Archive - Aug 17, 2012

While Europe is once again experiencing one of its brief, manic episodes of inexplicable euphoria sending all risk assets in the continent higher while everyone is still on vacation (and ahead of a surge in Spanish bond issuance in September, which only spikes even more in 2013 - more shortly), its banks have quietly run out of dollars again. Certainly, looking at the now irrelevant metric known as Libor which indicates precisely nothing of significance, and merely allows banks to feel good about themselves, and which has been declining, one could imagine that banks have zero problems finding unsecured follar funding. One would also be absolutely wrong because as the most recent ECB and Fed data confirm, 7-day dollar swaps between the ECB and New York Fed - the only real sign of dollar funding scarcity - has risen to $9.3 billion in the current week, the highest since December 9, 2009. And with 10 banks bidding at the last USD operation, one can be sure that at least 10 European banks are suddenly hoping that the bout of euphoria continues for at least 2 more weeks so that the executives of these 10 dollar impaired banks can continues their vacation in peace, until the eye of the European hurricane passes starting September 1.

• 'Pussy Riot' band members found guilty (Al Jazeera)
• Merkel Says Germany Backs Draghi’s ECB Aid Conditionality (Bloomberg)
• Now, the reverse psychology: Hilsenrath: Fed 'Hawks' Weigh In Against More Action (WSJ)
• London Firings Seen Surging As Finance Firms Add NY Jobs (Bloomberg)
• Facebook Second-Worst IPO Performer After Share Lock-Up (Bloomberg)
• Kocherlakota Says FOMC Goes Too Far With 2014 Rate Pledge (Bloomberg)
• China Said to Order Action by Banks as Developer Loans Sour (Bloomberg)
• Australian Treasury Dismisses AUD Intervention Calls (Dow Jones)
• Brevan Howard Loses Third Founder As Rokos Said To Leave (Bloomberg)
• Japan eyes end to decades long deflation (Reuters)... for 30 years now
• Ex-Morgan Stanley Executive Gets Nine Months in China Case (Bloomberg)

Over two years ago, the US Clearing house of the CME, the world's largest derivatives marketplace, had no choice but to allow gold as collateral. Why: because as we showed some days ago, while in Europe bank deposits are expansive, in the US, financial system funding relies primarily on mythical assets as liabilities, i.e., those that exist primarily due to faith in the system, something which has been in short supply, as a result of which the $15 trillion (down from a peak of $23 trillion) shadow banking system long used to fund regular operations, has been imploding.  Couple that with a scarcity of other (re)pledgeable assets which in the US do not, unlike the UK, have an infinite rehypothecation chain, and one can see why back in October 2009 the CME had no choice but to accept gold as eligible collateral for clearing purposes. As of minutes ago, the European arm of CME Clearing has folded too, and has released a press release stating that it to0 "has extended the range of eligible collateral types to include gold bullion." Of course, this is the same gold bullion that Germany will be seeking to "repo" in exchange for sovereign bail outs as Europe's periphery continues to run out of endogenous money and has to increasingly rely on the benevolence of the Bundesbank. For now all we need to know is that another exchange just threw in the towel and admitted that contrary to Bernanke's stern position, gold is, indeed money.

While not advocating the break-up of the Euro-zone, Finland's foreign minister Erkki Tuomioja told the Daily Telegraph this evening that "it is only a matter of time". In a somewhat stunning show of truthiness, perhaps the first cracks in Europe's Nash Equilibrium are starting to show through following Monti's 'threats', Draghi's 'promises', and Merkel's 'well, nothings'. The Finn continues, via Reuters, "Either the south or the north will break away because this currency strait-jacket is causing misery for millions and destroying Europe's future." Finland, which has a veto that could be used to block any new bailout measures, has already stirred the pot unilaterally by demanding collateral from Greece and Spain, is quite clear in its view that Europe "is a total catastrophe" but adds that no-one wants to be first to get out of the Euro and take all the blame. Insisting that the break-up of the Euro does not mean the end of the European Union, Tuomioja believes "it could make the EU function better," but comments that he is deeply suspicious of the 'gang of four' - which includes Draghi - with regard his promises (especially ESM seniority) adding that he "does not trust these people."