Last week, in the aftermath of the global coordinated liquidity swap facility expansion (OIS+100 to OIS+50) from November 30, with the added benefit of the contemporaneous Chinese RRR cut, bond yields plunged on short-term hope that the Fed's action would be a long-term solution for the Eurozone. It wasn't. But not before the ECB received a brief respite from manipulating bond markets. As a result of the November 30 action, the ECB proceeded to buy just €635 million of Peripheral (read Italian) bonds as the BTP yield plunged. Days later, following the realization that this is nothing but yet another band aid mechanism, yields once again soared, and depending on the benchmark used, pushed beyond 7% once again. In the meantime, the story of the ECB's 3 year LTRO rescue, lost in the aftermath of the Fed action, was resurrected, and is now attributed by some as being some pseudo bazooka that will rescue the ECB. It won't as was explained yesterday. And sure enough, one week after the knee jerk reaction from the liquidity intervention, the ECB was once again out in full force picking up pennies in front of the steamroller, buying up €3.361 billion in bonds in the week ended December 16, which brings the total purchases at €211 billion (net of maturities).
Tonight at 6:30 pm the House is set to vote on the Senate’s payroll tax cut/unemployment insurance bill. As it stands right now, it appears likely that the vote will fail due to lack of support by Boehner and other house leaders. Furthermore, Senate has said it will not present an alterantive bill (as of yet). Which means that with a major portion of Q1 GDP at stake (non-renewal of payroll cuts means up to 1% of GDP being cut in Q1 2012), the futures market will be very focued on newsflow after the close. Here is Goldman's rundown of what to expect tonight in DC.
In a just released piece by Goldman's Eugene King which explains the firm's justification for why gold will peak at over $1900 in 2012, and which we will discuss in greater detail shortly, Goldman brings up a very interesting point, namely that the ongoing weakness in gold stocks, and the broad decoupling of gold miners from gold price can be attributed to one primary thing: the emergence of synthetic means of expressing a position on the gold market and "bypassing" direct gold cost pass thru exposure in the form of gold stocks. Supposedly this is a good thing, although we would caution that this is potentially a very insidious scheme to allow the world's cash-rish entities (read banks full of those ones and zeros that these days pass for "money") to procure real gold assets at very cheap prices and valuations, even as the broader retail investors proceeds to chase paper gold in the form of "synthetic CDOs" such as GLD (which as we first noted over a week ago may well disappear when the paper claims collapse and suddenly everyone has a claim on the underlying physical), only after the fact realizing they merely used gold as a paper pass thru equivalent. In other words, as the broader population continues to realize that gold is the real safe asset, yet invests in legacy forms of exposure, i.e., paper, the real hard assets: firms that actually extract gold from the ground and process it, remain out on the auction block to be snapped up quietly by all those who want exposure to the primary source of the metal, which they can then throttle at will in order to manipulate the supply side of the equation post facto.
As noted over the weekend, the UK, having vetoed the December 9 summit, has made it clear it would also likely back out of its IMF mandated contribution to save the Eurozone. In other words, the €30.9 billion that was supposed to come from the UK to rescue French and Italian banks, is now probably gone, a move which threatens to topple the latest Plan Z euro bailout in which broke countries pool money to bailout the same broke countries. Sure enough, Dow Jones confirms it:
- EU loans to IMF likely to fall short of expected EUR 200bln according to sources
- Eurozone may move on IMF loans without immediate UK support according to a EU source
And while below we present the latest breakdown of IMF contribution by member countries, courtesy of Reuters, how long before populist pressure in various Eurozone (and especially non-Eurozone) countries threatens to topple governments unless each and every "joint and several" contributor country pulls a UK? Because if the UK is allowed to save taxpayer funds, why not everyone else?
Bullion banks remain positive on gold for 2012 with major banks predicting an average gold price of between 13% and 28% above today’s spot at $1,595/oz. It will be interesting to see if these forecasts get as much international media coverage as the poll of 20 hedge fund managers has. UBS have reiterated their bullish outlook for gold and believe gold will average $2,050/oz in 2012. This is 28% above today’s spot price of $1595/oz. Goldman Sachs said overnight that gold will average $1,810/oz in 2012 – which is 13% above today’s spot price. Barclays Capital have said this morning that gold will average $2,000/oz in 2012 – which is 25% above today’s spot price.
Bloomberg analyst TJ Marta summarizes market developments in the last few hours since the death of Kim Jong Il pushed risk aversion, especially in Asia to an extreme, while Bloomberg's James Holloway explains why market sentiment is where it is, and what the market will be looking for today.
- Obituary: Kim Jong-il (FT)
- Draghi Warns on Eurozone Break-up (FT)
- EU Ministers Seek Crisis IMF Funding Deal (Bloomberg)
- China November Home Prices Post Worse Performance This Year (Bloomberg)
- China Debts Dwarf Official Data With Too-Big-to-Finish Alarm (Bloomberg)
- China opens up to offshore renminbi investors (FT)
- Voters to Read Recovery Signs (Hilsenrath)
- Germany May Pay Full ESM Contribution in 2012 (Reuters)
- U.S. Housing Heals Even as its Damage Widens (Reuters)
- S&P Cut Proves Absurd as Investors Prefer U.S. (Bloomberg)
On a day when data confirms Spanish bad loans creeping up to recent highs and deposits continuing to stream out of the periphery, Boston Consulting Group has released an excellent treatise on the "What Next? Where Next?" perspective of the impact of collateral damage in and out of the Eurozone. The critical questions for most market watchers and prognosticators remain, how likely is an exit, and what would be the implications for 'leaver' and 'left behind'? BCG offers an at-a-glance chart of the economic, social, and market expectations for the ins-and-outs and notes, in less-than-Deutsche-Bank-like mutually assured destruction language, the cost of leaving the Euro varying from EUR3,500 to 11,500 depending on weak or strong exiting country per person per year. No matter what, an exit would impact the world economy considerably and BCG strongly suggests corporate management consider a Euro-zone breakup as a possible scenario for next year, along with a muddle-through, a Japanese deflation-like evolution, or a significant inflation possibility.
Just out on Yonhap:
- North Korea says its leader Kim Jong-il has died.
- N. Korean leader died of fatigue at 8:30 a.m. Dec. 17 during train ride: KCNA
And Reuters confirms:
- NORTH KOREA STATE TELEVISION SAYS KIM JONG IL HAS DIED
Great. More geopolitical uncertainty. Because as the Arab Spring has shown us there is nothing quite as stable as a transitory military government to fill a power vacuum (also see Thermidorian reaction during the French Revolution).
As expected the South Korean response is immediate.
- S. Korean gov't shifts to emergency footing on news of N.K. leader's death
Psssst France: Here Is Why You May Want To Cool It With The Britain Bashing - The UK's 950% Debt To GDPSubmitted by Tyler Durden on 12/18/2011 - 22:43
While certainly humorous, entertaining and very, very childish, the recent war of words between France and Britain has the potential to become the worst thing to ever happen to Europe. Actually, make that the world and modern civilization. Why? Because while we sympathize with England, and are stunned by the immature petulant response from France and its head banker Christian Noyer to the threat of an imminent S&P downgrade of its overblown AAA rating, the truth is that France is actually 100% correct in telling the world to shift its attention from France and to Britain. So why is this bad. Because as the chart below shows, if there is anything the global financial system needs, is for the rating agencies, bond vigilantes, and lastly, general public itself, to realize that the UK's consolidated debt (non-financial, financial, government and household) to GDP is... just under 1000%. That's right: the UK debt, when one adds to its more tenable sovereign debt tranche all the other debt carried on UK books (and thus making the transfer of private debt to the public balance sheet impossible), is nearly ten times greater than the country's GDP. To call that "game over" is an insult to game overs everywhere. So here's the bottom line: France should quietly and happily accept a downgrade, because the worst that could happen would be a few big French banks collapsing, and that's it. If, on the other hand, the UK becomes the center of attention (recall this is the same UK that allows unlimited rehypothecation of worthless assets, and the same UK that unleashed the juggernaut known as AIG-FP's Joe Cassano - after all there is a reason why the UK has 600% its GDP in financial liabilities - financial innovation always goes there where it is least regulated), then this island, which far more so than the US is the true center of the global banking ponzi scheme, will suddenly find itself at the mercy of the market. At that point the only question is whether the vigilantes will dare to take down the UK, as said take down will result in an implosion in the very fabric of modern finance, much more so than what even a full collapse of France could ever achieve, or if due to the certain Mutual Assured Destruction that would follow a coordinated UK onslaught, the market will simply very quietly proceed to ignore the elephant in the room.
As first reported here, two weeks ago European banks saw the amount of USD-loans from the Fed, via the ECB's revised swap line, surge to over $50 billion - a total first hit in the aftermath of the Bear Stearns failure prompting us to ask "When is Lehman coming?" However, according to little noted prepared remarks by Anthony Sanders in his Friday testimony to the Congress Oversight Committee, "What the Euro Crisis Means for Taxpayers and the U.S. Economy, Pt. 1", we may have been optimistic, because the end result will be not when is Lehman coming, but when are the next two Lehmans coming, as according to Sanders, the relaunch of the Fed's swaps program may "get to the $1 trillion level, or perhaps even higher." As a reference, FX swap line usage peaked at $583 billion in the Lehman aftermath (see chart). Needless to say, this estimate is rather ironic because as Bloomberg's Bradely Keoun reports, "Fed Chairman Ben S. Bernanke yesterday told a closed-door gathering of Republican senators that the Fed won’t provide more aid to European banks beyond the swap lines and the discount window -- another Fed program that provides emergency funds to U.S. banks, including U.S. branches of foreign banks." Well, between a trillion plus in FX swap lines, and a surge in discount window usage which only Zero Hedge has noted so far, there really is nothing else that the Fed can possibly do, as these actions along amount to a QE equivalent liquidity injection, only denominated in US Dollars. Aside of course to shower Europe with dollars from the ChairsatanCopter. Then again, before this is all over, we are certain that paradollardop will be part of the vernacular.
Two weeks ago in "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?" we suggested that according to recent fund flow data, "the Bundesbank wants slowly and quietly out." Out of what? Why the European intertwined monetary mechanism of course, where surplus nations' central bank continue to fund deficit countries' accounts via an ECB intermediary. We speculated that according to the recent ECB proposal, the primary beneficiary of direct ECB intermediation in fund flows, as Draghi has been pushing for past month, would be to disentangle solvent entities like the Bundesbank, allowing it to prepare for D-Day without the shackles of trillions of Euros in deficit capital by virtually all of its counterparties. Today it is the turn of Goldman's Dirk Schumacher to pick up where our argument left off, and to suggest that it is indeed a possibility that the Buba would suffer irreparable consequences as a result of Eurozone implosion, and thus, implicitly, it is Jens Wiedmann's role to accelerate the plan of extracting the Buba from the continent's rapidly unwinding monetary (and fiscal) system. Needless to say, the possibility that a European country can leave at will, as the European Nash Equilibrium finally fails, is something the Bundesbank not only knows all too well, but is actively preparing for: here is what we said on December 6: "we may be experiencing the attempt by the last safe European central bank - Buba - to disintermediate itself from the slow motion trainwreck that is the European shadow banking (first) and then traditional banking collapse (second and last). Because as Lehman showed, it took the lock up of money markets - that stalwart of shadow liabilities - to push the system over the edge, and require a multi-trillion bailout from the true lender of last resort. The same thing is happening now in Europe. And the Bundesbank increasingly appears to want none of it." After all, Germany has been sending the periphery enough messages to where only the most vacuous is not preparing to exit. The question is just how self-serving is Germany being, and whether once Buba is fully disintermediated, Germany will finally push the domino, letting the chips fall where they may?
As Bob Janjuah, of Nomura, notes in his final dissertation of the year, our in-boxes are stuffed with all the good cheer of sell-side research outlooks. However, the bearded bear manages to cut through all the nuance to get to the six questions that need to be addressed in order to see your way successfully in 2012. With the US two-thirds of the way through the post-crisis workout phase while Europe remains only half-way through, and China a mere one-third through the necessary adjustments to less global imbalance, he is not a global uber-bear on every asset class as the net effect is modest global underlying demand and plenty of savings sloshing around looking for a home. The market, though, will have to adjust further to an extended period of weakness in Europe, which will impact EM growth expectations and so the existential ursine strategist is skewing his macro expectations to the downside and with the market pricing a 'softish' global landing, there remains a considerable gap between downside risk potential and current expectations. Furthermore, Janjuah believes the upside is relatively self-limiting on the basis of commodity price pressures and the potential for property or asset bubble bursts - leaving upside limited and downside substantial.
As is by now well known, it was the British refusal to budge and thus agree to the fiscal compact from the December 9th summit, that led to the realization that the European bailout is now further away than ever before. And as reported earlier, tomorrow European finance ministers will sit down to finalize the terms of a €200 billion IMF injection, funded by various European governments, which is the last ditch rescue effort now that the EFSF and ESM have both failed to convince the market of a long-term solution. Enter Britain. Again. Because as the Telegraph reports, it will be up to Britain to fund not just any portion of the upcoming €200 billion payment, but the second largest one, a commitment which David Cameron and the majority of Britain will likely balk at. "Figures suggest European Union officials expect British taxpayers to be the second largest contributor. The Prime Minister has repeatedly promised not to provide any extra funding for the IMF for the specific purpose of saving the euro and Britain is already liable for £12 billion of loans and guarantees to Ireland, Greece and Portugal...An EU official said Britain was still expected to contribute €30.9 billion (£25.9 billion), leaving the country as the second biggest contributor to the new IMF fund behind Germany and equal with France." So ten days after British obstinacy to "on the fly" European bailout plans led to the EURUSD dropping to 2011 lows, will it be the Albion that once again leads to another step down in the European currency, as it now becomes clear that the last ditch Plan Z "IMF Bailout" plan is now worthless? We will find out shortly, although we are confident that anyone hoping that Britain will do an about face and revert on its controversial position, will be disappointed.