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Italy On The Ropes Again After Secret Berlusconi Promise To Step Down In Exchange For Compromise Achieves Nothing

Over the past few days, Italy has promptly re-emerged as a main cog in the illusion that Europe is a well-greased machine (yes, we know, funny) after it became clear that the country continues to refuse to implement any actual austerity measures following the requirement to do just that months ago when it got access to the ECB's sterlizied bond monetization scheme. In fact it got so bad that yesterday the entire Italian government was rumored to be on the verge of collapse as it was once again unable to reach a resolution on what the EU demands are prompt actions taken to raise pension and/or retirement age. According to the Telegraph, Italy may have found a compromise, one which actually ends the regime of Berlusconi... but not yet. Telegraph reports that Silvio Berlusconi has reportedly drawn up a "secret pact" under which he will resign in December or January, paving the way for Italy to elect a new government in March. "The embattled prime minister made the deal with his key coalition ally, Umberto Bossi of the devolutionist Northern League, in return for Mr Bossi's support for pension reforms, according to unconfirmed reports in two Italian newspapers – La Repubblica and La Stampa. Italy is under huge pressure from the European Union to reform its pensions system and extend retirement ages as part of a plan to rein in its enormous public debt and revive its moribund economy." "Don't make a fool of me in Brussels, and I promise that we'll go to elections in March," Mr Berlusconi told the Northern League leader, according to La Repubblica." This would all be great, if only for one small snag: the "plan", like everything else in Europe, is worthless. The FT reports that the compromise agreement "lacks specifics and risks falling short of what eurozone leaders have demanded ahead of Wednesday’s summit in Brussels....In the end, Umberto Bossi, the fiercely eurosceptic leader of the federalist League, made minor concessions that would raise the general retirement age to 67 years by 2026, but rejected changes to Italy’s length of service pension system that allows many workers to retire at the age of 61 with 35 years of contributions. Even Mr Bossi did not sound hopeful that the proposals would go down well in Brussels. In the past he has said he “doesn’t give a damn” about pressure from Europe over Italy’s pension system." He may change his tune once BTPs drop under 90 and go bidless.



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Gold Breaks Out and Consolidates Above $1,700/oz – Financial Alchemy Risks Severe Inflation

Gold has extended yesterday’s 4% rise in the US, with further gains seen overnight in Asia and consolidation in Europe. Safe haven demand continues due to increasing risk of a failed outcome from the European Union leaders' meeting scheduled later today and due to significant macroeconomic and monetary risks. The cancellation of a European finance ministers meeting and downplaying of expectations by euro-zone officials about the outcome of the EU summit is adding to investor concerns about contagion emanating from the nexus of European banks and large sovereigns including Italy. There are conflicting reports that Berlusconi has agreed to step down. U.S. Treasury Secretary, Timothy Geithner warned of the “catastrophic risk” posed by the turmoil. The Bank of England dismissed the chaotic efforts to save the eurozone from financial meltdown as a temporary solution to the region’s woes. Governor Sir Mervyn King said long term issues such as towering levels of debt and structurally weak economies still needed to be tackled. ‘The aim of the measures to be introduced over the next few days is to create a year or possibly two years’ breathing space,’ he said. King’s warning follows that of former Fed Chairman Alan Greenspan who warned on CNBC two weeks ago that the EU was doomed to fail because the divide between the northern and southern countries is just too great. The key problem facing bureaucrats and bankers of massive swathes of debt in the European and global financial system is not being tackled. They are attempting to rectify a problem of too much debt by further electronic and paper money creation and the creation of even more debt.



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Frontrunning: October 26

  • Incoming ECB head gives euro zone pre-summit boost (Reuters)
  • Fears Euro Summit Could Miss Final Deal (FT)
  • Merkel Puts Rescue Fund to German Vote (Bloomberg)
  • Iron ore in record slide as China demand slows (Reuters) BHP, Rio CDS Soar
  • MF Global slumps 47% on unexpected loss (FT)
  • Bankers fear political moves will kill off CDS (FT)
  • EU Banks Warn of Credit Drought in Push for Capital (Bloomberg)
  • Analysis: Obama's moves pack political rather than economic heft (Reuters)


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Guest Post: Whilst We All Await The Outcome Of The EU Summit I Want To Draw Your Attention Elsewhere

Whilst the US equity markets closed down 2% last night, it is clear that there is little appetite to put on new trades in front of this summit meeting as evidenced by the lack of interest in Asia. Equities and FX markets were extremely quiet except for when the Aussie CPI came in weaker than expected sparking a fall in the AUD and a complete 25bp cut being priced in for next week’s meeting. To me the AUD looks very exposed to a steep fall as global growth is in trouble. The fall on Wall St was, in my opinion, more on the back of further weak data from the housing market in the US and consumer confidence which is collapsing fast, as the Case Schiller disappointed yet again. Is operation twist going to help? If the answer is no then Bernanke will have to try something else and this view is building as the fall in equities was accompanied by a fall in the Dollar and a steep rise in precious metals, all signs that fears of further QE are building.



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Merkel Goes For The Nuclear Mutual Assured Destruction (But Mostly Suicide) Option

As Merkel ends her speech to the Bundestag on her way out to the Euro Summit, here are the main rhetorical conclusions:

  • MERKEL SAYS JUSTIFIABLE TO MAXIMISE EFSF FIREPOWER
  • MERKEL SAYS GERMANY `IS NOT THE NAVEL OF THE WORLD'
  • MERKEL SAYS EURO CAN'T BE ALLOWED TO FAIL
  • MERKEL CITES 'HISTORIC DUTY' TO PRESERVE EUROPE, EURO

But none of that compares to what just was the use of the nuclear mutual assured destruction option, to wit

  • Merkel: No one should take another 50 years of peace in Europe for Granted

And scene: Hank Paulson would be so proud



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Mario Draghi Says Situation In Italy Is "Confusing And Dramatic" - As Is All Of Europe Today

With European coverage today about to confirm with absolutely certainty that the only option for Europe is to baffle everyone with intolerable and ridiculous amounts of bullshit, and failing that, to delay, delay, delay (we are already hearing of another summit in 4 days), probably what is most indicative of what to expect out of Europe is what incoming ECB president Mario Draghi said is the situation in Italy which he called is "confused and dramatic." That pretty much sums it up. Anyone expecting any actionable result out of the drama queen country or continent, will be disappointed. In the meantime here are sporadic news which attempt to paint a picture of the total confusion in Europe...



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The Groupon Groupon

Simply because it is right there, just waiting... And in more serious news, has Groupon pulled its IPO yet? After all, isn't any down day now considered "market conditions?"



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Brazil Refuses To Buy European Bonds, Dashing Hopes For A BRIC-based European Rescue

About a year ago, we speculated that as part of the ongoing currency warfare between Brazil and the "developed" world, its finance minister Guido Mantega would keep his trade surplus trump card until the moment of biggest impact. That moment has come, after the financial head (with the Playboy-posing daughter) just told Europe to take a hike. "I believe that European countries do not need funds from Brazil to buy bonds. Brazil is not considering it," Mantega told reporters in Brasilia. "They have to find solutions to the European problems within Europe." And with Brazil out, it is certain that China will not step up over fears of appearing weak and needing to provide vendor financing to its biggest export partner. Unfortunately for Europe this means that at least one component of the revised SPIV: that which foresees public investment from third parties into the EFSF (a new twist proposed only last week), can now be safely forgotten, bringing us back to page one and the entire 5x levered CDO structure which as has been explained numerous times, is Dead on Arrival. There is, however, one loophole. "Mantega said Brazil would be willing to provide financial help via the International Monetary Fund." Which is rather laughable considering that by IMF, one typically refers to, at least in polite society, Uncle Sam. Then again, with a French woman (and one who until recently was solely reponsible for the grave French financial condition) in charge, it is easy to lose sight and to be, there is that phrase again, baffled by irrelevant bullshit even as following the bailout money always lead to the same old source.



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Ex-Goldman Director Will Turn Himself In To FBI, To Face Criminal Charges

Is it safe to say that the Goldman love affair with the government is officially over? From Reuters: "Former Goldman Sachs director Rajat Gupta will surrender to the FBI on Wednesday to face criminal charges, a person familiar with the investigation said. Gupta was named as an unindicted co-conspirator in hedge fund founder Raj Rajaratnam's trial earlier this year. He has denied wrongdoing. Rajaratnam was sentenced to 11-years in prison this month. Gupta's attorney, Gary Naftalis, did not immediately respond to a call seeking comment." Perhaps it is also safe to say that the war between Obama and Wall Street is now official. Of course, we give Obama about 24 hours before the economy tanks, the stock market implodes, the great unwashed see their meager 201k's converted into 100.5k's, and decide to #OccupyTheWhiteHouse. In other words, our money is not on the administration on this one. In fact, when the smoke settles, we expect a few extra tentacles from 200 West to penetrate even deeper into the three farcical branches of government of this once non-banana republic.



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The Beginning Of The European Endgame

On Friday the "haircuts" on Greece get serious. No more bogus high coupon principal protected notes - but real notional reductions of 50 per cent or more. I believe the ECB has a portfolio of 55 billion of Greek debt. If average price was 80 then that is a 16.5 billion actual loss. ECB, unlike our beloved FED, doesn't want to just print money so they make a capital call on their members. Yes, the same members that back the EFSF. How many of those members even remembered the ECB can call for additional capital (it's why they are so happy to employ the double down don't frown trading strategy). The terms of ECB capital calls are worse than EFSF because they are joint and several. If countries don't meet their obligations they don't go away, they get passed to another country. So as ECB loads up on PIIGS debt and losses or haircuts would be paid for by the non problem countries - in addition to their EFSF obligations. Germany maybe has learned not to overextend and is scared to pile this (previously ignored) liability on top of it's EFSF guarantees. At least EFSF is something they have control over. France I think was planning on loading up the ECB with so much debt they would just capitulate and print money.



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Michael Maloney: "We Pay Tax For The Privilege To Have Currency"

In this video excerpt from the Casey Summit When Money Dies, Rich Dad advisor Mike Maloney explains how currency is created, "fractional reserve banking," and why our banking system is a pyramid scam of epic proportions.



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NYSE Short Interest Drops To Two Month Low As Weak Hands Have Been Squeezed Out

It was bound to happen: after hitting a two year high recently at (adjusted) 15.3 billion shares, total NYSE short interest, which failed to be satisfied with a violent market plunge and instead got caught in a vicious short squeeze, has dropped to the lowest level since mid-August, or 14.7 billion shares. Naturally, this, coupled with the massive bearish bias in the euro, discussed previously, where covering merely added to reinforce the squeeze dynamics, are sufficient to explain the weak hands covering following the unprecedented near 1000 point jump in the DJIA. The good news for bears: it appears the weak hands have been shaken off now. At this point, even if no incremental shorts are layered on, then certainly the autopilot melt up in equities will be next to impossible to be sustained, and some real, not rhetorical, pick up in the global economy will be needed. Alas, one is not coming.



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Amazon Misses, Guides Lower, Sees Q4 Operating Loss; Shares Tumble

The latest Momo implosion as predicted:

  • AMAZON.COM 3Q EPS 14C, EST. 24C                       
  • AMAZON.COM 3Q REVENUE $10.88 BILLION VS EST. $10.95
  • AMAZON.COM SEES 4Q SALES $16.45B-$18.65B, EST. $18.16B
  • AMAZON.COM 3Q OPERATING MARGIN 0.7%
  • AMAZON.COM sees 4Q operating income (loss) between $(200) million and $250 million, or between 142% decline and 47% decline compared with fourth quarter 2010

No, Paulson & Co. is not long.



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