent why there should be any funding stress at all.
One theory is that there is a “collateral shortage.” The ECB only provides liquidity in exchange for certain types of collateral. Furthermore, they only provide a certain percentage of the value of certain assets. The amount of the “high quality” collateral that certain banks have may not be sufficient to cover their loss of funding sources (that previously did not have collateral requirements). Under that theory, many banks are essentially being shut out of the ECB and thrown to the “wolves” in the private market where they must pay high rates of interest. Based on my knowledge of this issue and the data that I have seen, I am not sure that a “collateral deficit” can explain the funding stress – unless the deposit withdrawals and money market fund withdrawals are of a MUCH greater magnitude than anything that can be discerned from publicly available information.
Another possibility is that the market is exhibiting a delayed response to these measures and that the restoration of fluidity in the system will be gradual. Again, this is not a particularly satisfying theory. Surely there should have been some positive market response if the measures are expected to make a difference.
The tentative conclusion I derive from the lack of market response to the newly announced ECB measures is that risk of a major banking crisis in Europe is extremely high. If some banks are currently finding it difficult to acquire funding, and they are being shut out by the ECB due to relatively stringent collateral or other requirements, then a continued run on European banks by depositors and money market fund managers could bring one or several of these banks to the breaking point at any moment. In this regard, unless the upcoming EU summit changes the psychological dynamic significantly and restores confidence in European financial institutions, a “Lehman event” could occur within days of December 9. Market participants have been focused on sovereign bond yields. But the real stress point, and potential crisis catalyst, may be in the funding market for banks.If there is not a discernible improvement in indicators of bank funding stress in the next few days after Dec 9th, I think that a “Lehman event” could be very near - perhaps prior to December 31, 2011.
9) … The current dollar liquidity shortages have commenced a global run on banks, which has caused the world central banks to institute a world wide dollar swap operation; this will debase the dollar and monetize gold to unprecedented levels.
Alan Greenspan was the world’s purveyor of credit liquidity. His ongoing policy of credit liquidity and the Freddie Mac and Fannie Mae securitization GSE loans by mortgage REITS, such as Annaly Capital Management, were forms of ponzi credit that debased the US dollar and created Inflationism. Ben Bernanke actively monetized the US debt via ZIRP and POMO activities favorable to the primary dealers. The he went beyond the Rubicon of sound fiscal and monetary policy to rescue the world’s banks like Dexia with QE 1; and then he inflated commodities and stocks with QE2; this strongly drove the US Dollar lower.
In July 2011, investors became aware that a debt union had formed in the EU, and sold out of stocks and commodities. When Angela Merkel and Nicolas Sarkozy called for a true European economic government in August 2011, concern arose that a sovereignty union was forming, an investors exited the global risk trade. Risk avoidance precipitated increasing of margin requirements and margin calls caused Deflationism, that is global derisking and disinvesting from carry trade loans, resulting in a massive sell off and the creation of support by the world banks of their dollar swap operations, which in turn only serves to debase the US currency even more, and will serve as a spring board to boost gold prices to levels previously thought impossible.
Mr. Rickards in King World News discusses the recent gold smash and what the central planners are doing and how it will impact gold in The US Treasury Shorts The Dollar. Jim Rickards’ new book Currency Wars: The Making of the Next Global Crisis, has launched and has made the New York Times Best Seller List. Mr. Rickards relates Well, I always think it’s important, Eric, to separate fundamentals and long-term trends. That’s one thing you have to understand and get right. But there are short-term technical factors as well. Gold responds to both. In the long-run the fundamentals will prevail, but in the short-run the technicals can definitely dominate and this was a week where the technicals dominated.
Let me explain what I mean by that. One thing that is going on is there is a massive run on the banks globally. It is primarily centered in Europe, but also around the world. There is a huge demand for dollars. There’s a liquidity shortage and people just need dollars. So lets just say, hypothetically, I have gold and I like gold for the long-run and think it’s a good investment. I’m a bank let’s say and they (depositors) are withdrawing money and I need dollars.
Well, I will sell the gold to get the dollars, even though I like my gold position and I think it’s going higher. I may have to sell it to get cash to meet these other obligations in a liquidity crisis and we are seeing a liquidity crisis. So the action this week is technically driven, but the fundamentals are still intact. The fundamentals have everything to do with the excess of paper money relative to gold and the potential loss of confidence in paper money that’s coming from over-printing.
“The Fed will print if the dollar gets stronger because the Fed needs the dollar to be weaker. With all of this printing coming on stream, you can rest assured the price of gold is going to go a lot higher.”
When asked about the US dollar, Rickards responded, “Some legislation authorized a $100 billion line of credit from the United States to the IMF. It suddenly occurred to me how this actually works. The IMF puts in the borrowing notice for the $100 billion and the Treasury sends the $100 billion to the IMF. They (the IMF) then use it to bail out Europe. But here’s what happens, the Treasury sends the money and the IMF gives the Treasury a note because it’s a borrowing. So that’s very significant because for the first time in history the IMF would be leveraging its balance sheet. But the note they give the Treasury is not denominated in dollars, it’s denominated in SDR’s.
The SDR includes dollars, but it also includes other things such as Swiss francs, pounds sterling, euros, Japanese Yen and eventually the Yuan. Now when the note matures, the IMF pays you back in the dollar equivalent of the SDR at that time. In other words, they don’t give you $100 billion back. They take the SDR equivalent back and convert it into dollars at whatever the exchange rate is at the time.
What that means is that the Treasury is going short dollars. Think about the significance of that, Eric. The Treasury sponsors the dollar. You take a dollar bill out of your pocket and look at it, the Secretary of the Treasury signs every dollar bill. It’s sponsored and backed up by the Treasury and yet the Treasury is shorting its own currency by taking SDR notes from the IMF. My question is, if the Treasury is shorting the dollar, shouldn’t the rest of us be shorting the dollar too?”
In Forbes, Michael Pento commented on the newly installed head of the ECB, “Similarly, Mario Draghi now believes that the problem with European debt is fear, not one of insolvency.”
Global Banking And Financial Review reports that on May 31, 2011, Jean Claude Trichet declared, “There is no liquidity or collateral shortage for the European banking system.” Well, that was then, but now, risk aversion is causing a collateral shortage. All the liquidity measures undertaken by the world central banks will not solve the European sovereign and banking debt crisis, as it is not one of liquidity, but one of solvency: the European nations and their banks are both insolvent.
The world banks, seen in this Finviz Screener are going down and will all be nationalized by their governments and will be called government banks, that is gov banks for short. As the world major currencies, DBV, emerging market currencies, CEW, continue to plummet in value in ongoing competitive currency devaluation, so will the world financial institutions, IXG. Fiat money is dying as the PIGS are among the first to loose their debt sovereignty and as the global risk trade, being built on carry trade lending, reverses. Collateral shortages and debasement of currencies are factors actively ongoing deleveraging investments worldwide.
Avery Goodman wrote on December 2, 2011 in Seeking Alpha The Fed Makes Sure U.S. Dollar Collapses With The Eurozone. On Wednesday, the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, and the Swiss National Bank announced coordinated actions to shore up international banks. The purpose is to ease pressure on European mega banks which are in increasing danger of insolvency due to the sovereign debt crisis in Europe, are heavily short the dollar, via various mechanisms, and must now incur big interest costs in funding dollar-denominated assets.
The central bankers agreed to lower the price of existing U.S. dollar liquidity swap arrangements. Even before the recent action, the ECB and other central banks, were offered as many dollars as their banks would borrow. But the cost was higher. The potential size of the swaps are unlimited, as the Fed has agreed to supply as many dollars as its peers request. The Federal Reserve, of course, does not have an unlimited number of dollars currently available. Its books are evenly balanced between assets and liabilities. It is not talking about selling assets to pay for these swap lines. To supply the dollars, the Fed must print them without limit. The cost of dollar loans is being reduced by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (NYSE:OIS) rate plus 50 basis points. That compares with the previous arrangements, whereby it was OIS plus 100 basis points.
By making ECB dollar funding much cheaper than dollar funding from the free market, the hope is that solvent Euro-banks will also start using lines of credit from the ECB. This would serve to reduce the stigma of insolvency currently arising out of accessing central bank swap facilities. The pricing will be effective from December 5, 2011. The actions of the Federal Reserve will insure another permanent and major devaluation of the American dollar, similar to that of 2009. Fed Chairman Ben Bernanke says this type of lending between central banks is "risk-free". There is a very real risk that the ECB will never pay back the swap lines.
Joey Friedman writes Insolvency means the bank simply can't pay up because the firm made bad loans and its assets are fundamentally and persistently smaller than its outstanding debt. Providing liquidity to an insolvent bank is like putting a band-aid on a gunshot wound; it just hides the problem for a short while and refuses to address the underlying issue. Central bankers must stop handing out bandages and painkillers and address the lethal bullet wounds that have perforated the major European banks. The European financial sector has morphed into a grotesque and insolvent monster that is taking down economies and governments, namely Greece's and Italy's, and certainly with more to follow. Although it can be difficult to discern between illiquidity and insolvency, market volatility over the past year indicates that we simply do not know how much exposure these banks really have to bad loans made during the pre-crisis boom. Considering the widespread lack of borrowing, it's clear that even the banks don't know the answer.
I believe a credible sovereign has the answers, and that he is waiting in the wings, and at the appropriate time, fate will open the curtain, and he and his banking partner, will step onto the world’s stage, and install a Federal European Government and a European Fiscal Union, which will provide the seigniorage of diktat to replace the seigniorage of fiat money. The Sovereign’s and Seignior’s rise to power will come out of sovereign armageddon, that is a failure of credit and banking, and the people will be amazed by the sovereign’s solution, and place their trust in it and give their allegiance to it. The Euro is a currency with a country, but soon it will have a Master and Lord. As for Libertarianism, its just a broken artifact of human philosophy, as Freedom and Free Enterprise are mirages on the Neoauthoritarian Desert of the Real. And Choice is a relic of the bygone the era of Milton Friedman’s Neoliberalism. The Free To Choose script reigned for the last 40 years, but the Diktat script implied in the 1974 Clarion Call of the Club of Rome is going to rule from here on out.
10) … It’s a good time to begin dollar cost averaging the purchase of gold as a stealth QE 3 is underway as the debasement of paper money continues.
I relate that as of this week the chart of FRED M2 Money Stock (WM2NS) Weekly, Not Seasonally Adjusted, continued higher to 9691.2, largely due to dollar liquidity swaps.
This week we witnessed a liquidation event in the sell off of gold. Liquidation events usually precede solvency events.
Kenneth Schortgen Jr writes Gold Rebounds Back Over $1600. Wealth protection in opposition to the purchasing power of a currency (dollar), and as long as the central banks (Fed) have to monetize, print money, or do any form of intervention and easing, gold will move inevitably up. Gold is not in a 'bull market', or ANY market for that matter. It is moving because it is the one true barometer of the global economy, and right now, we are in that temporary deflation period that always preceeds the disasterous hyperinflation one.
A global debt monetization operation is underway. Larouchepac writes hyperinflation is coming to gold thanks to Helicopter Ben Bernanke and his global central banking partners and Bob Chapman of The International Forecaster wrote on December 3, 2011, in Ahead of the Herd, Do We Need Central Banks At All? It’s a good question. We have had the Federal Reserve since 1913 and their management has been a disaster for Americans and a wealth builder for its owners, the Wall Street banks. It has also allowed the financial sector to control our country. It is the seat of elitist power. The Fed has debauched the US dollar via their monopoly and enriched their owners beyond belief. Any entity that has to resort to the subterfuge of using a cloaking term, such as quantitative easing has to be a scam. The Federal Reserve and other central banks were created to inflate currencies thereby depreciating them and in that process the owners of the Fed and their colleagues’ reaped enormous profits. Entities like the Fed have been doing this for centuries. You might say such a monopoly leads to currency debauchery. Reflecting on such a track record there is no reason to have central banks. In the latest turn of events the Fed has mastermind another rescue in conjunction with the ECB. Europe hurting for cash, particularly US dollars, brought England, Japan, Switzerland and Canada and ECB into their latest money creation scheme. They will lower prices on dollar liquidity swaps on 12/2/11 and extend these swap subsidies until 12/01/13. What has happened as we pointed out previously is that US money market and pension funds dropped participation in short-term bond markets in Europe from 55% of assets to about 20% of assets. That meant European banks couldn’t function.
The eventual outcome would be no dollar investments in Europe until their financial house is put in order. In addition there are on again off again stories that the IMF has been talking with Italy and Spain. Both sides deny it and behind the scenes we are told talks have in fact been going on for weeks. We can assure you that the dollar swap is really all coming from the Fed. England and Japan are probably window dressing and Switzerland and Canada may participate.
This is a Fed operation. What confuses the public is misdirection engendered in utterances by policy makers. There is absolutely no coordination, which belies confusion, which leads to lack of belief in any statements. Again, the problem is not liquidity, but solvency.
These dollar loans will be run through the ECB, the European Central Bank, giving euro zone banks direct access to dollars. It is all subterfuge in order to continue the force short term. Additional liquidity is a stopgap measure, which not only deceives, but also is injurious in the long run. The result is the Fed will continue to prop up European financial markets with no solution in sight moving from one calamity to another until the systemically insolvent conditions take the system down. The coordinated disbursement of dollars and perhaps other currencies is not the cure all for what ails the banking community in Europe.
Major European banks are broke just as major UK and US banks are. They gambled big and lost and somehow they expect the Fed, the American taxpayer, to bail them out. What happened was when money market and pension funds pulled their short-term dollar deposits out of these European banks it was almost like having a bank run. The US lenders simply feared insolvency. That certainly is understandable. That entrapped European banks, particularly French banks, even though they were and had been selling bonds of unsound nations, they still do not have enough liquid capital particularly US dollars. That meant that if the Fed did not create money for them they would have to sell and call in loans to businesses in Europe and the US.
As a result of this quagmire the Fed made it easier and less costly to obtain US dollars. Agreements in place since 2007 for $500 billion, which few probably remember. We still think these Fed rescues are the result of a secret deal between the Fed and European banks to take on toxic mortgages, so NYC legacy banks could hand out giant bonuses, the flip side being the Fed protecting European banks at all costs. This is what we see. Those bond buyers knew they were buying garbage, but did it anyway. Newly created capital is another temporarily positive. It does nothing to fix the balance sheets of banks. They are systemically insolvent and the only solution is to allow them to be liquidated, which corrects the system and puts the bankers that deliberately caused these problems out of business permanently. This Fed money machine will never stop until the result of hyperinflation brings it to collapse and that is where we are headed. Not this year, but in 2014 and 2015. Currencies, particularly the dollar, will be ravaged and the only safe place to be will be in gold and silver shares, coins and bullion.
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