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Japan's Kokusai Liquidates Remainder Of Euro Sovereign Exposure, Just As European Primary Issuance Supply Surges

When we discussed the specifics of the ongoing European bank run, we cited from the NYT which noted the actions of a core Japanese mutual fund with European sovereign exposure, namely that "earlier this month, Kokusai Asset Management in Japan unloaded nearly $1 billion in Italian debt." The Nikkei has just reported that this was merely the beginning: "Kokusai Asset Management Co. has sold all Spanish and Belgian government bonds that were part of its flagship fund, Global Sovereign Open, The Nikkei learned Monday. As of Nov. 10, Spanish and Belgian bonds accounted for 1.8% and 3.1% of the fund, respectively. The share of the bonds in the fund's portfolio fell to zero as of Thursday." Just what prompted this drastic move and very loud slap in the face of the European confidence building exercise? "A Kokusai Asset Management official said the company sold off the bonds, amid widespread concerns about the outlook for Europe's sovereign debt crisis to avoid hurting the value of the fund, given volatile prices of the bonds. The mutual fund operator had already divested the fund of all its French government bonds in October and all Italian bonds in early November." It is safe to say that where one core asset managers has been (and no longer is), everyone else will shortly follow. For the simple reason that it is now if not cool to not have European exposure, it is certainly required by one's LPs to cut down on all European bonds. Kokusai is merely the canary: expect everyone else to go ahead and dump the €741 billion in non-domestically held Italian (and then all other European sovereigns) bonds. Good luck ECB buying these in the secondary market. And one market where the ECB can do nothing by charter, is the primary issuance one, where as the following update from Morgan Stanley shows, things are getting from from bad to worse.

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Jim O'Neill Describes Europe's Surreal Times, Asks If Germany And The Euro Area Even Want The Monetary Union Any Longer

Among the traditionally meandering permabullish ramblings of a man who continues to ignore the disconnect between reality and his view of the world, tonight's note by GSAM loss leader Jim O'Neill "Surreal Times" has a very ominous rhetorical question inbetween all the bullish propaganda: "The ECB doesn’t seem to regard 10-year Italian bonds as a bargain and, of course, it is rather tricky as they need to be sure that Monti will deliver. In turn, this means that what is really important is that Mario gets support from those in the background and, ultimately, the Italian voters. And then there is Spain. And still, of course, the troubling Greek situation. And ultimately, the complex world of Berlin and Frankfurt. As many European newspapers are asking in recent days, does Germany actually really still want the EMU? And, as I shall now provocatively ask, does the Euro Area? All very surreal." No Jim, all very logical, because for the first time in decades, Europe is finally starting to do the math and realizes it is failing miserably. It is those stuck in a world in which combined total exports are greater than total imports by over $300 blilion: a mathematical lunacy, who think that what is happening is "very surreal." To everyone else, the right phrase is "very much expected."

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Presenting Russell Napier's Greatest Hits

Two weeks ago, courtesy of Gresham's Law, we brought to our readers Jim Grant's greatest hits: a compilation of the most memorable TV appearances by the famous newsletter writer. Today, we are happy to present another controversial luminary - Russell Napier: the renowned financial historian and consultant for CLSA, as well as author of the engrossing Anatomy of the Bear, who only together with Albert Edwards, has predicted that the S&P would eventually drop to 400. Napier has articulated some fantastic insights on the generational cycle, bear market bottoms and currencies in recent years. His insights, unlike those of TV pundits whose soundbites are only there to fill the gap between two ad segments, are always something to look forward to.

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Man Arrested In New York Terror Plot

Just hitting the headlines, probably related to Mike Bloomberg's 7:30 pm announcement:


That's it for now

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ES Opens -1% As Oil, Gold, And FX Carry Leak Lower


UPDATE: ES 1201 seemed to spur some serious volume for the overnight session.

While EURUSD had managed to clamber back into the green from a modest 25pip drop (bouncing off 1.3500), carry crosses (most specifically AUDJPY) are ebbing lower and Oil and Gold's soft opening is dragging equity futures to a dismal start. ES opened -13pts (around 1%), below its 50DMA (first time since 10/10) and at its lowest in over a month. With TSYs not open yet, ES is mildly lower than CONTEXT but we would expect the implicit shift in 2s10s30s to sync up with equity derisking.

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Goodbye Super-Committee, Hello Stupor-Committee: It's Official - "No Agreement"

As if anyone is actually surprised by the headlines appearing from Bloomberg with regard the Super-Committee - which in retrospect is perhaps a little aggressively-named:



While not immediate, it would seem obvious that a ratings downgrade can't be far behind this event given the reasoning for the last downgrade and the clear indication by this lack of agreement that nothing-has-changed.

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Kyle Bass Destroys The Ponzi-Prone Debt Sustainability Arguments Of The Status Quo...And Why Germany Can't Save The World

Another noteworthy Kyle Bass moment as he discusses debt sustainability among major global sovereign nations. Simply and proficiently, the hedge fund manager describes how a dwindling current account surplus in Japan, US welfare economics, and the peripheral-to-core European stressors are all Madoff-like and unsustainable. Switching from broad-brush terms to the idiosyncratic complexities of each region, Bass offers his inimitable take - in a mere six minutes - on how the status quo is quivering under its own self-deception. His rightful conclusions remain extremely worrisome and should be required reading/watching for every central banker and politician trying to keep the dream alive.

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European Black Swan Sighted

While everyone's attention was focused intently on peripheral European bond spreads last week and the incessant call for ECB intervention, a dramatic (and contagiously panic-worthy) move occurred in the European Investment Bank (EIB) bonds. For those unfamiliar, the EIB is the EU's IMF-equivalent and is the largest international non-sovereign lender and borrower. Technically, it is defined as "the European Union's long-term lending institution established in 1958 under the Treaty of Rome. It supports the EU’s priority objectives, especially European integration and the development of economically weak regions." 5Y Euro-denominated AAA-rated EIB bond spreads crashed higher, blowing past the 2009 record wides and clearly indicating that European capital flight is in full swing. The IMF-like entity, supported by a small capital base of deposits backed by promises of huge capital injections by sovereign nations (sound familiar?), has massive exposure across Europe (and elsewhere). The massive implicit leverage in the capital structure suggests the need for capital calls (and is Greece, Italy, and Spain likely to do that?) to maintain its AAA-status could be needed - given the MtM losses on its loans at a minimum. Clearly investors think the same this week and are starting to worry about the same self-referencing, self-supporting house-of-cards that caused the EFSF to be written off as potentially unworkable. With EUR20bn to be rolled (and EUR6bn in interest payments) in the next few months, we will get plenty of insight into investor demand for EIB AAA-rated paper and the impact on secondary trading from that supply.

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Nomura "Goes There" With "The Legal Aspects Of A Eurozone Breakup"

Below we present the note from Nomura which is making the rounds today following the WSJ article referencing it and which touches upon a topic discussed by Zero Hedge way back before even the second Greek bailout from July 21, namely that the statutory law governing the sovereign bond indenture (i.e., whether bonds are issued under Greek or English law) should have major implications for trading dynamics due to the defatul fallback currency in the case of a currency collapse. In a nutshell: "Bonds issued under local law, such as Greek law, would likely be converted from euros into a new local currency—a blow to any investors left holding the paper. "New" currencies, such as a new drachma, could rapidly fall in value by as much as 50%, according to most estimates. Foreign-law debt, on the other hand, would be more likely to remain in euros, assuming a smaller euro still existed at all, the bank said." That Nomura and the WSJ is only half a year late with this discussion is not surprising. What is surprising is that the discussion has appeared in the first place: needless to say this is another rhetorical escalation in the push to get Merkel on the "same page" as it being telegraphed all too loudly that investors are now actively gearing up for a Eurozone collapse. Then again Nomura bankers are people too and deserve to be well paid for being part of the detested 1%. How else will this happen unless they too join the onslaught by the global banking syndicate which now consists of Deutsche Bank, JP Morgan, Barclays, Credit Suisse, and virtually everyone else, expect for Goldman of course, which appears quite happy with the chips falling as they may. After all, it already has Europe by the political short hairs. Now it just needs to take charge financially too. If in the process a few not so good banks are converted into omelette, so be it.

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Buyers Of Last Resort: As Dumping Accelerates, Here Is Who Is Stuck Buying Another €741 Billion In Italian Bonds

Spoiler alert: There will be no surprise "I see dead bondholders"-type ending here. Having suggested precisely what the BTP trading dynamics look like previously, we now get official confirmation. With everyone else dumping Italian bonds in the open market, there are only two parties on the bid side: the ECB, and Italian banks. That's it. The only question is "how much" in order to determine at what point the selling onslaught will overhwhelm both insolvent Italian banks whose Risk Weighted capital will soon become too high forcing them out of the market, as well as drag down Draghi's recently expanded bond buying desk (we would say trading, but that would imply a two way market). Here is Barclays with the full breakdown: "Italy’s government bonds, representing the largest bond market in Europe, or the third largest in the world, have been particularly unstable since the beginning of July. The sheer size of the €1.6trn outstanding stock, of which around €220bn of bonds and €120bn of bills are rolled over every year, begs the questions who will be the buyers going forward. We thus update the breakdown of Italian bond holders which we presented in July (see Who Owns Italy's Government Debt? July 29, 2011), and analysed who has been selling and buying between the beginning of July (when widening started) and end of September (as of the latest available data). ECB has been the main buyer since August 8th, and held 4% of the Italian bond market as of September. Domestic holders, mainly financial institutions (banks) have gradually increased their holdings, taking domestic holding from 55% to 56% of the total market. Foreign investors, consisting of European non-Italian banks and real money investors as well as international asset managers, have been the main seller of BTPs, reducing their holdings from 45% to 39%." As said earlier - nothing at all unexpected: everyone who can get out is getting out. The only buyers are those for whom selling equates to suicide. That said, we wish Italian banks and the ECB the best of luck as they seek to purchase the €741 billion in bonds that are still to be offloaded as Merkel persists in refusing to let the ECB even considering announcing monetization intentions.

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Ron Paul "Faces The Nation" On September 11 And Other Key Topics

Rep. Ron Paul, who is statistically tied in first in the Iowa polls among the 2012 GOP presidential candidates, spoke with Bob Schieffer on how America's flawed policies contributed to 9/11, his stance on dealing with Iran, and the dismantling of key government institutions. Must watch, as unlike the other GOP candidates, Paul never peppers the audience (pardon the pun) with banal sound bites, moronic meanderings and pandering platitudes.

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Guest Post: Antiquities: The Ageless Asset

The 2008 collapse of the United States financial institutions and the recent economic events around the world have sent investors scrambling for smarter and safer ways in which to store and grow their capital. The common questions being asked are “What is good?” and “Where to now?” These questions could be answered, however, by taking a step back in history.

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Guest Post: MF Global - A Fractal In A Frying Pan

Gerald Celente, in an interview with Russia Today, claims he cannot access his PM trading account or get answers to his inquiries. It turns out Lind-Waldock, who he originally had the account with, was subsequently bought out by the now bankrupting MF Global. Understandably distraught, Celente asserts, “They took my money out of my account, six figures, and they have it. They closed out two of my positions, and I cannot get any answers, and I can’t get my money.” Celente got many of us thinking—“If a guy like him can be refused access to his money, then who is safe?” Some argue he should not have been buying “paper gold.” Celente states that he was buying PM futures and taking delivery. “Max Keiser” the “Silver Bears” “Turd Fergusen” and more, have encouraged us to buy silver and “Bust the Comex.” Many of us here on Zero Hedge have fantasized in the comments section about someone wealthy enough to lay a few billion on the Comex for PMs and then stand for delivery. Celente, it is arguable, was doing this not only for himself but perhaps for Joe and Josephine Average who do not have the ammunition to fight this fight. But as I got to thinking, I realized all of the above misses a valuable take away lesson. It is not simply the case that MF Global is a “first domino to fall” or a “canary in the coal mine” or a “harbinger of collapse.” MF Global is a fractal in a frying pan.

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Things That Make You Go Hmmm.... Such As Basel I...II...III... And Onward

From Grant Williams: "Basel III attempts to force encourage banks to hold larger percentages of government bonds on their balance sheets in order to shore up their capital bases and to provide a riskless safety net should they run into liquidity problems. Thus far, holdings of Italian debt - with its 20% risk-weighting - have bankrupted MF Global in the space of a week (no 30-day cushion there, then) while the ECB SMP program has spent billions of euros accumulating 20% risk-weighted assets rapidly-declining assets that everybody else wants to sell high-grade Italian (and, latterly, Spanish) government bonds in a desper- ate attempt to stop the very assets that banks have been pushed into holding from bringing down the whole edifice. The absurdity of the situation is striking. After 2008, the world’s major governments (in their infinite collective wisdom) transferred the most toxic assets, that threatened to bring down their countries’ banking systems to their own balance sheets rather than suffer the sharp pain of bankruptcies throughout the global financial sector and the inevitable pain that would follow. Now, barely three short years after Lehman Brothers’ demise, central banks - their balance sheets hor- ribly disfigured by the fiendish experiments they have been conducting on monetary policy (charts, below) - have themselves become monstrous figures; distorted and twisted into barely-recognisable approximations of the institutions we have come to recognise over the decades as the guardians of monetary propriety. Bankenstein’s Monsters... And so we go back to Basel III."

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The Complete And Annotated Guide To The European Bank Run (Or The Final Phase Of Goldman's World Domination Plan)

"Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral. Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations. " So begins an article not in some hyperventilating fringe blog, but a cover article in the venerable New York Times titled "Europe Fears a Credit Squeeze as Investors Sell Bond Holdings." Said otherwise, Europe's continental bank run in which virtually, but not quite, all banks are dumping any peripheral exposure with reckless abandon is now on. Granted, considering the epic collapse in bond prices of Italian, French, Austrian, Hungarian, Spanish and Belgian bonds which all hit record wide yields and spreads in the past week, and furthermore following last week's "Sold To You": European Banks Quietly Dumping €300 Billion In Italian Debt" which predicted precisely this outcome, the news is not much of a surprise. However, learning that everyone (with two exceptions) has given up on Europe's financial system should send a shudder through the back of everyone who still is capable of independent thought - because said otherwise, the world's largest economic block is becoming unglued, and its entire financial system is on the edge of a complete meltdown. And just to make sure that various fringe bloggers who warned this would happen over a year ago no longer lead to the hyperventilation of the venerable NYT, below, with the help of Goldman's Jernej Omahan, we bring to our readers the complete annotated and abbreviated beginner's guide to the pan-European bank run.

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