Archive - Mar 2013

“Financial stability has not been assured”

It is difficult to describe the weekend bailout package to Cyprus in any other way. The confiscation of 6.75 percent of small depositors' money and 9.9 percent of big depositors' funds is without precedence that I can think of in a supposedly civilised and democratic society. But maybe the European Union (EU) is no longer a civilised democracy? This is a breach of fundamental property rights, dictated to a small country by foreign powers and it must make every bank depositor in Europe shiver. If you can do this once, you can do it again. Depositors in other prospective bailout countries must be running scared - is it safe to keep money in an Italian, Spanish or Greek bank any more? This is a major, MAJOR game changer and the fallout will be with us for a long time to come. Market reaction? it must be very good for gold - and for safe-haven countries like Switzerland and Singapore. This is full-blown socialism and I still cannot believe this really happened. Be careful out there...

Short answer: we don't know.

We do, however, know something we have been pointing out since early 2012 - when it comes to the funding strcuture of European banks, there is a dramatic difference between the US and Europe. In the US, as we showed most recently two months ago, the Big Three depositor banks (JPM, Wells and Bank of America, excluding the still pseudo-nationalized Citi), have a record $858 billion in excess deposits over loans. So what about Europe? Here things get bad. Very bad. So bad in fact that we covered it all just one short year ago. What is the reason for this? Well, as readers can surmise based on what just happened in Europe, it once again has to do with deposits, and specifically the loan-to-deposit ratios of European banks. Because if the US has an excess of deposits over loans, Europe is and has always suffered from the inverse: a massive excess of loans (impaired assets) compared to the most critical of bank liabilities - deposits... One doesn't have to be a rocket scientist to figure out that in a world in which European loans are massively mismarked relative to fair value, and where bad and non-performing loans are an exponentially rising component of all "asset" exposure, it will be the liabilities that are ultimately impaired. Liabilities such as deposits.

This is the third and last of three articles we are posting on the price suppression of gold. In the first article we showed that, under mainstream economic theory, the suppression of the gold market is not a conspiracy theory, but a logical necessity, a logical outcome.  Mainstream economics, framed by the Walras’ Law, believes in global monetary coordination which, to be achieved, necessitates that gold, if considered money, be oversupplied. The second article showed, at a very high (not exhaustive) level, how that suppression takes place and how to hedge it (if my thesis is correct, of course). Today’s article will examine the systemic impact of this suppression and test the claim of the gold bugs, namely that physical gold will trade at a premium over fiat/paper gold, commensurate with the credit multiplier created by the bullion banks. (Hint - it is)

A dispassionate discussion of developments in Cyprus and a few broader implications.

While offering up some 'hope' that the unprecedented tax on Cypriot deposits will not spark "massive" contagion (due to the ECB's "promise"), it appears from this summary of sell-side opinion on this weekend's European developments that the sell-side is starting to panic... it would appear the European credit markets, that have been so skittish in recent weeks (especially the financials), had it right all along? whocouldanode? It seems, as the head of the European Parliament's Economic and Monetary Affairs Committee, no less, said: "The lesson here is that the EU's single-market rules will be flouted when the Eurozone, ECB, and IMF say so."

China’s economic model, which has delivered a genuine economic miracle over the last 30 years by lifting more people out of poverty than ever before in human history, is increasingly tapped out. While the authorities have been talking about rebalancing the economy since at least 2006, BNP Paribas' Richard Iley notes that China’s macroeconomic imbalances have become progressively more extreme. The economy now has an investment share of ~48% of GDP, which, Iley explains, no other economy has been able to reach, let alone sustain. Unsurprisingly diminishing returns are increasingly apparent. Largely uneconomic investments in sectors already suffering overcapacity, such as real estate and steel, continue to accelerate, fuelling exponential growth in energy consumption and producing increasingly unbearable levels of pollution as we discussed here. Despite the long-term gulf between reform rhetoric and concrete action, ‘hype’ at least continues to spring eternal.

The logical question comes next: why is there a massive bulldozer parked outside a (just "bailed out") Cypriot bank? Well, if up to 9.9% of your money was suddenly and without warning stolen by your bank (pardon, forcefully "reinvested" in the equity of the same bank) and the rest was completely inaccessible, you too would probably park your bulldozer in front of said bank.

Asia has badly lagged U.S. and European stock markets this year and over the past 12 months. We explain why it's happened and why it may continue.

"In the early hours of Saturday, the Eurogroup agreed an adjustment programme of up to €10bn for Cyprus, the first under the ESM. Eurogroup President Dijsselbloem referred to the “exceptional nature” of the situation that required “unique measures”. In the special case of Cyprus, this is a upfront one-off “stability levy” of 6.75% on all bank deposits of 100K or less and 9.9% for deposits over 100K, with the aim to raise €5.8bn. A MoU will be finalised shortly. The national approval processes of the euro area member states will then be launched and final agreement should be reached in the second half of April. The IMF is also expected to offer financial support. The package for Cyprus still comes with tough conditionality and the risk is that introducing a new “unique” bank levy measure – despite the many reassurances - could trigger renewed concerns."

Europe has done it again.

Late last night, after markets closed for the weekend, following an extended discussion the European finance ministers announced their "bailout" solution for Russian oligarch depositor-haven Cyprus: a €13 billion bailout (Europe's fifth) with a huge twist: the implementation of what has been the biggest taboo in European bailouts to date - the  impairment of depositors, and a fresh, full blown escalation in the status quo's war against savers everywhere.  Specifically, Cyprus will impose a levy of 6.75% on deposits of less than €100,000 - the ceiling for European Union account insurance, which is now effectively gone following this case study - and 9.9% above that. The measures will raise €5.8 billion, Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area ministers, said. But it doesn't stop there: a partial "bail-in" of junior bondholders is also possible, as for the first time ever the entire liability structure of a European bank - even if it is a Cypriot bank - is open season for impairments. The logical question: why here, and why now? And what happens when the Cypriot bank run that has taken the country by storm this morning spreads everywhere else, now that the scab over Europe's biggest festering wound is torn throughout the periphery as all the other PIIGS realize they too are expendable on the altar of mollifying voters and investors in the other countries that make up Europe's disunion.

A weekly overview of the technical condition of a number of currencies against the US dollar. It is meant to compliment and supplement fundamental analysis. We retain a mostly favorable outlook for the US dollar, though skeptical of the scope for additional significant gains against the Japanese yen.

Following Part 1's discussion of America's Dangerous Drift, and Part 2's succincy summation of why America needs a Grand Strategy, today's Part 3 concludes with a discussion of the 'choice' American leaders have: "A decline in America’s leadership role and the emergence of a highly unstable world is a serious possibility. In reality, decline is not a foregone conclusion but a deliberate political choice that builds from a failure to define what matters most to the nation." When we step back from the language and imperatives of grand strategy, the case for the United States to rethink its grand strategy is fundamentally simple. It is designed to meet serious threats while creating and taking advantage of strategic opportunities. To continue on the present course of "drifting" from crisis to crisis effectively invites powers to believe that America is in decline. Worse, Americans, too, might believe wrongly that the nation’s decline is inevitable. If we are to assure America’s future security and prosperity, we need a new national grand strategy that harnesses America’s spirit, sense of optimism, and perseverance to help the nation meet the challenges and grasp the opportunities of this era. When we think about the alternatives, the United States simply has no choice.

The state, crippled by massive deficits, endless war and corporate malfeasance, is clearly sliding toward unavoidable bankruptcy. It is time for Big Brother to take over from Huxley’s feelies, the orgy-porgy and the centrifugal bumble-puppy. We are transitioning from a society where we are skillfully manipulated by lies and illusions to one where we are overtly controlled. We are one crisis away from a police state. All the powers are in place. Someone will flip the switch. Whether a Cyber Attack, escalating Currency War tensions or a 'terrorist' attack by indebted college youth, it is only a matter of time and circumstance... We are one crisis away from a police state. All the powers are in place. Someone will flip the switch. Whether a Cyber Attack, escalating Currency War tensions or a 'terrorist' attack by indebted college youth, it is only a matter of time and circumstance.